FaithShares Trust, et al.; Notice of Application, 58325-58332 [E9-27130]
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Federal Register / Vol. 74, No. 217 / Thursday, November 12, 2009 / Notices
the public burden of the collection of
information is accurate, and based on
valid assumptions and methodology;
and ways in which we can minimize the
burden of the collection of information
on those who are to respond, through
the use of appropriate technological
collection techniques or other forms of
information technology.
Approximately 11,000 RI 38–115
forms are completed annually. The form
takes approximately 20 minutes to
complete. The annual estimated burden
is 3,667 hours.
For copies of this proposal, contact
Cyrus S. Benson on (202) 606–0623,
FAX (202) 606–0910 or via E-mail to
Cyrus.Benson@opm.gov. Please include
a mailing address with your request.
DATES: Comments on this proposal
should be received within 60 calendar
days from the date of this publication.
ADDRESSES: Send or deliver comments
to—James K. Freiert, Deputy Assistant
Director, Retirement Services Program,
Center for Retirement and Insurance
Services, U.S. Office of Personnel
Management, 1900 E Street, NW., Room
3305, Washington, DC 20415–3500.
For information regarding
administrative coordination contact:
Cyrus S. Benson, Team Leader,
Publications Team, RIS Support
Services/Support Group, U.S. Office of
Personnel Management, 1900 E Street,
NW.—Room 4H28, Washington, DC
20415, (202) 606–0623.
U.S. Office of Personnel Management.
John Berry,
Director.
[FR Doc. E9–27138 Filed 11–10–09; 8:45 am]
BILLING CODE 6325–38–P
OFFICE OF PERSONNEL
MANAGEMENT
Proposed Collection; Comment
Request for Review of a Revised
Information Collection: (OMB Control
No. 3206–0228; Standard Form 3112)
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AGENCY: Office of Personnel
Management.
ACTION: Notice.
SUMMARY: In accordance with the
Paperwork Reduction Act of 1995 (Pub.
L. 104–13, May 22, 1995), this notice
announces that the Office of Personnel
Management (OPM) intends to submit to
the Office of Management and Budget
(OMB) a request for review of a revised
information collection. This information
collection, ‘‘CSRS/FERS Documentation
in Support of Disability Retirement
Application’’ (OMB Control No. 3206–
0228; Standard Form 3112), collects
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information from applicants for
disability retirement so that OPM can
determine whether to approve a
disability retirement. The applicant will
only complete Standard Forms 3112A
and 3112C. Standard Forms 3112B,
3112D and 3112E will be completed by
the immediate supervisor and the
employing agency of the applicant.
Comments are particularly invited on:
Whether this collection of information
is necessary for the proper performance
of functions of the OPM, and whether it
will have practical utility; whether our
estimate of the public burden of this
collection of information is accurate,
and based on valid assumptions and
methodology; and ways in which we
can minimize the burden of the
collection of information on those who
are to respond, through the use of
appropriate technological collection
techniques or other forms of information
technology.
Approximately 12,100 applicants for
disability retirement complete this
application annually. The SF 3112C
requires approximately 60 minutes to
complete. A burden of 12,100 hours is
estimated for SF 3112C. SF 3112A is
used each year by approximately 1,350
persons who are not Federal employees.
SF 3112A requires approximately 30
minutes to complete and a burden of
675 hours is estimated for SF 3112A.
All 12,100 respondents must use SF
3112C; of the 12,100, only 1,350 of the
applicants are not Federal Employees
and use SF 3112A. The total annual
burden for SF 3112 is 12,775 hours.
For copies of this proposal, contact
Cyrus S. Benson on (202) 606–4808,
FAX (202) 606–0910 or via E-mail to
Cyrus.Benson@opm.gov. Please include
a mailing address with your request.
DATES: Comments on this proposal
should be received within 60 calendar
days from the date of this publication.
ADDRESSES: Send or deliver comments
to—James K. Freiert, Deputy Assistant
Director, Retirement Services Program,
Center for Retirement and Insurance
Services, U.S. Office of Personnel
Management, 1900 E Street, NW., Room
3305, Washington, DC 20415–3500.
For information regarding
administrative coordination contact:
Cyrus S. Benson, Team Leader,
Publications Team, RIS Support
Services/Support Group, U.S. Office of
Personnel Management, 1900 E Street,
NW., Room 4H28, Washington, DC
20415, (202) 606–0623.
U.S. Office of Personnel Management.
John Berry,
Director.
[FR Doc. E9–27139 Filed 11–10–09; 8:45 am]
BILLING CODE 6325–38–P
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58325
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
28991; File No. 812–13638]
FaithShares Trust, et al.; Notice of
Application
November 5, 2009.
AGENCY: Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of an application for an
order under section 6(c) of the
Investment Company Act of 1940 (the
‘‘Act’’) for an exemption from sections
2(a)(32), 5(a)(1), 22(d), and 22(e) of the
Act and rule 22c–1 under the Act; and
under sections 6(c) and 17(b) of the Act
for an exemption from sections 17(a)(1)
and 17(a)(2) of the Act; and under
section 12(d)(1)(J) for an exemption
from sections 12(d)(1)(A) and
12(d)(1)(B) of the Act.
FaithShares Trust (‘‘Trust’’),
FaithShares Advisors, LLC (‘‘Advisor’’)
and SEI Investments Distribution
Company.
SUMMARY OF APPLICATION: Applicants
request an order that would permit: (a)
Series of an open-end management
investment company to issue shares
(‘‘Fund Shares’’) that can be redeemed
only in large aggregations (‘‘Creation
Unit Aggregations’’); (b) secondary
market transactions in Fund Shares to
occur at negotiated prices; (c) certain
series to pay redemption proceeds,
under certain circumstances, more than
seven days after the tender of Fund
Shares for redemption; (d) certain
affiliated persons of the series to deposit
securities into, and receive securities
from, the series in connection with the
purchase and redemption of Creation
Unit Aggregations; and (e) certain
registered management investment
companies and unit investment trusts
outside of the same group of investment
companies as the series to acquire Fund
Shares.
FILING DATES: The application was filed
on March 4, 2009, and amended on
April 21, 2009, October 23, 2009, and
November 4, 2009.
HEARING OR NOTIFICATION OF HEARING: An
order granting the application will be
issued unless the Commission orders a
hearing. Interested persons may request
a hearing by writing to the
Commission’s Secretary and serving
applicants with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on November 30, 2009, and
should be accompanied by proof of
service on applicants, in the form of an
affidavit, or for lawyers, a certificate of
APPLICANTS:
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Federal Register / Vol. 74, No. 217 / Thursday, November 12, 2009 / Notices
service. Hearing requests should state
the nature of the writer’s interest, the
reason for the request, and the issues
contested. Persons who wish to be
notified of a hearing may request
notification by writing to the
Commission’s Secretary.
ADDRESSES: Secretary, U.S. Securities
and Exchange Commission, 100 F
Street, NE., Washington, DC 20549–
1090; Applicants: FaithShares Trust and
FaithShares Advisors, LLC, c/o Mr. J.
Garrett Stevens, 3555 Northwest 58th
Street, Suite 410, Oklahoma City, OK
73112 and SEI Investments Distribution
Company, c/o John Munch, Esq., 1
Freedom Valley Drive, Oaks, PA 19456.
FOR FURTHER INFORMATION CONTACT: Jean
E. Minarick, Senior Counsel at (202)
551–6811 or Julia Kim Gilmer, Branch
Chief, at (202) 551–6821 (Division of
Investment Management, Office of
Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained via the Commission’s
Web site by searching for the file
number, or an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
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Applicants’ Representations
1. The Trust is registered as an openend management investment company
under the Act and is organized as a
Delaware statutory trust. The Trust will
initially offer Fund Shares of five series
(‘‘Initial Funds’’), each of which will
track a specified equity securities index
(‘‘Underlying Index’’).1 Applicants may
offer additional series of the Trust
(together with any other future
registered open-end investment
company and its series advised by the
Advisor or an entity controlling,
controlled by, or under common control
with the Advisor, the ‘‘Future Funds,’’
and the Future Funds together with the
Initial Funds, the ‘‘Funds’’).2
2. The Advisor, an Oklahoma limited
liability company, or an entity
controlling, controlled by or under
common control with the Advisor will
be the investment adviser to the Funds.
The Advisor is registered as an
investment adviser under the
Investment Advisers Act of 1940, as
1 The Initial Funds are: FaithShares Baptist
Values Fund, FaithShares Catholic Values Fund,
FaithShares Christian Values Fund, FaithShares
Lutheran Values Fund and FaithShares Methodist
Values Fund.
2 All existing entities that currently intend to rely
on the requested order have been named as
applicants. Any other existing or future entity that
relies on the order in the future will comply with
the terms and conditions of the application.
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amended (the ‘‘Advisers Act’’). The
Advisor may enter into sub-advisory
agreements with one or more additional
investment advisers to act as subadvisors to one or more Funds (‘‘SubAdvisors’’). Any Sub-Advisor will be
registered under the Advisers Act. SEI
Investments Distribution Company, a
broker-dealer registered under the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’), will act as the
principal underwriter and distributor
for the Creation Unit Aggregations of
Fund Shares (each such broker-dealer, a
‘‘Distributor’’). Applicants request that
the requested order also apply to any
other Distributor to the Funds in the
future that complies with the terms and
conditions of the application.
3. The Funds will seek investment
results that correspond, before fees and
expenses, generally to the price and
yield performance of a specified
Underlying Index.3 The Initial Funds’
Underlying Indexes are comprised of
domestic equity securities (securities
which are issued by U.S. issuers and
non-U.S. issuers meeting the
requirements for trading in U.S.
markets). A Future Fund’s Underlying
Index may be based on domestic equity
securities or foreign equity securities
(securities traded on a non-U.S.
securities market) (such Future Fund, a
‘‘Foreign Fund’’). Any entity that
creates, compiles, sponsors or maintains
an Underlying Index (‘‘Index Provider’’)
will not be an affiliated person, as
defined in section 2(a)(3) of the Act, or
an affiliated person of an affiliated
person, of the Trust or a Fund, the
Advisor, any promoter of the Funds,
Sub-Advisor or Distributor.4
4. The investment objective of each
Fund will be to seek to track the
performance, before fees and expenses,
of its Underlying Index.5 Intra-day
values of each Underlying Index will be
disseminated every 15 seconds
3 The Underlying Indexes for the Initial Funds are
the: FaithShares Baptist Values Index, FaithShares
Catholic Values Index, FaithShares Christian Values
Index, FaithShares Lutheran Values Index and
FaithShares Methodist Values Index.
4 The Index Provider to the Initial Funds is FTSE/
KLD Research and Analytics, Inc.
5 Applicants represent that each Fund will invest
at least 80% of its assets in the component
securities (‘‘Component Securities’’) of its
Underlying Index. In the case of Foreign Funds, at
least 80% of the Fund’s assets will be invested in
Component Securities and Depositary Receipts (as
defined below) representing such Component
Securities. A Fund may invest up to 20% of its
assets in cash and cash equivalents, such as money
market instruments or other types of investments
not included in its Underlying Index, but which the
Advisor or Sub-Advisor believes will help the Fund
track its Underlying Index. ‘‘Depositary Receipts’’
will typically be American Depositary Receipts, as
well as Global Depositary Receipts and Euro
Depositary Receipts.
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throughout the trading day except for
the values of Underlying Indices based
on foreign equity securities which will
be disseminated every 60 seconds
throughout the trading day. A Fund will
utilize either a replication or
representative sampling strategy which
will be disclosed with regard to each
Fund in its prospectus (‘‘Prospectus’’).6
A Fund using a replication strategy will
invest in the Component Securities in
its Underlying Index in approximately
the same proportions as in the
Underlying Index. In certain
circumstances, such as when there are
practical difficulties or substantial costs
involved in holding every security in an
Underlying Index or when one or more
Component Securities is less liquid,
illiquid or unavailable, a Fund may use
a representative sampling strategy
pursuant to which it will invest in
some, but not all of the Component
Securities of its Underlying Index.7
Applicants anticipate that a Fund that
utilizes a representative sampling
strategy will not track the performance
of its Underlying Index with the same
degree of accuracy as an investment
vehicle that invests in every Component
Security of the Underlying Index with
the same weighting as the Underlying
Index. Applicants expect that each Fund
will have an annual tracking error
relative to the performance of its
Underlying Index of less than 5 percent.
5. The Funds will issue Creation Unit
Aggregations in groups of 50,000 Fund
Shares. Applicants expect that the
initial price of a Creation Unit
Aggregation will fall in the range of
$1,000,000 to $2,000,000. All orders to
purchase Creation Unit Aggregations
must be placed with the Distributor, by
or through a party that has entered into
an agreement with the Distributor
(‘‘Authorized Participant’’). The
Distributor will be responsible for
transmitting the orders to the Funds. An
Authorized Participant must be either:
(a) A broker-dealer or other participant
in the continuous net settlement system
of the National Securities Clearing
Corporation, a clearing agency
registered with the Commission, or (b)
6 All representations and conditions contained in
the application that require a Fund to disclose
particular information in the Fund’s Prospectus
and/or annual report shall be effective with respect
to the Fund until the time that the Fund complies
with the disclosure requirements adopted by the
Commission in Investment Company Act Release
No. 28584 (Jan. 13, 2009).
7 Under the representative sampling strategy, the
Advisor and any Sub-Advisor will seek to construct
a Fund’s portfolio so that its market capitalization,
industry weightings, fundamental investment
characteristics (such as return variability, earnings
valuation and yield) and liquidity measures
perform like those of the Underlying Index.
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a participant in the Depository Trust
Company (‘‘DTC’’, and such participant,
‘‘DTC Participant’’). Fund Shares of
each Fund generally will be sold in
Creation Unit Aggregations in exchange
for an in-kind deposit by the purchaser
of a portfolio of securities designated by
the Advisor or Sub-Advisor to
correspond generally to the price and
yield performance of the relevant
Underlying Index (the ‘‘Deposit
Securities’’), together with the deposit of
a specified cash payment (‘‘Balancing
Amount,’’ together with the Deposit
Securities, the ‘‘Portfolio Deposit’’). The
Balancing Amount is an amount equal
to the difference between (a) the net
asset value (‘‘NAV’’) (per Creation Unit
Aggregation) of a Fund and (b) the total
aggregate market value (per Creation
Unit Aggregation) of the Deposit
Securities.8 Each Fund may permit a
purchaser of Creation Unit Aggregations
to substitute cash in lieu of depositing
some or all of the Deposit Securities if
a Fund and the Advisor believe such
method would reduce the Fund’s
transaction costs or enhance the Fund’s
operating efficiency.9
6. An investor purchasing or
redeeming a Creation Unit Aggregation
from a Fund will be charged a fee
(‘‘Transaction Fee’’) to prevent the
dilution of the interests of the remaining
shareholders resulting from costs in
connection with the purchase or
redemption of Creation Unit
Aggregations.10 The maximum
8 Each Fund will sell and redeem Creation Unit
Aggregations only on a ‘‘Business Day,’’ which is
any day that a Fund is required to be open under
Section 22(e) of the Act. Each Business Day, prior
to the opening of trading on the Exchange (defined
below), the list of names and the required number
of shares of each security included in the current
Portfolio Deposit and the Balancing Amount will be
made available. Any national securities exchange
(as defined in section 2(a)(26) of the Act)
(‘‘Exchange’’) on which Fund Shares are listed will
disseminate, every 15 seconds during its regular
trading hours, an amount per Fund Share
representing the sum of the estimated Balancing
Amount and the current value of the Deposit
Securities.
9 Applicants state that in some circumstances or
in certain countries, it may not be practicable or
convenient, or permissible under the laws of certain
countries or the regulations of certain foreign stock
exchanges, for a Foreign Fund to operate
exclusively on an ‘‘in-kind’’ basis. Applicants also
note that when a substantial rebalancing of a Fund’s
portfolio is required, the Advisor might prefer to
receive cash rather than in-kind securities so that
the Fund may avoid transaction costs involved in
liquidating part of its portfolio to achieve the
rebalancing.
10 Where a Fund permits a purchaser to substitute
cash in lieu of depositing a portion of the requisite
Deposit Securities, the purchaser may be assessed
a higher Transaction Fee to cover the cost of
purchasing such Deposit Securities, including
operational processing and brokerage costs, and
part or all of the spread between the expected bid
and the offer side of the market relating to such
Deposit Securities.
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Transaction Fees, and any variations or
waivers thereof, will be disclosed in
each Fund’s Prospectus. The Distributor
will be responsible for delivering the
Fund’s Prospectus to those persons
purchasing Creation Unit Aggregations,
and for maintaining records of both the
orders placed and the confirmations of
acceptance furnished. In addition, the
Distributor will maintain a record of the
instructions given to the applicable
Fund to implement the delivery of its
Fund Shares.
7. Purchasers of Fund Shares in
Creation Unit Aggregations may hold
such Fund Shares or may sell such
Fund Shares into the secondary market.
Fund Shares will be listed and traded
on an Exchange. It is expected that one
or more member firms of a listing
Exchange will be designated to act as a
specialist or a market maker (each, a
‘‘Market Maker’’) and maintain a market
for Fund Shares trading on the listing
Exchange. The price of Fund Shares
trading on an Exchange will be based on
the current bid/offer market. Fund
Shares sold in the secondary market
will be subject to customary brokerage
commissions and charges.
8. Applicants expect that purchasers
of Creation Unit Aggregations will
include institutional investors and
arbitrageurs (which could include
institutional investors). A Market
Maker, in providing a fair and orderly
secondary market for the Fund Shares,
also may purchase Creation Unit
Aggregations for use in its marketmaking activities. Applicants expect
that secondary market purchasers of
Fund Shares will include both
institutional investors and retail
investors.11 Applicants expect that the
price at which Fund Shares trade will
be disciplined by arbitrage
opportunities created by the option to
continually purchase or redeem
Creation Unit Aggregations at their
NAV, which should ensure that Fund
Shares will not trade at a material
discount or premium in relation to their
NAV.
9. Fund Shares will not be
individually redeemable, and owners of
Fund Shares may acquire those Fund
Shares from a Fund, or tender such
Fund Shares for redemption to the
Fund, in Creation Unit Aggregations
only. To redeem, an investor will have
to accumulate enough Fund Shares to
constitute a Creation Unit Aggregation.
Redemption orders must be placed by or
through an Authorized Participant. An
11 Fund Shares will be registered in book-entry
form only. DTC or its nominee will be the registered
owner of all outstanding Fund Shares. DTC or DTC
Participants will maintain records reflecting
beneficial owners of Fund Shares.
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investor redeeming a Creation Unit
Aggregation generally will receive (a)
Portfolio Securities designated to be
delivered for Creation Unit Aggregation
redemptions on the date that the request
for redemption is made (‘‘Fund
Securities’’) 12 and (b) a ‘‘Cash
Redemption Payment,’’ consisting of an
amount calculated in the same manner
as the Balancing Amount, although the
actual amount of the Cash Redemption
Payment may differ if the Fund
Securities are not identical to the
Deposit Securities on that day. An
investor may receive the cash equivalent
of a Fund Security in certain
circumstances, such as if the investor is
constrained from effecting transactions
in the security by regulation or policy.
10. No Fund will be advertised or
marketed or otherwise held out as a
traditional open-end investment
company or a mutual fund. Instead,
each Fund will be marketed as an
‘‘exchange-traded fund’’ or ‘‘ETF,’’
‘‘investment company’’ and ‘‘fund.’’ All
marketing materials that describe the
features or method of obtaining, buying
or selling Creation Unit Aggregations or
Fund Shares, or refer to redeemability,
will prominently disclose that Fund
Shares are not individually redeemable
and that the owners of Fund Shares may
acquire or redeem Fund Shares from the
Fund in Creation Unit Aggregations
only. The same approach will be
followed in the statement of additional
information (‘‘SAI’’), shareholder
reports and investor educational
materials issued or circulated in
connection with the Fund Shares. Each
Fund will provide copies of its annual
and semi-annual shareholder reports to
DTC Participants for distribution to
shareholders.
Applicants’ Legal Analysis
1. Applicants request an order under
section 6(c) of the Act for an exemption
from sections 2(a)(32), 5(a)(1), 22(d), and
22(e) of the Act and rule 22c-1 under the
Act; under sections 6(c) and 17(b) of the
Act for an exemption from sections
17(a)(1) and 17(a)(2) of the Act; and
under section 12(d)(1)(J) of the Act for
an exemption from sections 12(d)(1)(A)
and 12(d)(1)(B) of the Act.
12 The Funds will comply with the federal
securities laws in accepting Deposit Securities and
satisfying redemptions with Fund Securities,
including that the Deposit Securities and Fund
Securities are sold in transactions that would be
exempt from registration under the Securities Act
of 1933. As a general matter, the Deposit Securities
and Fund Securities will correspond pro rata to the
securities held by a Fund, although Fund Securities
received on redemption may not be identical to
Deposit Securities deposited in connection with the
purchase of Creation Unit Aggregations for the same
day.
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2. Section 6(c) of the Act provides that
the Commission may exempt any
person, security or transaction, or any
class of persons, securities or
transactions, from any provision of the
Act, if and to the extent that such
exemption is necessary or appropriate
in the public interest and consistent
with the protection of investors and the
purposes fairly intended by the policy
and provisions of the Act. Section 17(b)
of the Act authorizes the Commission to
exempt a proposed transaction from
section 17(a) of the Act if evidence
establishes that the terms of the
transaction, including the consideration
to be paid or received, are reasonable
and fair and do not involve
overreaching on the part of any person
concerned, and the proposed
transaction is consistent with the
policies of the registered investment
company and the general purposes of
the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may
exempt any person, security, or
transaction, or any class or classes of
persons, securities or transactions, from
any provisions of section 12(d)(1) if the
exemption is consistent with the public
interest and the protection of investors.
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Sections 5(a)(1) and 2(a)(32) of the Act
3. Section 5(a)(1) of the Act defines an
‘‘open-end company’’ as a management
investment company that is offering for
sale or has outstanding any redeemable
security of which it is the issuer.
Section 2(a)(32) of the Act defines a
redeemable security as any security,
other than short-term paper, under the
terms of which the holder, upon its
presentation to the issuer, is entitled to
receive approximately the holder’s
proportionate share of the issuer’s
current net assets, or the cash
equivalent. Because Fund Shares will
not be individually redeemable,
applicants request an order that would
permit each Fund to issue Fund Shares
that are redeemable in Creation Unit
Aggregations only. Applicants state that
investors may purchase Fund Shares in
Creation Unit Aggregations and redeem
Creation Unit Aggregations from each
Fund. Applicants state that because
Creation Unit Aggregations may always
be purchased and redeemed at NAV, the
market price of Fund Shares should not
vary substantially from their NAV.
Section 22(d) of the Act and Rule 22c–
1 under the Act
4. Section 22(d) of the Act, among
other things, prohibits a dealer from
selling a redeemable security, which is
currently being offered to the public by
or through a principal underwriter,
except at a current public offering price
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described in the prospectus. Rule 22c–
1 under the Act generally requires that
a dealer selling, redeeming or
repurchasing a redeemable security do
so only at a price based on its NAV.
Applicants state that secondary market
trading in Fund Shares will take place
at negotiated prices, not at a current
offering price described in a Fund’s
Prospectus, and not at a price based on
NAV. Thus, purchases and sales of
Fund Shares in the secondary market
will not comply with section 22(d) of
the Act and rule 22c–1 under the Act.
Applicants request an exemption under
section 6(c) from these provisions.
5. Applicants assert that the concerns
sought to be addressed by section 22(d)
of the Act and rule 22c–1 under the Act
with respect to pricing are equally
satisfied by the proposed method of
pricing Fund Shares. Applicants
maintain that while there is little
legislative history regarding section
22(d), its provisions, as well as those of
rule 22c–1, appear to have been
designed to (a) prevent dilution caused
by certain riskless-trading schemes by
principal underwriters and contract
dealers, (b) prevent unjust
discrimination or preferential treatment
among buyers, and (c) ensure an orderly
distribution of investment company
shares by eliminating price competition
from dealers offering shares at less than
the published sales price and
repurchasing shares at more than the
published redemption price.
6. Applicants believe that none of
these purposes will be thwarted by
permitting Fund Shares to trade in the
secondary market at negotiated prices.
Applicants state that (a) secondary
market trading in Fund Shares do not
directly involve Fund assets and will
not cause dilution of an investment in
Fund Shares, and (b) to the extent
different prices exist during a given
trading day, or from day to day, such
variances occur as a result of third-party
market forces, such as supply and
demand. Therefore, applicants assert
that secondary market transactions in
Fund Shares will not lead to
discrimination or preferential treatment
among purchasers. Finally, applicants
contend that the proposed distribution
system will be orderly because
competitive forces will ensure that the
difference between the market price of
Fund Shares and their NAV remains
narrow.
Section 22(e)
7. Section 22(e) of the Act generally
prohibits a registered investment
company from suspending the right of
redemption or postponing the date of
payment of redemption proceeds for
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Fmt 4703
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more than seven days after the tender of
a security for redemption. Applicants
state that settlement of redemptions for
the Foreign Funds is contingent not
only on the settlement cycle of the
United States market, but also on the
delivery cycles in local markets for the
underlying foreign securities held by
Foreign Funds. Applicants state that
delivery cycles currently practicable for
transferring Fund Securities to
redeeming investors, coupled with local
market holiday schedules, will, in
certain circumstances, require a delivery
process longer than seven calendar days
for Foreign Funds. Applicants request
relief under section 6(c) of the Act from
section 22(e) to permit Foreign Funds to
pay redemption proceeds up to a
maximum of 14 calendar days following
the tender of a Creation Unit
Aggregation of such Funds. Except as
disclosed in a Foreign Fund’s
Prospectus and/or SAI, applicants
expect that each Foreign Fund will be
able to deliver redemption proceeds
within seven days.13
8. Applicants state that section 22(e)
was designed to prevent unreasonable,
undisclosed and unforeseen delays in
the payment of redemption proceeds.
Applicants assert that the requested
relief will not lead to the problems that
section 22(e) was designed to prevent.
Applicants state that the SAI will
disclose those local holidays in a given
year where more than seven days will
be needed to deliver redemption
proceeds and the maximum number of
days needed to deliver the proceeds.
Applicants are not seeking relief from
section 22(e) with respect to Foreign
Funds that do not effect redemptions of
Creation Unit Aggregations in-kind.
Section 12(d)(1)
9. Section 12(d)(1)(A) of the Act, in
relevant part, prohibits a registered
investment company from acquiring
securities of an investment company if
such securities represent more than 3%
of the total outstanding voting stock of
the acquired company, more than 5% of
the total assets of the acquiring
company, or, together with the
securities of any other investment
companies, more than 10% of the total
assets of the acquiring company. Section
12(d)(1)(B) of the Act prohibits a
registered open-end investment
company, its principal underwriter, or
any other broker or dealer from selling
13 Rule 15c6–1 under the Exchange Act requires
that most securities transactions be settled within
three business days of the trade. Applicants
acknowledge that no relief obtained from the
requirements of section 22(e) will affect any
obligations applicants may have under rule 15c6–
1.
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the investment company’s shares to
another investment company if the sale
will cause the acquiring company to
own more than 3% of the acquired
company’s voting stock, or if the sale
will cause more than 10% of the
acquired company’s voting stock to be
owned by investment companies
generally.
10. Applicants request an exemption
to permit management investment
companies (‘‘Investing Management
Companies’’) and unit investment trusts
(‘‘Investing Trusts,’’ and collectively
with the Investing Management
Companies, ‘‘Investing Funds’’)
registered under the Act that are not
sponsored or advised by the Advisor or
any entity controlling, controlled by, or
under common control with the Advisor
and are not part of the same ‘‘group of
investment companies,’’ as defined in
section 12(d)(1)(G)(ii) of the Act, as the
Funds to acquire Fund Shares beyond
the limits of section 12(d)(1)(A).
Investing Funds do not include the
Funds. In addition, applicants seek
relief to permit the Distributor and any
broker or dealer that is registered under
the Exchange Act to sell Fund Shares to
an Investing Fund in excess of the limits
of section 12(d)(1)(B).
11. Each Investing Management
Company will be advised by an
investment adviser within the meaning
of section 2(a)(20)(A) of the Act (the
‘‘Investing Fund Advisor’’) and may be
sub-advised by one or more investment
advisers within the meaning of section
2(a)(20)(B) of the Act (each an
‘‘Investing Fund Sub-Advisor’’). Any
Investing Fund Advisor or Investing
Fund Sub-Advisor will be registered
under the Advisers Act. Each Investing
Trust will be sponsored by a sponsor
(‘‘Sponsor’’).
12. Applicants submit that the
proposed conditions to the requested
relief adequately address the concerns
underlying the limits in sections
12(d)(1)(A) and (B), which include
concerns about undue influence by a
fund of funds over underlying funds,
excessive layering of fees and overly
complex fund structures. Applicants
believe that the requested exemption is
consistent with the public interest and
the protection of investors.
13. Applicants believe that neither the
Investing Funds nor an Investing Fund
Affiliate would be able to exert undue
influence over the Funds.14 To limit the
14 An ‘‘Investing Fund Affiliate’’ is an Investing
Fund Advisor, Investing Fund Sub-Advisor,
Sponsor, promoter, and principal underwriter of an
Investing Fund, and any person controlling,
controlled by, or under common control with any
of these entities. A ‘‘Fund Affiliate’’ is an
investment adviser, promoter, or principal
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16:12 Nov 10, 2009
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control that an Investing Fund may have
over a Fund, applicants propose a
condition prohibiting an Investing Fund
Advisor or a Sponsor, any person
controlling, controlled by, or under
common control with an Investing Fund
Advisor or Sponsor, and any investment
company and any issuer that would be
an investment company but for sections
3(c)(1) or 3(c)(7) of the Act that is
advised or sponsored by an Investing
Fund Advisor or Sponsor, or any person
controlling, controlled by, or under
common control with an Investing Fund
Advisor or Sponsor (‘‘Investing Fund’s
Advisory Group’’) from controlling
(individually or in the aggregate) a Fund
within the meaning of section 2(a)(9) of
the Act. The same prohibition would
apply to any Investing Fund SubAdvisor, any person controlling,
controlled by or under common control
with the Investing Fund Sub-Advisor,
and any investment company or issuer
that would be an investment company
but for sections 3(c)(1) or 3(c)(7) of the
Act (or portion of such investment
company or issuer) advised or
sponsored by the Investing Fund SubAdvisor or any person controlling,
controlled by or under common control
with the Investing Fund Sub-Advisor
(‘‘Investing Fund’s Sub-Advisor
Group’’).
14. Applicants propose other
conditions to limit the potential for
undue influence over the Funds,
including that no Investing Fund or
Investing Fund Affiliate (except to the
extent it is acting in its capacity as an
investment adviser to a Fund) will cause
a Fund to purchase a security in any
offering of securities during the
existence of any underwriting or selling
syndicate of which a principal
underwriter is an Underwriting Affiliate
(‘‘Affiliated Underwriting’’). An
‘‘Underwriting Affiliate’’ is a principal
underwriter in any underwriting or
selling syndicate that is an officer,
director, member of an advisory board,
Investing Fund Advisor, Investing Fund
Sub-Advisor, employee or Sponsor of an
Investing Fund, or a person of which
any such officer, director, member of an
advisory board, Investing Fund Advisor,
Investing Fund Sub-Advisor, employee,
or Sponsor is an affiliated person
(except that any person whose
relationship to the Fund is covered by
section 10(f) of the Act is not an
Underwriting Affiliate).
15. Applicants assert that the
proposed conditions address any
concerns regarding excessive layering of
underwriter of a Fund and any person controlling,
controlled by or under common control with any
of these entities.
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58329
fees. The board of directors or trustees
of any Investing Management Company,
including a majority of the directors or
trustees who are not ‘‘interested
persons’’ within the meaning of section
2(a)(19) of the Act (‘‘independent
directors or trustees’’), will find that the
advisory fees charged to the Investing
Management Company are based on
services provided that will be in
addition to, rather than duplicative of,
services provided under the advisory
contract(s) of any Fund in which the
Investing Management Company may
invest. In addition, except as provided
in condition 11, an Investing Fund
Advisor or a trustee (‘‘Trustee’’) or
Sponsor of an Investing Trust, as
applicable, will waive fees otherwise
payable to it by the Investing Fund in
an amount at least equal to any
compensation (including fees received
pursuant to any plan adopted by a Fund
under rule 12b–1 under the Act)
received by the Investing Fund Advisor
or Trustee or Sponsor or an affiliated
person of the Investing Fund Advisor,
Trustee or Sponsor, from a Fund in
connection with the investment by the
Investing Fund in the Fund. Applicants
also state that any sales charges or
service fees charged with respect to
shares of an Investing Fund will not
exceed the limits applicable to a fund of
funds set forth in Conduct Rule 2830 of
the National Association of Securities
Dealers (‘‘NASD’’).15
16. Applicants submit that the
proposed conditions address the
concern about complexity. Applicants
note that no Fund may acquire
securities of any investment company or
company relying on sections 3(c)(1) or
3(c)(7) of the Act in excess of the limits
contained in section 12(d)(1)(A) of the
Act except as permitted pursuant to rule
12d1–1 under the Act. To ensure that
Investing Funds comply with the terms
and conditions of the requested relief
from section 12(d)(1), any Investing
Fund that intends to invest in a Fund in
reliance on the requested order will
enter into a written agreement with such
Fund regarding the terms of such
Investing Fund’s investment
(‘‘Participation Agreement’’) requiring
the Investing Fund to adhere to the
terms and conditions of the requested
order. The Participation Agreement also
will include an acknowledgement from
the Investing Fund that it may rely on
the requested order only to invest in the
Funds and not in any other investment
company.
15 Any references to NASD Conduct Rule 2830
include any successor or replacement rule to NASD
Conduct Rule 2830 that may be adopted by the
Financial Industry Regulatory Authority.
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17. Applicants also note that a Fund
may choose to reject a direct purchase
of Fund Shares in Creation Unit
Aggregations by an Investing Fund. To
the extent that an Investing Fund
purchases Fund Shares in the secondary
market, a Fund would still retain its
ability to reject purchases of Fund
Shares made in reliance on the
requested order by declining to enter
into the Participation Agreement prior
to any investment by an Investing Fund
in excess of the limits of section
12(d)(1)(A).
Sections 17(a)(1) and (2) of the Act
18. Section 17(a) of the Act generally
prohibits an affiliated person of a
registered investment company, or an
affiliated person of such a person
(‘‘Second-Tier Affiliate’’), from selling
any security to or purchasing any
security from the company. Section
2(a)(3) of the Act defines ‘‘affiliated
person’’ to include (a) any person
directly or indirectly owning,
controlling or holding with power to
vote 5% or more of the outstanding
voting securities of the other person, (b)
any person 5% or more of whose
outstanding voting securities are
directly or indirectly owned, controlled
or held with the power to vote by the
other person, and (c) any person directly
or indirectly controlling, controlled by
or under common control with the other
person. Section 2(a)(9) of the Act
provides that a control relationship will
be presumed where one person owns
more than 25% of another person’s
voting securities.
19. Applicants request an exemption
from section 17(a) of the Act pursuant
to sections 6(c) and 17(b) of the Act to
permit persons to effectuate in-kind
purchases and redemptions with a Fund
when they are affiliated persons or
Second-Tier Affiliates of the Funds
solely by virtue of one or more of the
following: (a) Holding 5% or more, or in
excess of 25%, of the outstanding Fund
Shares of one or more Funds; (b) having
an affiliation with a person with an
ownership interest described in (a); or
(c) holding 5% or more, or more than
25%, of the shares of any other
registered investment company (or
series thereof) advised by the Advisor or
an entity controlling, controlled by or
under common control with the
Advisor.
20. Applicants assert that no useful
purpose would be served by prohibiting
these types of affiliated persons from
purchasing or redeeming Creation Unit
Aggregations through ‘‘in-kind
transactions.’’ The procedures for both
in-kind purchases and in-kind
redemptions of Creation Unit
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16:12 Nov 10, 2009
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Aggregations will be the same for all
purchases and redemptions. Deposit
Securities and Fund Securities will be
valued in the same manner as Portfolio
Securities. Therefore, applicants state
that in-kind purchases and redemptions
will afford no opportunity for the
specified affiliated persons, or SecondTier Affiliates, of a Fund to effect a
transaction detrimental to other holders
of Fund Shares. Applicants also believe
that in-kind purchases and redemptions
will not result in self-dealing or
overreaching of a Fund.
21. Applicants also seek relief from
section 17(a) to permit a Fund that is an
affiliated person of an Investing Fund to
sell its Fund Shares to and redeem its
Fund Shares from an Investing Fund,
and to engage in the accompanying inkind transactions with the Investing
Fund.16 Applicants state that the terms
of the transactions are fair and
reasonable and do not involve
overreaching. Applicants note that any
consideration paid by an Investing Fund
for the purchase or redemption of Fund
Shares directly from a Fund will be
based on the NAV of the Fund.17
Applicants believe that any proposed
transactions directly between the Funds
and Investing Funds will be consistent
with the policies of each Investing
Fund. The purchase of Creation Unit
Aggregations by an Investing Fund
directly from a Fund will be
accomplished in accordance with the
investment restrictions of any such
Investing Fund and will be consistent
with the investment policies set forth in
the Investing Fund’s registration
statement. The Participation Agreement
will require any Investing Fund that
purchases Creation Unit Aggregations
directly from a Fund to represent that
the purchase of Creation Unit
Aggregations from a Fund by an
Investing Fund will be accomplished in
compliance with the investment
restrictions of the Investing Fund and
will be consistent with the investment
policies set forth in the Investing Fund’s
registration statement.
16 Applicants acknowledge that receipt of
compensation by (a) an affiliated person of an
Investing Fund, or an affiliated person of such
person, for the purchase by the Investing Fund of
Fund Shares or (b) an affiliated person of a Fund,
or an affiliated person of such person, for the sale
by the Fund of its Fund Shares to an Investing Fund
may be prohibited by section 17(e)(1) of the Act.
The Participation Agreement also will include this
acknowledgment.
17 Applicants believe that most Investing Funds
will purchase Fund Shares in the secondary market
and will not purchase Creation Unit Aggregations
directly from a Fund. However, the requested relief
would apply to direct sales of Creation Unit
Aggregations by a Fund to an Investing Fund and
redemptions of those Fund Shares.
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Applicants’ Conditions
Applicants agree that any order
granting the requested relief will be
subject to the following conditions: 18
ETF Relief
1. Each Fund’s Prospectus will clearly
disclose that, for purposes of the Act,
the Fund Shares are issued by the
Funds, which are registered investment
companies, and that the acquisition of
Fund Shares by investment companies
is subject to the restrictions of section
12(d)(1) of the Act, except as permitted
by an exemptive order that permits
registered investment companies to
invest in a Fund beyond the limits in
Section 12(d)(1), subject to certain terms
and conditions, including that the
registered investment company enter
into a Participation Agreement with the
Fund regarding the terms of the
investment.
2. As long as a Fund operates in
reliance on the requested order, its Fund
Shares will be listed on an Exchange.
3. Neither the Trust nor any Fund will
be advertised or marketed as an openend investment company or a mutual
fund. Each Fund’s Prospectus will
prominently disclose that Fund Shares
are not individually redeemable shares
and will disclose that the owners of
Fund Shares may acquire those Fund
Shares from the Fund and tender those
Fund Shares for redemption to the Fund
in Creation Unit Aggregations only. Any
advertising material that describes the
purchase or sale of Creation Unit
Aggregations or refers to redeemability
will prominently disclose that Fund
Shares are not individually redeemable,
and that owners of Fund Shares may
acquire those Fund Shares from the
Fund and tender those Fund Shares for
redemption to the Fund in Creation Unit
Aggregations only.
4. The Web sites maintained for the
Funds, which are and will be publicly
accessible at no charge, will contain the
following information, on a per Fund
Share basis: (a) The prior Business Day’s
NAV and the mid-point of the bid-ask
spread at the time of the calculation of
NAV (‘‘Bid/Ask Price’’), and a
calculation of the premium or discount
of the Bid/Ask Price at the time of
calculation of the NAV against such
NAV; and (b) data in chart format
displaying the frequency distribution of
discounts and premiums of the daily
Bid/Ask Price against the NAV, within
appropriate ranges, for each of the four
previous calendar quarters.
5. Each Fund’s Prospectus and annual
report will also include: (a) The
18 See
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information listed in condition 4(b), (i)
in the case of the Prospectus, for the
most recently completed year (and the
most recently completed quarter or
quarters, as applicable) and (ii) in the
case of the annual report, for the
immediately preceding five years, as
applicable; and (b) the following data,
calculated on a per Fund Share basis for
one, five and ten year periods (or life of
the Fund): (i) The cumulative total
return and the average annual total
return based on NAV and Bid/Ask Price,
and (ii) the cumulative total return of
the relevant Underlying Index.
6. The requested relief to permit ETF
operations will expire on the effective
date of any Commission rule under the
Act that provides relief permitting the
operation of index-based ETFs.
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Section 12(d)(1) Relief
7. The members of an Investing
Fund’s Advisory Group will not control
(individually or in the aggregate) any
Fund within the meaning of section
2(a)(9) of the Act. The members of an
Investing Fund’s Sub-Advisor Group
will not control (individually or in the
aggregate) any Fund within the meaning
of section 2(a)(9) of the Act. If, as a
result of a decrease in the outstanding
Fund Shares, an Investing Fund’s
Advisory Group or an Investing Fund’s
Sub-Advisor Group, each in the
aggregate, becomes a holder of more
than 25 percent of the Fund Shares, it
will vote its Fund Shares in the same
proportion as the vote of all other
holders of the Fund Shares. This
condition does not apply to the
Investing Fund’s Sub-Advisor Group if
the Investing Fund Sub-Advisor or a
person controlling, controlled by, or
under common control with the
Investing Fund Sub-Advisor acts as the
investment adviser within the meaning
of section 2(a)(20)(A) of the Act.
8. No Investing Fund or Investing
Fund Affiliate will cause any existing or
potential investment by the Investing
Fund in a Fund to influence the terms
of any services or transactions between
the Investing Fund or Investing Fund
Affiliate and the Fund or Fund Affiliate.
9. The board of directors or trustees of
an Investing Management Company,
including a majority of the independent
directors or trustees, will adopt
procedures reasonably designed to
ensure that the Investing Fund’s
Advisor and any Investing Fund SubAdvisor are conducting the investment
program of the Investing Management
Company without taking into account
any consideration received by the
Investing Management Company or an
Investing Fund Affiliate from a Fund or
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16:12 Nov 10, 2009
Jkt 220001
a Fund Affiliate in connection with any
services or transactions.
10. Once an investment by an
Investing Fund in Fund Shares exceeds
the limit in section 12(d)(1)(A)(i) of the
Act, the board of directors or trustees of
a Fund (‘‘Board’’), including a majority
of the directors or trustees that are not
‘‘interested persons’’ within the
meaning of section 2(a)(19) of the Act
(‘‘independent Board members’’), will
determine that any consideration paid
by the Fund to the Investing Fund or an
Investing Fund Affiliate in connection
with any services or transactions: (a) Is
fair and reasonable in relation to the
nature and quality of the services and
benefits received by the Fund; (b) is
within the range of consideration that
the Fund would be required to pay to
another unaffiliated entity in connection
with the same services or transactions;
and (c) does not involve overreaching
on the part of any person concerned.
This condition does not apply with
respect to any services or transactions
between a Fund and its investment
adviser(s), or any person controlling,
controlled by, or under common control
with such investment adviser.
11. An Investing Fund Advisor,
Trustee or Sponsor will waive fees
otherwise payable to it by the Investing
Management Company or Investing
Trust in an amount at least equal to any
compensation (including fees received
pursuant to any plan adopted by the
Fund under rule 12b–1 under the Act)
received from a Fund by the Investing
Fund Advisor or Trustee or Sponsor, or
an affiliated person of the Investing
Fund Advisor, Trustee or Sponsor, other
than any advisory fees paid to the
Investing Fund Advisor, Trustee or
Sponsor by the Fund, in connection
with the investment by the Investing
Management Company or Investing
Trust in the Fund. Any Investing Fund
Sub-Advisor will waive fees otherwise
payable to the Investing Fund SubAdvisor, directly or indirectly, by the
Investing Management Company in an
amount at least equal to any
compensation received from a Fund by
the Investing Fund Sub-Advisor, or an
affiliated person of the Investing Fund
Sub-Advisor, other than any advisory
fees paid to the Investing Fund SubAdvisor or its affiliated person by a
Fund, in connection with the
investment by the Investing
Management Company in a Fund made
at the direction of the Investing Fund
Sub-Advisor. In the event that the
Investing Fund Sub-Advisor waives
fees, the benefit of the waiver will be
passed through to the Investing
Management Company.
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58331
12. No Investing Fund or Investing
Fund Affiliate (except to the extent it is
acting in its capacity as an investment
adviser to a Fund) will cause a Fund to
purchase a security in an Affiliated
Underwriting.
13. The Board, including a majority of
the independent Board members, will
adopt procedures reasonably designed
to monitor any purchases of securities
by a Fund in an Affiliated Underwriting
once an investment by an Investing
Fund in the Fund Shares exceeds the
limit of section 12(d)(1)(A)(i) of the Act,
including any purchases made directly
from an Underwriting Affiliate. The
Board will review these purchases
periodically, but no less frequently than
annually, to determine whether the
purchases were influenced by the
investment by the Investing Fund in the
Fund. The Board will consider, among
other things: (a) Whether the purchases
were consistent with the investment
objectives and policies of the Fund; (b)
how the performance of securities
purchased in an Affiliated Underwriting
compares to the performance of
comparable securities purchased during
a comparable period of time in
underwritings other than Affiliated
Underwritings or to a benchmark such
as a comparable market index; and (c)
whether the amount of securities
purchased by the Fund in Affiliated
Underwritings and the amount
purchased directly from an
Underwriting Affiliate have changed
significantly from prior years. The
Board will take any appropriate actions
based on its review, including, if
appropriate, the institution of
procedures designed to assure that
purchases of securities in Affiliated
Underwritings are in the best interests
of shareholders.
14. Each Fund will maintain and
preserve permanently in an easily
accessible place a written copy of the
procedures described in the preceding
condition, and any modifications to
such procedures, and will maintain and
preserve for a period not less than six
years from the end of the fiscal year in
which any purchase in an Affiliated
Underwriting occurred, the first two
years in an easily accessible place, a
written record of each purchase of
securities in Affiliated Underwritings
once an investment by an Investing
Fund in Fund Shares exceeds the limit
of section 12(d)(1)(A)(i) of the Act,
setting forth from whom the securities
were acquired, the identity of the
underwriting syndicate’s members, the
terms of the purchase, and the
information or material upon which the
Board’s determinations were made.
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15. Before investing in a Fund in
excess of the limits in section
12(d)(1)(A), the Investing Fund and the
Fund will execute a Participation
Agreement stating, without limitation,
that their boards of directors or trustees
and their investment advisers, and the
Trustee and Sponsor, as applicable,
understand the terms and conditions of
the order, and agree to fulfill their
responsibilities under the order. At the
time of its investment in Fund Shares in
excess of the limit in section
12(d)(1)(A)(i), an Investing Fund will
notify the Fund of the investment. At
such time, the Investing Fund will also
transmit to such Fund a list of names of
each Investing Fund Affiliate and
Underwriting Affiliate. The Investing
Fund will notify the Fund of any
changes to the list of names as soon as
reasonably practicable after a change
occurs. The Fund and the Investing
Fund will maintain and preserve a copy
of the order, the Participation
Agreement, and the list with any
updated information for the duration of
the investment and for a period of not
less than six years thereafter, the first
two years in an easily accessible place.
16. Before approving any advisory
contract under section 15 of the Act, the
board of directors or trustees of each
Investing Management Company,
including a majority of the independent
directors or trustees, will find that the
advisory fees charged under such
advisory contract are based on services
provided that will be in addition to,
rather than duplicative of, the services
provided under the advisory contract(s)
of any Fund in which the Investing
Management Company may invest.
These findings and their basis will be
recorded fully in the minute books of
the appropriate Investing Management
Company.
17. Any sales charges and/or service
fees charged with respect to shares of an
Investing Fund will not exceed the
limits applicable to a fund of funds as
set forth in Conduct Rule 2830 of the
NASD.
18. No Fund will acquire securities of
any investment company or companies
relying on sections 3(c)(1) or 3(c)(7) of
the Act in excess of the limits contained
in section 12(d)(1)(A) of the Act, except
as permitted pursuant to rule 12d1–1
under the Act.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–27130 Filed 11–10–09; 8:45 am]
BILLING CODE 8011–01–P
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16:12 Nov 10, 2009
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–60957; File No. SR–CBOE–
2009–070]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Order Approving a
Proposed Rule Change Relating to
Preferred Market Makers
November 6, 2009.
I. Introduction
On September 28, 2009, the Chicago
Board Options Exchange, Incorporated
(‘‘CBOE’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (the ‘‘Act’’),1 and Rule 19b–4
thereunder,2 a proposal to amend CBOE
Rule 8.13, ‘‘Preferred Market-Maker
Program’’ to establish a participation
entitlement for complex orders
designated to Preferred Market Makers
and to clarify the operation of the
Hybrid System with respect to the
existing Preferred Market Maker
participation entitlement for individual
options orders. The proposed rule
change was published for comment in
the Federal Register on October 7,
2009.3 The Commission received no
comments regarding the proposal. This
order approves the proposed rule
change.
II. Description of the Proposal
The CBOE proposes to amend CBOE
Rule 8.13 to: (1) Establish a
participation entitlement for complex
orders entered into the Complex Order
Book (‘‘COB’’) or the complex order
RFQ auction (‘‘COA’’) that are
designated to a Preferred Market Maker;
and (2) clarify the operation of the
Hybrid System with respect to the
Preferred Market Maker participation
entitlement for individual options
orders.
A. Participation Entitlement for
Complex Orders
Under the proposal, any Designated
Primary Market Maker, Lead Market
Maker, or Market Maker with an
appointment/allocation in the relevant
options class may be designated as a
Preferred Market Maker for complex
orders.4 A Preferred Market Maker must
comply with the quoting obligations
applicable to its Market Maker type
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 60746
(September 30, 2009), 74 FR 51626 (‘‘Notice’’).
4 See CBOE Rule 8.13, Interpretation and Policy
.01(a).
2 17
PO 00000
Frm 00094
Fmt 4703
Sfmt 4703
under CBOE’s rules and must provide
continuous electronic quotes (as defined
in CBOE Rule 1.1(ccc)) in at least 90%
of the series of each class for which it
receives Preferred Market Maker
orders.5 In addition, to receive a
participation entitlement for orders
entered into the COB, the Preferred
Market Maker must be quoting at the
best net priced bid/offer when the order
is received.6 For orders in a COA, the
Preferred Market Maker must: (1) At the
beginning of the auction, be quoting at
either (A) the best bid/offer on the CBOE
in at least one of the component series
of the complex order, or (B) the best net
priced bid/offer for the complex order;
and (2) be quoting at the best net priced
bid/offer at the conclusion of the
auction.7
CBOE prohibits an order flow
provider from notifying a Preferred
Market Maker of its intention to submit
a preferenced complex order so that the
Preferred Market Maker could change its
quotation to match the national best bid
or offer (‘‘NBBO’’) immediately prior to
the submission of the preferenced
order.8 CBOE states that CBOE Rule
4.18, ‘‘Prevention of the Misuse of
Material, Nonpublic Information,’’
prohibits this misuse of material nonpublic information.9 CBOE represents
that it will conduct surveillance for, and
enforce against, such violations.10
The participation entitlement for a
complex order is based on the contracts
remaining after equivalent net priced
orders and quotes on the EBook and
equivalent net priced public customer
complex orders resting in the COB that
have priority over Preferred Market
Makers have been filled.11 After these
orders have been filled, the
participation entitlement for a Preferred
Market Maker that satisfies the
requirements in CBOE Rule 8.13,
Interpretation and Policy .01 is: (1) 40%
when there are two or more Market
Makers also quoting at the best net
priced bid/offer execution price; and (2)
50% when there is one other Market
Maker quoting at the best net priced
bid/offer execution price.12 The
participation entitlement percentages
for complex orders are the same as the
5 See CBOE Rule 8.13, Interpretation and Policy
.01(c).
6 See CBOE Rule 8.13, Interpretation and Policy
.01(a)(ii).
7 See CBOE Rule 8.13, Interpretation and Policy
.01(a)(iii).
8 See Notice, supra note 3, at note 3.
9 Id.
10 Id.
11 See CBOE Rule 8.13, Interpretation and Policy
.01(b)(ii).
12 See CBOE Rule 8.13, Interpretation and Policy
.01(b).
E:\FR\FM\12NON1.SGM
12NON1
]]>Agencies
[Federal Register Volume 74, Number 217 (Thursday, November 12, 2009)]
[Notices]
[Pages 58325-58332]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-27130]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 28991; File No. 812-13638]
FaithShares Trust, et al.; Notice of Application
November 5, 2009.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (the ``Act'') for an exemption from
sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of the Act and rule 22c-1
under the Act; and under sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and 17(a)(2) of the Act; and under
section 12(d)(1)(J) for an exemption from sections 12(d)(1)(A) and
12(d)(1)(B) of the Act.
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Applicants: FaithShares Trust (``Trust''), FaithShares Advisors, LLC
(``Advisor'') and SEI Investments Distribution Company.
Summary of Application: Applicants request an order that would permit:
(a) Series of an open-end management investment company to issue shares
(``Fund Shares'') that can be redeemed only in large aggregations
(``Creation Unit Aggregations''); (b) secondary market transactions in
Fund Shares to occur at negotiated prices; (c) certain series to pay
redemption proceeds, under certain circumstances, more than seven days
after the tender of Fund Shares for redemption; (d) certain affiliated
persons of the series to deposit securities into, and receive
securities from, the series in connection with the purchase and
redemption of Creation Unit Aggregations; and (e) certain registered
management investment companies and unit investment trusts outside of
the same group of investment companies as the series to acquire Fund
Shares.
Filing Dates: The application was filed on March 4, 2009, and amended
on April 21, 2009, October 23, 2009, and November 4, 2009.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
and serving applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on November 30, 2009, and should be accompanied by proof of
service on applicants, in the form of an affidavit, or for lawyers, a
certificate of
[[Page 58326]]
service. Hearing requests should state the nature of the writer's
interest, the reason for the request, and the issues contested. Persons
who wish to be notified of a hearing may request notification by
writing to the Commission's Secretary.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-1090; Applicants: FaithShares Trust
and FaithShares Advisors, LLC, c/o Mr. J. Garrett Stevens, 3555
Northwest 58th Street, Suite 410, Oklahoma City, OK 73112 and SEI
Investments Distribution Company, c/o John Munch, Esq., 1 Freedom
Valley Drive, Oaks, PA 19456.
FOR FURTHER INFORMATION CONTACT: Jean E. Minarick, Senior Counsel at
(202) 551-6811 or Julia Kim Gilmer, Branch Chief, at (202) 551-6821
(Division of Investment Management, Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or an applicant
using the Company name box, at https://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicants' Representations
1. The Trust is registered as an open-end management investment
company under the Act and is organized as a Delaware statutory trust.
The Trust will initially offer Fund Shares of five series (``Initial
Funds''), each of which will track a specified equity securities index
(``Underlying Index'').\1\ Applicants may offer additional series of
the Trust (together with any other future registered open-end
investment company and its series advised by the Advisor or an entity
controlling, controlled by, or under common control with the Advisor,
the ``Future Funds,'' and the Future Funds together with the Initial
Funds, the ``Funds'').\2\
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\1\ The Initial Funds are: FaithShares Baptist Values Fund,
FaithShares Catholic Values Fund, FaithShares Christian Values Fund,
FaithShares Lutheran Values Fund and FaithShares Methodist Values
Fund.
\2\ All existing entities that currently intend to rely on the
requested order have been named as applicants. Any other existing or
future entity that relies on the order in the future will comply
with the terms and conditions of the application.
---------------------------------------------------------------------------
2. The Advisor, an Oklahoma limited liability company, or an entity
controlling, controlled by or under common control with the Advisor
will be the investment adviser to the Funds. The Advisor is registered
as an investment adviser under the Investment Advisers Act of 1940, as
amended (the ``Advisers Act''). The Advisor may enter into sub-advisory
agreements with one or more additional investment advisers to act as
sub-advisors to one or more Funds (``Sub-Advisors''). Any Sub-Advisor
will be registered under the Advisers Act. SEI Investments Distribution
Company, a broker-dealer registered under the Securities Exchange Act
of 1934 (the ``Exchange Act''), will act as the principal underwriter
and distributor for the Creation Unit Aggregations of Fund Shares (each
such broker-dealer, a ``Distributor''). Applicants request that the
requested order also apply to any other Distributor to the Funds in the
future that complies with the terms and conditions of the application.
3. The Funds will seek investment results that correspond, before
fees and expenses, generally to the price and yield performance of a
specified Underlying Index.\3\ The Initial Funds' Underlying Indexes
are comprised of domestic equity securities (securities which are
issued by U.S. issuers and non-U.S. issuers meeting the requirements
for trading in U.S. markets). A Future Fund's Underlying Index may be
based on domestic equity securities or foreign equity securities
(securities traded on a non-U.S. securities market) (such Future Fund,
a ``Foreign Fund''). Any entity that creates, compiles, sponsors or
maintains an Underlying Index (``Index Provider'') will not be an
affiliated person, as defined in section 2(a)(3) of the Act, or an
affiliated person of an affiliated person, of the Trust or a Fund, the
Advisor, any promoter of the Funds, Sub-Advisor or Distributor.\4\
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\3\ The Underlying Indexes for the Initial Funds are the:
FaithShares Baptist Values Index, FaithShares Catholic Values Index,
FaithShares Christian Values Index, FaithShares Lutheran Values
Index and FaithShares Methodist Values Index.
\4\ The Index Provider to the Initial Funds is FTSE/KLD Research
and Analytics, Inc.
---------------------------------------------------------------------------
4. The investment objective of each Fund will be to seek to track
the performance, before fees and expenses, of its Underlying Index.\5\
Intra-day values of each Underlying Index will be disseminated every 15
seconds throughout the trading day except for the values of Underlying
Indices based on foreign equity securities which will be disseminated
every 60 seconds throughout the trading day. A Fund will utilize either
a replication or representative sampling strategy which will be
disclosed with regard to each Fund in its prospectus
(``Prospectus'').\6\ A Fund using a replication strategy will invest in
the Component Securities in its Underlying Index in approximately the
same proportions as in the Underlying Index. In certain circumstances,
such as when there are practical difficulties or substantial costs
involved in holding every security in an Underlying Index or when one
or more Component Securities is less liquid, illiquid or unavailable, a
Fund may use a representative sampling strategy pursuant to which it
will invest in some, but not all of the Component Securities of its
Underlying Index.\7\ Applicants anticipate that a Fund that utilizes a
representative sampling strategy will not track the performance of its
Underlying Index with the same degree of accuracy as an investment
vehicle that invests in every Component Security of the Underlying
Index with the same weighting as the Underlying Index. Applicants
expect that each Fund will have an annual tracking error relative to
the performance of its Underlying Index of less than 5 percent.
---------------------------------------------------------------------------
\5\ Applicants represent that each Fund will invest at least 80%
of its assets in the component securities (``Component Securities'')
of its Underlying Index. In the case of Foreign Funds, at least 80%
of the Fund's assets will be invested in Component Securities and
Depositary Receipts (as defined below) representing such Component
Securities. A Fund may invest up to 20% of its assets in cash and
cash equivalents, such as money market instruments or other types of
investments not included in its Underlying Index, but which the
Advisor or Sub-Advisor believes will help the Fund track its
Underlying Index. ``Depositary Receipts'' will typically be American
Depositary Receipts, as well as Global Depositary Receipts and Euro
Depositary Receipts.
\6\ All representations and conditions contained in the
application that require a Fund to disclose particular information
in the Fund's Prospectus and/or annual report shall be effective
with respect to the Fund until the time that the Fund complies with
the disclosure requirements adopted by the Commission in Investment
Company Act Release No. 28584 (Jan. 13, 2009).
\7\ Under the representative sampling strategy, the Advisor and
any Sub-Advisor will seek to construct a Fund's portfolio so that
its market capitalization, industry weightings, fundamental
investment characteristics (such as return variability, earnings
valuation and yield) and liquidity measures perform like those of
the Underlying Index.
---------------------------------------------------------------------------
5. The Funds will issue Creation Unit Aggregations in groups of
50,000 Fund Shares. Applicants expect that the initial price of a
Creation Unit Aggregation will fall in the range of $1,000,000 to
$2,000,000. All orders to purchase Creation Unit Aggregations must be
placed with the Distributor, by or through a party that has entered
into an agreement with the Distributor (``Authorized Participant'').
The Distributor will be responsible for transmitting the orders to the
Funds. An Authorized Participant must be either: (a) A broker-dealer or
other participant in the continuous net settlement system of the
National Securities Clearing Corporation, a clearing agency registered
with the Commission, or (b)
[[Page 58327]]
a participant in the Depository Trust Company (``DTC'', and such
participant, ``DTC Participant''). Fund Shares of each Fund generally
will be sold in Creation Unit Aggregations in exchange for an in-kind
deposit by the purchaser of a portfolio of securities designated by the
Advisor or Sub-Advisor to correspond generally to the price and yield
performance of the relevant Underlying Index (the ``Deposit
Securities''), together with the deposit of a specified cash payment
(``Balancing Amount,'' together with the Deposit Securities, the
``Portfolio Deposit''). The Balancing Amount is an amount equal to the
difference between (a) the net asset value (``NAV'') (per Creation Unit
Aggregation) of a Fund and (b) the total aggregate market value (per
Creation Unit Aggregation) of the Deposit Securities.\8\ Each Fund may
permit a purchaser of Creation Unit Aggregations to substitute cash in
lieu of depositing some or all of the Deposit Securities if a Fund and
the Advisor believe such method would reduce the Fund's transaction
costs or enhance the Fund's operating efficiency.\9\
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\8\ Each Fund will sell and redeem Creation Unit Aggregations
only on a ``Business Day,'' which is any day that a Fund is required
to be open under Section 22(e) of the Act. Each Business Day, prior
to the opening of trading on the Exchange (defined below), the list
of names and the required number of shares of each security included
in the current Portfolio Deposit and the Balancing Amount will be
made available. Any national securities exchange (as defined in
section 2(a)(26) of the Act) (``Exchange'') on which Fund Shares are
listed will disseminate, every 15 seconds during its regular trading
hours, an amount per Fund Share representing the sum of the
estimated Balancing Amount and the current value of the Deposit
Securities.
\9\ Applicants state that in some circumstances or in certain
countries, it may not be practicable or convenient, or permissible
under the laws of certain countries or the regulations of certain
foreign stock exchanges, for a Foreign Fund to operate exclusively
on an ``in-kind'' basis. Applicants also note that when a
substantial rebalancing of a Fund's portfolio is required, the
Advisor might prefer to receive cash rather than in-kind securities
so that the Fund may avoid transaction costs involved in liquidating
part of its portfolio to achieve the rebalancing.
---------------------------------------------------------------------------
6. An investor purchasing or redeeming a Creation Unit Aggregation
from a Fund will be charged a fee (``Transaction Fee'') to prevent the
dilution of the interests of the remaining shareholders resulting from
costs in connection with the purchase or redemption of Creation Unit
Aggregations.\10\ The maximum Transaction Fees, and any variations or
waivers thereof, will be disclosed in each Fund's Prospectus. The
Distributor will be responsible for delivering the Fund's Prospectus to
those persons purchasing Creation Unit Aggregations, and for
maintaining records of both the orders placed and the confirmations of
acceptance furnished. In addition, the Distributor will maintain a
record of the instructions given to the applicable Fund to implement
the delivery of its Fund Shares.
---------------------------------------------------------------------------
\10\ Where a Fund permits a purchaser to substitute cash in lieu
of depositing a portion of the requisite Deposit Securities, the
purchaser may be assessed a higher Transaction Fee to cover the cost
of purchasing such Deposit Securities, including operational
processing and brokerage costs, and part or all of the spread
between the expected bid and the offer side of the market relating
to such Deposit Securities.
---------------------------------------------------------------------------
7. Purchasers of Fund Shares in Creation Unit Aggregations may hold
such Fund Shares or may sell such Fund Shares into the secondary
market. Fund Shares will be listed and traded on an Exchange. It is
expected that one or more member firms of a listing Exchange will be
designated to act as a specialist or a market maker (each, a ``Market
Maker'') and maintain a market for Fund Shares trading on the listing
Exchange. The price of Fund Shares trading on an Exchange will be based
on the current bid/offer market. Fund Shares sold in the secondary
market will be subject to customary brokerage commissions and charges.
8. Applicants expect that purchasers of Creation Unit Aggregations
will include institutional investors and arbitrageurs (which could
include institutional investors). A Market Maker, in providing a fair
and orderly secondary market for the Fund Shares, also may purchase
Creation Unit Aggregations for use in its market-making activities.
Applicants expect that secondary market purchasers of Fund Shares will
include both institutional investors and retail investors.\11\
Applicants expect that the price at which Fund Shares trade will be
disciplined by arbitrage opportunities created by the option to
continually purchase or redeem Creation Unit Aggregations at their NAV,
which should ensure that Fund Shares will not trade at a material
discount or premium in relation to their NAV.
---------------------------------------------------------------------------
\11\ Fund Shares will be registered in book-entry form only. DTC
or its nominee will be the registered owner of all outstanding Fund
Shares. DTC or DTC Participants will maintain records reflecting
beneficial owners of Fund Shares.
---------------------------------------------------------------------------
9. Fund Shares will not be individually redeemable, and owners of
Fund Shares may acquire those Fund Shares from a Fund, or tender such
Fund Shares for redemption to the Fund, in Creation Unit Aggregations
only. To redeem, an investor will have to accumulate enough Fund Shares
to constitute a Creation Unit Aggregation. Redemption orders must be
placed by or through an Authorized Participant. An investor redeeming a
Creation Unit Aggregation generally will receive (a) Portfolio
Securities designated to be delivered for Creation Unit Aggregation
redemptions on the date that the request for redemption is made (``Fund
Securities'') \12\ and (b) a ``Cash Redemption Payment,'' consisting of
an amount calculated in the same manner as the Balancing Amount,
although the actual amount of the Cash Redemption Payment may differ if
the Fund Securities are not identical to the Deposit Securities on that
day. An investor may receive the cash equivalent of a Fund Security in
certain circumstances, such as if the investor is constrained from
effecting transactions in the security by regulation or policy.
---------------------------------------------------------------------------
\12\ The Funds will comply with the federal securities laws in
accepting Deposit Securities and satisfying redemptions with Fund
Securities, including that the Deposit Securities and Fund
Securities are sold in transactions that would be exempt from
registration under the Securities Act of 1933. As a general matter,
the Deposit Securities and Fund Securities will correspond pro rata
to the securities held by a Fund, although Fund Securities received
on redemption may not be identical to Deposit Securities deposited
in connection with the purchase of Creation Unit Aggregations for
the same day.
---------------------------------------------------------------------------
10. No Fund will be advertised or marketed or otherwise held out as
a traditional open-end investment company or a mutual fund. Instead,
each Fund will be marketed as an ``exchange-traded fund'' or ``ETF,''
``investment company'' and ``fund.'' All marketing materials that
describe the features or method of obtaining, buying or selling
Creation Unit Aggregations or Fund Shares, or refer to redeemability,
will prominently disclose that Fund Shares are not individually
redeemable and that the owners of Fund Shares may acquire or redeem
Fund Shares from the Fund in Creation Unit Aggregations only. The same
approach will be followed in the statement of additional information
(``SAI''), shareholder reports and investor educational materials
issued or circulated in connection with the Fund Shares. Each Fund will
provide copies of its annual and semi-annual shareholder reports to DTC
Participants for distribution to shareholders.
Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the Act for an
exemption from sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of the Act
and rule 22c-1 under the Act; under sections 6(c) and 17(b) of the Act
for an exemption from sections 17(a)(1) and 17(a)(2) of the Act; and
under section 12(d)(1)(J) of the Act for an exemption from sections
12(d)(1)(A) and 12(d)(1)(B) of the Act.
[[Page 58328]]
2. Section 6(c) of the Act provides that the Commission may exempt
any person, security or transaction, or any class of persons,
securities or transactions, from any provision of the Act, if and to
the extent that such exemption is necessary or appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Act.
Section 17(b) of the Act authorizes the Commission to exempt a proposed
transaction from section 17(a) of the Act if evidence establishes that
the terms of the transaction, including the consideration to be paid or
received, are reasonable and fair and do not involve overreaching on
the part of any person concerned, and the proposed transaction is
consistent with the policies of the registered investment company and
the general purposes of the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may exempt any person, security, or
transaction, or any class or classes of persons, securities or
transactions, from any provisions of section 12(d)(1) if the exemption
is consistent with the public interest and the protection of investors.
Sections 5(a)(1) and 2(a)(32) of the Act
3. Section 5(a)(1) of the Act defines an ``open-end company'' as a
management investment company that is offering for sale or has
outstanding any redeemable security of which it is the issuer. Section
2(a)(32) of the Act defines a redeemable security as any security,
other than short-term paper, under the terms of which the holder, upon
its presentation to the issuer, is entitled to receive approximately
the holder's proportionate share of the issuer's current net assets, or
the cash equivalent. Because Fund Shares will not be individually
redeemable, applicants request an order that would permit each Fund to
issue Fund Shares that are redeemable in Creation Unit Aggregations
only. Applicants state that investors may purchase Fund Shares in
Creation Unit Aggregations and redeem Creation Unit Aggregations from
each Fund. Applicants state that because Creation Unit Aggregations may
always be purchased and redeemed at NAV, the market price of Fund
Shares should not vary substantially from their NAV.
Section 22(d) of the Act and Rule 22c-1 under the Act
4. Section 22(d) of the Act, among other things, prohibits a dealer
from selling a redeemable security, which is currently being offered to
the public by or through a principal underwriter, except at a current
public offering price described in the prospectus. Rule 22c-1 under the
Act generally requires that a dealer selling, redeeming or repurchasing
a redeemable security do so only at a price based on its NAV.
Applicants state that secondary market trading in Fund Shares will take
place at negotiated prices, not at a current offering price described
in a Fund's Prospectus, and not at a price based on NAV. Thus,
purchases and sales of Fund Shares in the secondary market will not
comply with section 22(d) of the Act and rule 22c-1 under the Act.
Applicants request an exemption under section 6(c) from these
provisions.
5. Applicants assert that the concerns sought to be addressed by
section 22(d) of the Act and rule 22c-1 under the Act with respect to
pricing are equally satisfied by the proposed method of pricing Fund
Shares. Applicants maintain that while there is little legislative
history regarding section 22(d), its provisions, as well as those of
rule 22c-1, appear to have been designed to (a) prevent dilution caused
by certain riskless-trading schemes by principal underwriters and
contract dealers, (b) prevent unjust discrimination or preferential
treatment among buyers, and (c) ensure an orderly distribution of
investment company shares by eliminating price competition from dealers
offering shares at less than the published sales price and repurchasing
shares at more than the published redemption price.
6. Applicants believe that none of these purposes will be thwarted
by permitting Fund Shares to trade in the secondary market at
negotiated prices. Applicants state that (a) secondary market trading
in Fund Shares do not directly involve Fund assets and will not cause
dilution of an investment in Fund Shares, and (b) to the extent
different prices exist during a given trading day, or from day to day,
such variances occur as a result of third-party market forces, such as
supply and demand. Therefore, applicants assert that secondary market
transactions in Fund Shares will not lead to discrimination or
preferential treatment among purchasers. Finally, applicants contend
that the proposed distribution system will be orderly because
competitive forces will ensure that the difference between the market
price of Fund Shares and their NAV remains narrow.
Section 22(e)
7. Section 22(e) of the Act generally prohibits a registered
investment company from suspending the right of redemption or
postponing the date of payment of redemption proceeds for more than
seven days after the tender of a security for redemption. Applicants
state that settlement of redemptions for the Foreign Funds is
contingent not only on the settlement cycle of the United States
market, but also on the delivery cycles in local markets for the
underlying foreign securities held by Foreign Funds. Applicants state
that delivery cycles currently practicable for transferring Fund
Securities to redeeming investors, coupled with local market holiday
schedules, will, in certain circumstances, require a delivery process
longer than seven calendar days for Foreign Funds. Applicants request
relief under section 6(c) of the Act from section 22(e) to permit
Foreign Funds to pay redemption proceeds up to a maximum of 14 calendar
days following the tender of a Creation Unit Aggregation of such Funds.
Except as disclosed in a Foreign Fund's Prospectus and/or SAI,
applicants expect that each Foreign Fund will be able to deliver
redemption proceeds within seven days.\13\
---------------------------------------------------------------------------
\13\ Rule 15c6-1 under the Exchange Act requires that most
securities transactions be settled within three business days of the
trade. Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations applicants
may have under rule 15c6-1.
---------------------------------------------------------------------------
8. Applicants state that section 22(e) was designed to prevent
unreasonable, undisclosed and unforeseen delays in the payment of
redemption proceeds. Applicants assert that the requested relief will
not lead to the problems that section 22(e) was designed to prevent.
Applicants state that the SAI will disclose those local holidays in a
given year where more than seven days will be needed to deliver
redemption proceeds and the maximum number of days needed to deliver
the proceeds. Applicants are not seeking relief from section 22(e) with
respect to Foreign Funds that do not effect redemptions of Creation
Unit Aggregations in-kind.
Section 12(d)(1)
9. Section 12(d)(1)(A) of the Act, in relevant part, prohibits a
registered investment company from acquiring securities of an
investment company if such securities represent more than 3% of the
total outstanding voting stock of the acquired company, more than 5% of
the total assets of the acquiring company, or, together with the
securities of any other investment companies, more than 10% of the
total assets of the acquiring company. Section 12(d)(1)(B) of the Act
prohibits a registered open-end investment company, its principal
underwriter, or any other broker or dealer from selling
[[Page 58329]]
the investment company's shares to another investment company if the
sale will cause the acquiring company to own more than 3% of the
acquired company's voting stock, or if the sale will cause more than
10% of the acquired company's voting stock to be owned by investment
companies generally.
10. Applicants request an exemption to permit management investment
companies (``Investing Management Companies'') and unit investment
trusts (``Investing Trusts,'' and collectively with the Investing
Management Companies, ``Investing Funds'') registered under the Act
that are not sponsored or advised by the Advisor or any entity
controlling, controlled by, or under common control with the Advisor
and are not part of the same ``group of investment companies,'' as
defined in section 12(d)(1)(G)(ii) of the Act, as the Funds to acquire
Fund Shares beyond the limits of section 12(d)(1)(A). Investing Funds
do not include the Funds. In addition, applicants seek relief to permit
the Distributor and any broker or dealer that is registered under the
Exchange Act to sell Fund Shares to an Investing Fund in excess of the
limits of section 12(d)(1)(B).
11. Each Investing Management Company will be advised by an
investment adviser within the meaning of section 2(a)(20)(A) of the Act
(the ``Investing Fund Advisor'') and may be sub-advised by one or more
investment advisers within the meaning of section 2(a)(20)(B) of the
Act (each an ``Investing Fund Sub-Advisor''). Any Investing Fund
Advisor or Investing Fund Sub-Advisor will be registered under the
Advisers Act. Each Investing Trust will be sponsored by a sponsor
(``Sponsor'').
12. Applicants submit that the proposed conditions to the requested
relief adequately address the concerns underlying the limits in
sections 12(d)(1)(A) and (B), which include concerns about undue
influence by a fund of funds over underlying funds, excessive layering
of fees and overly complex fund structures. Applicants believe that the
requested exemption is consistent with the public interest and the
protection of investors.
13. Applicants believe that neither the Investing Funds nor an
Investing Fund Affiliate would be able to exert undue influence over
the Funds.\14\ To limit the control that an Investing Fund may have
over a Fund, applicants propose a condition prohibiting an Investing
Fund Advisor or a Sponsor, any person controlling, controlled by, or
under common control with an Investing Fund Advisor or Sponsor, and any
investment company and any issuer that would be an investment company
but for sections 3(c)(1) or 3(c)(7) of the Act that is advised or
sponsored by an Investing Fund Advisor or Sponsor, or any person
controlling, controlled by, or under common control with an Investing
Fund Advisor or Sponsor (``Investing Fund's Advisory Group'') from
controlling (individually or in the aggregate) a Fund within the
meaning of section 2(a)(9) of the Act. The same prohibition would apply
to any Investing Fund Sub-Advisor, any person controlling, controlled
by or under common control with the Investing Fund Sub-Advisor, and any
investment company or issuer that would be an investment company but
for sections 3(c)(1) or 3(c)(7) of the Act (or portion of such
investment company or issuer) advised or sponsored by the Investing
Fund Sub-Advisor or any person controlling, controlled by or under
common control with the Investing Fund Sub-Advisor (``Investing Fund's
Sub-Advisor Group'').
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\14\ An ``Investing Fund Affiliate'' is an Investing Fund
Advisor, Investing Fund Sub-Advisor, Sponsor, promoter, and
principal underwriter of an Investing Fund, and any person
controlling, controlled by, or under common control with any of
these entities. A ``Fund Affiliate'' is an investment adviser,
promoter, or principal underwriter of a Fund and any person
controlling, controlled by or under common control with any of these
entities.
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14. Applicants propose other conditions to limit the potential for
undue influence over the Funds, including that no Investing Fund or
Investing Fund Affiliate (except to the extent it is acting in its
capacity as an investment adviser to a Fund) will cause a Fund to
purchase a security in any offering of securities during the existence
of any underwriting or selling syndicate of which a principal
underwriter is an Underwriting Affiliate (``Affiliated Underwriting'').
An ``Underwriting Affiliate'' is a principal underwriter in any
underwriting or selling syndicate that is an officer, director, member
of an advisory board, Investing Fund Advisor, Investing Fund Sub-
Advisor, employee or Sponsor of an Investing Fund, or a person of which
any such officer, director, member of an advisory board, Investing Fund
Advisor, Investing Fund Sub-Advisor, employee, or Sponsor is an
affiliated person (except that any person whose relationship to the
Fund is covered by section 10(f) of the Act is not an Underwriting
Affiliate).
15. Applicants assert that the proposed conditions address any
concerns regarding excessive layering of fees. The board of directors
or trustees of any Investing Management Company, including a majority
of the directors or trustees who are not ``interested persons'' within
the meaning of section 2(a)(19) of the Act (``independent directors or
trustees''), will find that the advisory fees charged to the Investing
Management Company are based on services provided that will be in
addition to, rather than duplicative of, services provided under the
advisory contract(s) of any Fund in which the Investing Management
Company may invest. In addition, except as provided in condition 11, an
Investing Fund Advisor or a trustee (``Trustee'') or Sponsor of an
Investing Trust, as applicable, will waive fees otherwise payable to it
by the Investing Fund in an amount at least equal to any compensation
(including fees received pursuant to any plan adopted by a Fund under
rule 12b-1 under the Act) received by the Investing Fund Advisor or
Trustee or Sponsor or an affiliated person of the Investing Fund
Advisor, Trustee or Sponsor, from a Fund in connection with the
investment by the Investing Fund in the Fund. Applicants also state
that any sales charges or service fees charged with respect to shares
of an Investing Fund will not exceed the limits applicable to a fund of
funds set forth in Conduct Rule 2830 of the National Association of
Securities Dealers (``NASD'').\15\
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\15\ Any references to NASD Conduct Rule 2830 include any
successor or replacement rule to NASD Conduct Rule 2830 that may be
adopted by the Financial Industry Regulatory Authority.
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16. Applicants submit that the proposed conditions address the
concern about complexity. Applicants note that no Fund may acquire
securities of any investment company or company relying on sections
3(c)(1) or 3(c)(7) of the Act in excess of the limits contained in
section 12(d)(1)(A) of the Act except as permitted pursuant to rule
12d1-1 under the Act. To ensure that Investing Funds comply with the
terms and conditions of the requested relief from section 12(d)(1), any
Investing Fund that intends to invest in a Fund in reliance on the
requested order will enter into a written agreement with such Fund
regarding the terms of such Investing Fund's investment
(``Participation Agreement'') requiring the Investing Fund to adhere to
the terms and conditions of the requested order. The Participation
Agreement also will include an acknowledgement from the Investing Fund
that it may rely on the requested order only to invest in the Funds and
not in any other investment company.
[[Page 58330]]
17. Applicants also note that a Fund may choose to reject a direct
purchase of Fund Shares in Creation Unit Aggregations by an Investing
Fund. To the extent that an Investing Fund purchases Fund Shares in the
secondary market, a Fund would still retain its ability to reject
purchases of Fund Shares made in reliance on the requested order by
declining to enter into the Participation Agreement prior to any
investment by an Investing Fund in excess of the limits of section
12(d)(1)(A).
Sections 17(a)(1) and (2) of the Act
18. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such a person (``Second-Tier Affiliate''), from selling any security to
or purchasing any security from the company. Section 2(a)(3) of the Act
defines ``affiliated person'' to include (a) any person directly or
indirectly owning, controlling or holding with power to vote 5% or more
of the outstanding voting securities of the other person, (b) any
person 5% or more of whose outstanding voting securities are directly
or indirectly owned, controlled or held with the power to vote by the
other person, and (c) any person directly or indirectly controlling,
controlled by or under common control with the other person. Section
2(a)(9) of the Act provides that a control relationship will be
presumed where one person owns more than 25% of another person's voting
securities.
19. Applicants request an exemption from section 17(a) of the Act
pursuant to sections 6(c) and 17(b) of the Act to permit persons to
effectuate in-kind purchases and redemptions with a Fund when they are
affiliated persons or Second-Tier Affiliates of the Funds solely by
virtue of one or more of the following: (a) Holding 5% or more, or in
excess of 25%, of the outstanding Fund Shares of one or more Funds; (b)
having an affiliation with a person with an ownership interest
described in (a); or (c) holding 5% or more, or more than 25%, of the
shares of any other registered investment company (or series thereof)
advised by the Advisor or an entity controlling, controlled by or under
common control with the Advisor.
20. Applicants assert that no useful purpose would be served by
prohibiting these types of affiliated persons from purchasing or
redeeming Creation Unit Aggregations through ``in-kind transactions.''
The procedures for both in-kind purchases and in-kind redemptions of
Creation Unit Aggregations will be the same for all purchases and
redemptions. Deposit Securities and Fund Securities will be valued in
the same manner as Portfolio Securities. Therefore, applicants state
that in-kind purchases and redemptions will afford no opportunity for
the specified affiliated persons, or Second-Tier Affiliates, of a Fund
to effect a transaction detrimental to other holders of Fund Shares.
Applicants also believe that in-kind purchases and redemptions will not
result in self-dealing or overreaching of a Fund.
21. Applicants also seek relief from section 17(a) to permit a Fund
that is an affiliated person of an Investing Fund to sell its Fund
Shares to and redeem its Fund Shares from an Investing Fund, and to
engage in the accompanying in-kind transactions with the Investing
Fund.\16\ Applicants state that the terms of the transactions are fair
and reasonable and do not involve overreaching. Applicants note that
any consideration paid by an Investing Fund for the purchase or
redemption of Fund Shares directly from a Fund will be based on the NAV
of the Fund.\17\ Applicants believe that any proposed transactions
directly between the Funds and Investing Funds will be consistent with
the policies of each Investing Fund. The purchase of Creation Unit
Aggregations by an Investing Fund directly from a Fund will be
accomplished in accordance with the investment restrictions of any such
Investing Fund and will be consistent with the investment policies set
forth in the Investing Fund's registration statement. The Participation
Agreement will require any Investing Fund that purchases Creation Unit
Aggregations directly from a Fund to represent that the purchase of
Creation Unit Aggregations from a Fund by an Investing Fund will be
accomplished in compliance with the investment restrictions of the
Investing Fund and will be consistent with the investment policies set
forth in the Investing Fund's registration statement.
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\16\ Applicants acknowledge that receipt of compensation by (a)
an affiliated person of an Investing Fund, or an affiliated person
of such person, for the purchase by the Investing Fund of Fund
Shares or (b) an affiliated person of a Fund, or an affiliated
person of such person, for the sale by the Fund of its Fund Shares
to an Investing Fund may be prohibited by section 17(e)(1) of the
Act. The Participation Agreement also will include this
acknowledgment.
\17\ Applicants believe that most Investing Funds will purchase
Fund Shares in the secondary market and will not purchase Creation
Unit Aggregations directly from a Fund. However, the requested
relief would apply to direct sales of Creation Unit Aggregations by
a Fund to an Investing Fund and redemptions of those Fund Shares.
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Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions: \18\
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\18\ See note 6, supra.
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ETF Relief
1. Each Fund's Prospectus will clearly disclose that, for purposes
of the Act, the Fund Shares are issued by the Funds, which are
registered investment companies, and that the acquisition of Fund
Shares by investment companies is subject to the restrictions of
section 12(d)(1) of the Act, except as permitted by an exemptive order
that permits registered investment companies to invest in a Fund beyond
the limits in Section 12(d)(1), subject to certain terms and
conditions, including that the registered investment company enter into
a Participation Agreement with the Fund regarding the terms of the
investment.
2. As long as a Fund operates in reliance on the requested order,
its Fund Shares will be listed on an Exchange.
3. Neither the Trust nor any Fund will be advertised or marketed as
an open-end investment company or a mutual fund. Each Fund's Prospectus
will prominently disclose that Fund Shares are not individually
redeemable shares and will disclose that the owners of Fund Shares may
acquire those Fund Shares from the Fund and tender those Fund Shares
for redemption to the Fund in Creation Unit Aggregations only. Any
advertising material that describes the purchase or sale of Creation
Unit Aggregations or refers to redeemability will prominently disclose
that Fund Shares are not individually redeemable, and that owners of
Fund Shares may acquire those Fund Shares from the Fund and tender
those Fund Shares for redemption to the Fund in Creation Unit
Aggregations only.
4. The Web sites maintained for the Funds, which are and will be
publicly accessible at no charge, will contain the following
information, on a per Fund Share basis: (a) The prior Business Day's
NAV and the mid-point of the bid-ask spread at the time of the
calculation of NAV (``Bid/Ask Price''), and a calculation of the
premium or discount of the Bid/Ask Price at the time of calculation of
the NAV against such NAV; and (b) data in chart format displaying the
frequency distribution of discounts and premiums of the daily Bid/Ask
Price against the NAV, within appropriate ranges, for each of the four
previous calendar quarters.
5. Each Fund's Prospectus and annual report will also include: (a)
The
[[Page 58331]]
information listed in condition 4(b), (i) in the case of the
Prospectus, for the most recently completed year (and the most recently
completed quarter or quarters, as applicable) and (ii) in the case of
the annual report, for the immediately preceding five years, as
applicable; and (b) the following data, calculated on a per Fund Share
basis for one, five and ten year periods (or life of the Fund): (i) The
cumulative total return and the average annual total return based on
NAV and Bid/Ask Price, and (ii) the cumulative total return of the
relevant Underlying Index.
6. The requested relief to permit ETF operations will expire on the
effective date of any Commission rule under the Act that provides
relief permitting the operation of index-based ETFs.
Section 12(d)(1) Relief
7. The members of an Investing Fund's Advisory Group will not
control (individually or in the aggregate) any Fund within the meaning
of section 2(a)(9) of the Act. The members of an Investing Fund's Sub-
Advisor Group will not control (individually or in the aggregate) any
Fund within the meaning of section 2(a)(9) of the Act. If, as a result
of a decrease in the outstanding Fund Shares, an Investing Fund's
Advisory Group or an Investing Fund's Sub-Advisor Group, each in the
aggregate, becomes a holder of more than 25 percent of the Fund Shares,
it will vote its Fund Shares in the same proportion as the vote of all
other holders of the Fund Shares. This condition does not apply to the
Investing Fund's Sub-Advisor Group if the Investing Fund Sub-Advisor or
a person controlling, controlled by, or under common control with the
Investing Fund Sub-Advisor acts as the investment adviser within the
meaning of section 2(a)(20)(A) of the Act.
8. No Investing Fund or Investing Fund Affiliate will cause any
existing or potential investment by the Investing Fund in a Fund to
influence the terms of any services or transactions between the
Investing Fund or Investing Fund Affiliate and the Fund or Fund
Affiliate.
9. The board of directors or trustees of an Investing Management
Company, including a majority of the independent directors or trustees,
will adopt procedures reasonably designed to ensure that the Investing
Fund's Advisor and any Investing Fund Sub-Advisor are conducting the
investment program of the Investing Management Company without taking
into account any consideration received by the Investing Management
Company or an Investing Fund Affiliate from a Fund or a Fund Affiliate
in connection with any services or transactions.
10. Once an investment by an Investing Fund in Fund Shares exceeds
the limit in section 12(d)(1)(A)(i) of the Act, the board of directors
or trustees of a Fund (``Board''), including a majority of the
directors or trustees that are not ``interested persons'' within the
meaning of section 2(a)(19) of the Act (``independent Board members''),
will determine that any consideration paid by the Fund to the Investing
Fund or an Investing Fund Affiliate in connection with any services or
transactions: (a) Is fair and reasonable in relation to the nature and
quality of the services and benefits received by the Fund; (b) is
within the range of consideration that the Fund would be required to
pay to another unaffiliated entity in connection with the same services
or transactions; and (c) does not involve overreaching on the part of
any person concerned. This condition does not apply with respect to any
services or transactions between a Fund and its investment adviser(s),
or any person controlling, controlled by, or under common control with
such investment adviser.
11. An Investing Fund Advisor, Trustee or Sponsor will waive fees
otherwise payable to it by the Investing Management Company or
Investing Trust in an amount at least equal to any compensation
(including fees received pursuant to any plan adopted by the Fund under
rule 12b-1 under the Act) received from a Fund by the Investing Fund
Advisor or Trustee or Sponsor, or an affiliated person of the Investing
Fund Advisor, Trustee or Sponsor, other than any advisory fees paid to
the Investing Fund Advisor, Trustee or Sponsor by the Fund, in
connection with the investment by the Investing Management Company or
Investing Trust in the Fund. Any Investing Fund Sub-Advisor will waive
fees otherwise payable to the Investing Fund Sub-Advisor, directly or
indirectly, by the Investing Management Company in an amount at least
equal to any compensation received from a Fund by the Investing Fund
Sub-Advisor, or an affiliated person of the Investing Fund Sub-Advisor,
other than any advisory fees paid to the Investing Fund Sub-Advisor or
its affiliated person by a Fund, in connection with the investment by
the Investing Management Company in a Fund made at the direction of the
Investing Fund Sub-Advisor. In the event that the Investing Fund Sub-
Advisor waives fees, the benefit of the waiver will be passed through
to the Investing Management Company.
12. No Investing Fund or Investing Fund Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Fund)
will cause a Fund to purchase a security in an Affiliated Underwriting.
13. The Board, including a majority of the independent Board
members, will adopt procedures reasonably designed to monitor any
purchases of securities by a Fund in an Affiliated Underwriting once an
investment by an Investing Fund in the Fund Shares exceeds the limit of
section 12(d)(1)(A)(i) of the Act, including any purchases made
directly from an Underwriting Affiliate. The Board will review these
purchases periodically, but no less frequently than annually, to
determine whether the purchases were influenced by the investment by
the Investing Fund in the Fund. The Board will consider, among other
things: (a) Whether the purchases were consistent with the investment
objectives and policies of the Fund; (b) how the performance of
securities purchased in an Affiliated Underwriting compares to the
performance of comparable securities purchased during a comparable
period of time in underwritings other than Affiliated Underwritings or
to a benchmark such as a comparable market index; and (c) whether the
amount of securities purchased by the Fund in Affiliated Underwritings
and the amount purchased directly from an Underwriting Affiliate have
changed significantly from prior years. The Board will take any
appropriate actions based on its review, including, if appropriate, the
institution of procedures designed to assure that purchases of
securities in Affiliated Underwritings are in the best interests of
shareholders.
14. Each Fund will maintain and preserve permanently in an easily
accessible place a written copy of the procedures described in the
preceding condition, and any modifications to such procedures, and will
maintain and preserve for a period not less than six years from the end
of the fiscal year in which any purchase in an Affiliated Underwriting
occurred, the first two years in an easily accessible place, a written
record of each purchase of securities in Affiliated Underwritings once
an investment by an Investing Fund in Fund Shares exceeds the limit of
section 12(d)(1)(A)(i) of the Act, setting forth from whom the
securities were acquired, the identity of the underwriting syndicate's
members, the terms of the purchase, and the information or material
upon which the Board's determinations were made.
[[Page 58332]]
15. Before investing in a Fund in excess of the limits in section
12(d)(1)(A), the Investing Fund and the Fund will execute a
Participation Agreement stating, without limitation, that their boards
of directors or trustees and their investment advisers, and the Trustee
and Sponsor, as applicable, understand the terms and conditions of the
order, and agree to fulfill their responsibilities under the order. At
the time of its investment in Fund Shares in excess of the limit in
section 12(d)(1)(A)(i), an Investing Fund will notify the Fund of the
investment. At such time, the Investing Fund will also transmit to such
Fund a list of names of each Investing Fund Affiliate and Underwriting
Affiliate. The Investing Fund will notify the Fund of any changes to
the list of names as soon as reasonably practicable after a change
occurs. The Fund and the Investing Fund will maintain and preserve a
copy of the order, the Participation Agreement, and the list with any
updated information for the duration of the investment and for a period
of not less than six years thereafter, the first two years in an easily
accessible place.
16. Before approving any advisory contract under section 15 of the
Act, the board of directors or trustees of each Investing Management
Company, including a majority of the independent directors or trustees,
will find that the advisory fees charged under such advisory contract
are based on services provided that will be in addition to, rather than
duplicative of, the services provided under the advisory contract(s) of
any Fund in which the Investing Management Company may invest. These
findings and their basis will be recorded fully in the minute books of
the appropriate Investing Management Company.
17. Any sales charges and/or service fees charged with respect to
shares of an Investing Fund will not exceed the limits applicable to a
fund of funds as set forth in Conduct Rule 2830 of the NASD.
18. No Fund will acquire securities of any investment company or
companies relying on sections 3(c)(1) or 3(c)(7) of the Act in excess
of the limits contained in section 12(d)(1)(A) of the Act, except as
permitted pursuant to rule 12d1-1 under the Act.
For the Commission, by the Division of Investment Management,
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-27130 Filed 11-10-09; 8:45 am]
BILLING CODE 8011-01-P
