First Trust Exchange-Traded Fund, et al.; Notice of Application, 2700-2706 [2013-00516]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 9 (Monday, January 14, 2013)]
[Notices]
[Pages 2700-2706]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00516]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 30345; File No. 812-13895]


First Trust Exchange-Traded Fund, et al.; Notice of Application

January 8, 2013.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 12(d)(1)(J) 
of the Investment Company Act of 1940 (the ``1940 Act'') for exemptions 
from sections 12(d)(1)(A), (B), and (C) of the 1940 Act, under sections 
6(c) and 17(b) of the 1940 Act for an exemption from section 17(a) of 
the 1940 Act, and under section 6(c) of the 1940 Act for an exemption 
from rule 12d1-2(a) under the 1940 Act.

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Summary of the Application: Applicants request an order that would (a) 
permit certain registered open-end management investment companies that 
operate as ``funds of funds'' to acquire shares of certain registered 
open-end management investment companies, registered closed-end 
management investment companies, ``business development companies,'' as 
defined by section 2(a)(48) of the 1940 Act, and registered unit 
investment trusts that are within or outside the same group of 
investment companies as the acquiring investment companies and (b) 
permit certain registered open-end management investment companies 
relying on rule 12d1-2 under the 1940 Act to invest in certain 
financial instruments.

Applicants: First Trust Exchange-Traded Fund, First Trust Exchange-
Traded Fund II, First Trust Exchange-Traded Fund III, First Trust 
Exchange-Traded Fund IV, First Trust Exchange-Traded Fund V, First 
Trust Exchange-Traded Fund VI, First Trust Exchange-Traded Fund VII, 
First Trust Exchange-Traded AlphaDEX Fund and First Trust Exchange-
Traded AlphaDEX Fund II (each an ``ETF Trust''), First Trust Series 
Fund (the ``Series Trust''), First Defined Portfolio Fund, LLC (``First 
Defined''), First Trust Variable Insurance Trust (``Variable Insurance 
Trust'' and, together with First Defined, the Series Trust and the ETF 
Trusts, the ``Acquiring Companies''), First Trust Advisors L.P. (the 
``Advisor'') and First Trust Portfolios L.P. (the ``Distributor'').

Filing Dates: The application was filed on April 29, 2011, and amended 
on October 21, 2011, May 18, 2012, September 14, 2012, and January 3, 
2013.

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 February 4, 2013, and should be accompanied by proof of service 
on applicants, in the form of an affidavit or, for lawyers, a 
certificate of 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: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-1090. Applicants, 
120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187.

FOR FURTHER INFORMATION CONTACT: Jill Ehrlich, Senior Counsel, at (202) 
551-6819, or David P. Bartels, 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 for an 
applicant using the ``Company'' name box, at https://www.sec.gov/search/search.htm or by calling (202) 551-8090.

Applicants' Representations

    1. Each Acquiring Company other than First Defined was organized as 
a Massachusetts business trust, and each Fund (as defined below) will 
pursue its own investment objective(s) and strategies.\1\ Each 
Acquiring Company is

[[Page 2701]]

or will be registered as an open-end management investment company 
under the 1940 Act.\2\
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    \1\ Shares of series of the Variable Insurance Trust and 
interests in series of First Defined, which is organized as a 
Delaware limited liability company, are not offered directly to the 
public. Shares of series of the Variable Insurance Trust are offered 
to separate accounts that are registered as investment companies 
under the 1940 Act (``Registered Separate Accounts'') or that are 
not registered under the 1940 Act (``Unregistered Separate 
Accounts,'' collectively with Registered Separate Accounts, 
``Separate Accounts'') of affiliated and unaffiliated insurance 
companies as the underlying investment vehicles for the variable 
life insurance and variable annuity contracts (collectively, 
``variable insurance contracts'') issued by the insurance companies 
(owners of such contracts, ``contract holders''). They are also 
offered to qualified pension and retirement plans. Interests in 
series of First Defined are offered to a Registered Separate Account 
of an unaffiliated insurance company as an underlying investment 
vehicle for the variable insurance contracts that the insurance 
company issues.
    \2\ Applicants request that the order apply not only to any 
existing series of the Acquiring Companies, but that the order also 
extend to any future series of the Acquiring Companies, and any 
other existing or future registered open-end management investment 
companies and any series thereof that are part of the same group of 
investment companies, as defined in section 12(d)(1)(G)(ii) of 1940 
Act, as the Acquiring Companies and are, or may in the future be, 
advised by the Advisor or any other investment adviser controlling, 
controlled by, or under common control with the Advisor (together 
with the existing series of the Acquiring Companies, each series a 
``Fund,'' and collectively, the ``Funds''). All entities that 
currently intend to rely on the requested order are named as 
applicants. Any other entity that relies on the order in the future 
will comply with the terms and conditions of the application.
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    2. The Advisor, an Illinois limited partnership, is a registered 
investment adviser under the Investment Advisers Act of 1940 and serves 
as the investment adviser to each of the Funds of Funds (as defined 
below).\3\ The Distributor is a Broker (as defined below) and currently 
serves as the Funds' principal underwriter and distributor.
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    \3\ All references to the term ``Advisor'' include successors-
in-interest to the Advisor. A successor-in-interest is limited to an 
entity that results from a reorganization into another jurisdiction 
or a change in the type of business organization.
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    3. Applicants request relief to the extent necessary to permit: (a) 
A Fund (each, a ``Fund of Funds,'' and collectively, the ``Funds of 
Funds'') to acquire shares of registered open-end management investment 
companies (each an ``Unaffiliated Open-End Investment Company''), 
registered closed-end management investment companies, ``business 
development companies'' as defined by section 2(a)(48) of the 1940 Act 
(``business development companies'') (each registered closed-end 
management investment company and each business development company, an 
``Unaffiliated Closed-End Investment Company'' and, together with the 
Unaffiliated Open-End Investment Companies, the ``Unaffiliated 
Investment Companies''), and registered unit investment trusts 
(``UITs'') (the ``Unaffiliated Trusts,'' and together with the 
Unaffiliated Investment Companies, the ``Unaffiliated Funds''), in each 
case, that are not part of the same ``group of investment companies'' 
as the Funds of Funds;\4\ (b) the Unaffiliated Funds, their principal 
underwriters and any broker or dealer registered under the Securities 
Exchange Act of 1934 (the ``1934 Act'') (``Broker'') to sell shares of 
such Unaffiliated Funds to the Funds of Funds; (c) the Funds of Funds 
to acquire shares of other registered investment companies, including 
open-end management investment companies and series thereof, closed-end 
management investment companies and UITs, as well as business 
development companies (if any), in the same group of investment 
companies as the Funds of Funds (collectively, the ``Affiliated 
Funds,'' and, together with the Unaffiliated Funds, the ``Underlying 
Funds'');\5\ and (d) the Affiliated Funds, their principal underwriters 
and any Broker to sell shares of the Affiliated Funds to the Funds of 
Funds.\6\ Applicants also request an order under sections 6(c) and 
17(b) of the 1940 Act to exempt applicants from section 17(a) to the 
extent necessary to permit Underlying Funds organized as open-end 
investment companies (``Underlying Open-End Funds'') to sell their 
shares to Funds of Funds and redeem their shares from Funds of 
Funds.\7\
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    \4\ For purposes of the request for relief from Sections 
12(d)(1)(A), (B), and (C) of the 1940 Act, the term ``group of 
investment companies'' means any two or more registered investment 
companies, including closed-end investment companies, that hold 
themselves out to investors as related companies for purposes of 
investment and investor services.
    \5\ Certain of the Underlying Funds may be registered under the 
1940 Act as either UITs or open-end management investment companies 
and have obtained exemptions from the Commission necessary to permit 
their shares to be listed and traded on a national securities 
exchange at negotiated prices and, accordingly, to operate as 
exchange-traded funds (collectively, ``ETFs'' and each, an ``ETF''). 
In addition, certain of the Underlying Funds currently pursue, or 
may in the future pursue, their investment objectives through a 
master-feeder arrangement in reliance on section 12(d)(1)(E) of the 
1940 Act. In accordance with condition 12, a Fund of Funds may not 
invest in an Underlying Fund that operates as a feeder fund unless 
the feeder fund is part of the same ``group of investment 
companies'' as its corresponding master fund or the Fund of Funds. 
If a Fund of Funds invests in an Affiliated Fund that operates as a 
feeder fund and the corresponding master fund is not within the same 
``group of investment companies'' as the Fund of Funds and 
Affiliated Fund, the master fund would be an Unaffiliated Fund for 
purposes of the application and its conditions.
    \6\ With respect to investments in business development 
companies, applicants only seek an exemption from section 
12(d)(1)(A) of the 1940 Act, not section 12(d)(1)(C). Applicants 
state that they do not believe that investments in business 
development companies present any particular considerations or 
concerns that may be different from those presented by investments 
in registered closed-end investment companies.
    \7\ Applicants note that a Fund of Funds will purchase and sell 
shares of an Underlying Fund that is a closed-end fund through 
secondary market transactions at market prices rather than through 
principal transactions with the closed-end fund. Accordingly, 
applicants are not requesting section 17(a) relief with respect to 
principal transactions with closed-end funds.
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    4. Applicants also request an exemption under section 6(c) from 
rule 12d1-2 under the 1940 Act to permit any existing or future Fund of 
Funds that relies on section 12(d)(1)(G) of the 1940 Act (``Section 
12(d)(1)(G) Fund of Funds'') and that otherwise complies with rule 
12d1-2 under the 1940 Act, to also invest, to the extent consistent 
with its investment objective(s), policies, strategies and limitations, 
in other financial instruments that may not be securities within the 
meaning of section 2(a)(36) of the 1940 Act (``Other Investments'').

Applicants' Legal Analysis

A. Section 12(d)(1)

    1. Section 12(d)(1)(A) of the 1940 Act, in relevant part, prohibits 
a registered investment company from acquiring shares of an investment 
company if the 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 1940 Act prohibits a 
registered open-end investment company, its principal underwriter, and 
any Broker from selling 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. Section 12(d)(1)(C) prohibits 
an investment company from acquiring any security issued by a 
registered closed-end investment company if such acquisition would 
result in the acquiring company, any other investment companies having 
the same investment adviser, and companies controlled by such 
investment companies, collectively, owning more than 10% of the 
outstanding voting stock of the registered closed-end investment 
company.
    2. Section 12(d)(1)(J) of the 1940 Act provides that the Commission 
may exempt any person, security, or transaction, or any class or 
classes of persons, securities or transactions, from any provision of 
section 12(d)(1) if the exemption is consistent with the public 
interest and the protection of investors. Applicants request an 
exemption under

[[Page 2702]]

section 12(d)(1)(J) of the 1940 Act from the limitations of sections 
12(d)(1)(A), (B) and (C) to the extent necessary to permit: (i) the 
Funds of Funds to acquire shares of Underlying Funds in excess of the 
limits set forth in section 12(d)(1)(A) and (C) of the 1940 Act; and 
(ii) the Underlying Funds, their principal underwriters and any Broker 
to sell shares of the Underlying Funds to the Funds of Funds in excess 
of the limits set forth in section 12(d)(1)(B) of the 1940 Act.
    3. Applicants state that the proposed arrangement will not give 
rise to the policy concerns underlying sections 12(d)(1)(A), (B), and 
(C), which include concerns about undue influence by a fund of funds 
over underlying funds, excessive layering of fees, and overly complex 
fund structures. Accordingly, applicants believe that the requested 
exemption is consistent with the public interest and the protection of 
investors.
    4. Applicants submit that the proposed structure will not result in 
the exercise of undue influence by a Fund of Funds or its affiliated 
persons over the Underlying Funds. Applicants assert that the concern 
about undue influence does not arise in connection with a Fund of 
Funds' investment in the Affiliated Funds because they are part of the 
same group of investment companies. To limit the control a Fund of 
Funds or Fund of Funds Affiliate \8\ may have over an Unaffiliated 
Fund, applicants propose a condition prohibiting the Advisor and any 
person controlling, controlled by or under common control with the 
Advisor, and any investment company and any issuer that would be an 
investment company but for section 3(c)(1) or section 3(c)(7) of the 
1940 Act advised or sponsored by the Advisor or any person controlling, 
controlled by or under common control with the Advisor (collectively, 
the ``Group'') from controlling (individually or in the aggregate) an 
Unaffiliated Fund within the meaning of section 2(a)(9) of the 1940 
Act. The same prohibition would apply to any other investment adviser 
within the meaning of section 2(a)(20)(B) of the 1940 Act to a Fund of 
Funds (``Sub-Adviser'') and any person controlling, controlled by or 
under common control with the Sub-Adviser, and any investment company 
or issuer that would be an investment company but for section 3(c)(1) 
or 3(c)(7) of the 1940 Act (or portion of such investment company or 
issuer) advised or sponsored by the Sub-Adviser or any person 
controlling, controlled by or under common control with the Sub-Adviser 
(collectively, the ``Sub-Adviser Group'').
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    \8\ A ``Fund of Funds Affiliate'' is the Advisor, any Sub-
Adviser, promoter or principal underwriter of a Fund of Funds, as 
well as any person controlling, controlled by or under common 
control with any of those entities. An ``Unaffiliated Fund 
Affiliate'' is an investment adviser(s), sponsor, promoter or 
principal underwriter of any Unaffiliated Fund or any person 
controlling, controlled by or under common control with any of those 
entities.
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    5. With respect to closed-end underlying funds, applicants submit 
that one significant difference from open-end underlying funds is that, 
whereas open-end underlying funds may be unduly influenced by the 
threat of large-scale redemptions, closed-end underlying funds cannot 
be so influenced because they do not issue redeemable securities and, 
therefore, are not subject to large-scale redemptions. On the other 
hand, applicants state that closed-end underlying funds may be unduly 
influenced by a holder's ability to vote a large block of stock. To 
address this concern, applicants submit that, with respect to a Fund's 
investment in an Unaffiliated Closed-End Investment Company, (i) each 
member of the Group or Sub-Adviser Group that is an investment company 
or an issuer that would be an investment company but for section 
3(c)(1) or 3(c)(7) of the 1940 Act will vote its shares of the 
Unaffiliated Closed-End Investment Company in the manner prescribed by 
section 12(d)(1)(E) of the 1940 Act and (ii) each other member of the 
Group or Sub-Adviser Group will vote its shares of the Unaffiliated 
Closed-End Investment Company in the same proportion as the vote of all 
other holders of the same type of such Unaffiliated Closed-End 
Investment Company's shares (except that any member of the Group or 
Sub-Adviser Group that is a Separate Account will instead be subject to 
the separate but similar voting procedures described in condition 1 
below). Applicants state that, in this way, an Unaffiliated Closed-End 
Investment Company will be protected from undue influence by a Fund of 
Funds through the voting of the Unaffiliated Closed-End Investment 
Company's shares.
    6. Applicants propose other conditions to limit the potential for 
undue influence over the Unaffiliated Funds, including that no Fund of 
Funds or Fund of Funds Affiliate (except to the extent it is acting in 
its capacity as an investment adviser to an Unaffiliated Investment 
Company or sponsor to an Unaffiliated Trust) will cause an Unaffiliated 
Fund to purchase a security in an offering of securities during the 
existence of any underwriting or selling syndicate of which a principal 
underwriter is an Underwriting Affiliate (``Affiliated 
Underwriting'').\9\
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    \9\ An ``Underwriting Affiliate'' is a principal underwriter in 
any underwriting or selling syndicate that is an officer, director, 
trustee, advisory board member, investment adviser, sub-adviser or 
employee of the Fund of Funds, or a person of which any such 
officer, director, trustee, investment adviser, sub-adviser, member 
of an advisory board or employee is an affiliated person. An 
Underwriting Affiliate does not include any person whose 
relationship to an Unaffiliated Fund is covered by section 10(f) of 
the 1940 Act.
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    7. To further ensure that an Unaffiliated Investment Company 
understands the implications of a Fund of Funds' investment under the 
requested exemptive relief, prior to its investment in the shares of an 
Unaffiliated Investment Company in excess of the limit of section 
12(d)(1)(A)(i) of the 1940 Act, a Fund of Funds and the Unaffiliated 
Investment Company will execute an agreement stating, without 
limitation, that each of their boards of directors or trustees (each, a 
``Board'') and their investment advisers understand the terms and 
conditions of the order and agree to fulfill their responsibilities 
under the order (the ``Participation Agreement''). Applicants note that 
an Unaffiliated Investment Company (including an ETF or an Unaffiliated 
Closed-End Investment Company) would also retain its right to reject 
any initial investment by a Fund of Funds in excess of the limits in 
section 12(d)(1)(A)(i) of the 1940 Act by declining to execute the 
Participation Agreement with the Fund of Funds. In addition, an 
Unaffiliated Investment Company (other than an ETF or closed-end fund 
whose shares are purchased by a Fund of Funds in the secondary market) 
will retain its right at all times to reject any investment by a Fund 
of Funds. Finally, subject solely to the giving of notice to a Fund of 
Funds and the passage of a reasonable notice period, an Unaffiliated 
Fund (including a closed-end fund) could terminate a Participation 
Agreement with the Fund of Funds.
    8. Applicants state that they do not believe that the proposed 
arrangement will result in excessive layering of fees. The Board of 
each Fund of Funds, including a majority of the trustees who are not 
``interested persons'' within the meaning of section 2(a)(19) of the 
1940 Act (the ``Independent Trustees''), will find that the management 
or advisory fees charged under a Fund of Funds' advisory contract are 
based on services provided that are in addition to, rather than 
duplicative of, services provided under the advisory contract(s) of any 
Underlying Fund in which the Fund of Funds may invest. In addition, the 
Advisor will waive fees otherwise

[[Page 2703]]

payable to it by a Fund of Funds in an amount at least equal to any 
compensation (including fees received pursuant to any plan adopted by 
an Unaffiliated Investment Company under rule 12b-1 under the 1940 Act) 
received from an Unaffiliated Fund by the Advisor, or an affiliated 
person of the Advisor, other than any advisory fees paid to the Advisor 
or an affiliated person of the Advisor by the Unaffiliated Investment 
Company, in connection with the investment by the Fund of Funds in the 
Unaffiliated Fund.
    9. Applicants further state that, with respect to Registered 
Separate Accounts that invest in a Fund of Funds, no sales load will be 
charged at the Fund of Funds level or at the Underlying Fund level. 
Other sales charges and service fees, as defined in rule 2830 of the 
Conduct Rules of the NASD (``NASD Conduct Rule 2830''),\10\ if any, 
will only be charged at the Fund of Funds level or at the Underlying 
Fund level, not both. With respect to other investments in a Fund of 
Funds, any sales charges and/or service fees charged with respect to 
shares of a Fund of Funds will not exceed the limits applicable to 
funds of funds set forth in NASD Conduct Rule 2830.
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    \10\ Any references to NASD Conduct Rule 2830 include any 
successor or replacement FINRA rule to NASD Conduct Rule 2830.
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    10. Applicants assert that each Fund of Funds will represent in the 
Participation Agreement that no insurance company sponsoring a Separate 
Account funding variable insurance contracts will be permitted to 
invest in the Fund of Funds unless the insurance company has certified 
to the Fund of Funds that the aggregate of all fees and charges 
associated with each contract that invests in the Fund of Funds, 
including fees and charges at the Separate Account, Fund of Funds, and 
the Underlying Fund levels, are reasonable in relation to the services 
rendered, the expenses expected to be incurred, and the risks assumed 
by the insurance company.
    11. Applicants submit that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that no Underlying 
Fund will acquire securities of any other investment company or company 
relying on section 3(c)(1) or 3(c)(7) of the 1940 Act in excess of the 
limits contained in section 12(d)(1)(A) of the 1940 Act, except in 
certain circumstances identified in condition 12 below.

B. Section 17(a)

    1. Section 17(a) of the 1940 Act generally prohibits sales or 
purchases of securities between a registered investment company and any 
affiliated person of the company. Section 2(a)(3) of the 1940 Act 
defines an ``affiliated person'' of another 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 
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.
    2. Applicants state that the Funds of Funds and the Affiliated 
Funds may be deemed to be under the common control of the Advisor and, 
therefore, affiliated persons of one another. Applicants also state 
that the Funds of Funds and the Underlying Open-End Funds may also be 
deemed to be affiliated persons of one another if a Fund of Funds owns 
5% or more of the outstanding voting securities of one or more of such 
Underlying Open-End Funds. Applicants state that the sale of shares by 
the Underlying Open-End Funds to the Funds of Funds and the purchase of 
those shares from the Funds of Funds by the Underlying Open-End Funds 
(through redemptions) could be deemed to violate section 17(a).\11\
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    \11\ Applicants acknowledge that receipt of any compensation by 
(a) an affiliated person of a Fund of Funds, or an affiliated person 
of such person, for the purchase by the Fund of Funds of shares of 
an Underlying Fund or (b) an affiliated person of an Underlying 
Fund, or an affiliated person of such person, for the sale by the 
Underlying Fund of its shares to a Fund of Funds may be prohibited 
by section 17(e)(1) of the 1940 Act. The Participation Agreement 
also will include this acknowledgement.
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    3. Section 17(b) of the 1940 Act authorizes the Commission to grant 
an order permitting a transaction otherwise prohibited by section 17(a) 
if it finds that (i) the terms of the proposed transaction are fair and 
reasonable and do not involve overreaching on the part of any person 
concerned; (ii) the proposed transaction is consistent with the 
policies of each registered investment company concerned; and (iii) the 
proposed transaction is consistent with the general purposes of the 
1940 Act. Section 6(c) of the 1940 Act permits the Commission to exempt 
any person or transactions from any provision of the 1940 Act if 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 1940 Act.
    4. Applicants submit that the proposed transactions satisfy the 
standards for relief under sections 17(b) and 6(c) of the 1940 Act. 
Applicants state that the terms of the transactions are reasonable and 
fair and do not involve overreaching. Applicants state that the terms 
upon which an Underlying Open-End Fund will sell its shares to or 
purchase its shares from a Fund of Funds will be based on the net asset 
value of each Underlying Open-End Fund.\12\ Applicants also state that 
the proposed transactions will be consistent with the policies of each 
Fund of Funds and Underlying Open-End Fund, and with the general 
purposes of the 1940 Act.
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    \12\ Applicants note that a Fund of Funds generally would 
purchase and sell shares of an Underlying Fund that operates as an 
ETF through secondary market transactions rather than through 
principal transactions with the Underlying Fund. Applicants 
nevertheless request relief from sections 17(a)(1) and (2) to permit 
each Fund of Funds that is an affiliated person, or an affiliated 
person of an affiliated person, as defined in section 2(a)(3) of the 
1940 Act, of an ETF to purchase or redeem shares from the ETF. 
Applicants are not seeking relief from section 17(a) for, and the 
requested relief will not apply to, transactions where an ETF could 
be deemed an affiliated person, or an affiliated person of an 
affiliated person, of a Fund of Funds because an investment adviser 
to the ETF or an entity controlling, controlled by or under common 
control with the investment adviser to the ETF is also an investment 
adviser to the Fund of Funds. Applicants note that a Fund of Funds 
will purchase and sell shares of an Underlying Fund that is a 
closed-end fund through secondary market transactions at market 
prices rather than through principal transactions with the closed-
end fund. Accordingly, applicants are not requesting section 17(a) 
relief with respect to principal transactions with closed-end funds.
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C. Other Investments by Section 12(d)(1)(G) Funds of Funds

    1. Section 12(d)(1)(G) of the 1940 Act provides that section 
12(d)(1) will not apply to securities of an acquired company purchased 
by an acquiring company if: (i) the acquiring company and acquired 
company are part of the same ``group of investment companies,'' as 
defined in section 12(d)(1)(G)(ii) of the 1940 Act; (ii) the acquiring 
company holds only securities of acquired companies that are part of 
the same ``group of investment companies,'' as defined in section 
12(d)(1)(G)(ii) of the 1940 Act, government securities, and short-term 
paper; (iii) the aggregate sales loads and distribution-related fees of 
the acquiring company and the acquired company are not excessive under 
rules adopted pursuant to section 22(b) or section 22(c) of the 1940 
Act by a securities association registered under section 15A of the 
1934 Act or by the Commission; and (iv) the acquired

[[Page 2704]]

company has a policy that prohibits it from acquiring securities of 
registered open-end management investment companies or registered UITs 
in reliance on section 12(d)(1)(F) or (G) of the 1940 Act.
    2. Rule 12d1-2 under the 1940 Act permits a registered open-end 
investment company or a registered UIT that relies on section 
12(d)(1)(G) of the 1940 Act to acquire, in addition to securities 
issued by another registered investment company in the same group of 
investment companies, government securities, and short-term paper: (1) 
Securities issued by an investment company that is not in the same 
group of investment companies, when the acquisition is in reliance on 
section 12(d)(1)(A) or 12(d)(1)(F) of the 1940 Act; (2) securities 
(other than securities issued by an investment company); and (3) 
securities issued by a money market fund, when the investment is in 
reliance on rule 12d1-1 under the 1940 Act. For the purposes of rule 
12d1-2, ``securities'' means any security as defined in section 
2(a)(36) of the 1940 Act.
    3. Applicants state that the proposed arrangement would comply with 
rule 12d1-2 under the 1940 Act, but for the fact that the Section 
12(d)(1)(G) Funds of Funds may invest a portion of their assets in 
Other Investments. Applicants request an order under section 6(c) of 
the 1940 Act for an exemption from rule 12d1-2(a) to allow the Section 
12(d)(1)(G) Funds of Funds to invest in Other Investments. Applicants 
assert that permitting a Section 12(d)(1)(G) Fund of Funds to invest in 
Other Investments as described in the application would not raise any 
of the concerns that section 12(d)(1) of the 1940 Act was intended to 
address.
    4. Consistent with its fiduciary obligations under the 1940 Act, a 
Section 12(d)(1)(G) Fund of Funds' Board will review the advisory fees 
charged by the Section 12(d)(1)(G) Fund of Funds' investment adviser(s) 
to ensure that the fees are based on services provided that are in 
addition to, rather than duplicative of, services provided pursuant to 
the advisory agreement of any investment company in which the Section 
12(d)(1)(G) Fund of Funds may invest.

Applicants' Conditions

A. Investments by Funds of Funds in Underlying Funds

    Applicants agree that the order granting the requested relief to 
permit Funds of Funds to invest in Underlying Funds shall be subject to 
the following conditions:
    1. The members of the Group will not control (individually or in 
the aggregate) an Unaffiliated Fund within the meaning of section 
2(a)(9) of the 1940 Act. The members of a Sub-Adviser Group will not 
control (individually or in the aggregate) an Unaffiliated Fund within 
the meaning of section 2(a)(9) of the 1940 Act. With respect to a 
Fund's investment in an Unaffiliated Closed-End Investment Company, (i) 
each member of the Group or Sub-Adviser Group that is an investment 
company or an issuer that would be an investment company but for 
section 3(c)(1) or 3(c)(7) of the 1940 Act will vote its shares of the 
Unaffiliated Closed-End Investment Company in the manner prescribed by 
section 12(d)(1)(E) of the 1940 Act and (ii) each other member of the 
Group or Sub-Adviser Group will vote its shares of the Unaffiliated 
Closed-End Investment Company in the same proportion as the vote of all 
other holders of the same type of such Unaffiliated Closed-End 
Investment Company's shares (except that any member of the Group or 
Sub-Adviser Group that is a Separate Account will instead be subject to 
the voting procedures described below). If, as a result of a decrease 
in the outstanding voting securities of any other Unaffiliated Fund, 
the Group or a Sub-Adviser Group, each in the aggregate, becomes a 
holder of more than 25 percent of the outstanding voting securities of 
such Unaffiliated Fund, then the Group or the Sub-Adviser Group (except 
for any member of the Group or Sub-Adviser Group that is a Separate 
Account) will vote its shares of the Unaffiliated Fund in the same 
proportion as the vote of all other holders of the Unaffiliated Fund's 
shares. This condition will not apply to a Sub-Adviser Group with 
respect to an Unaffiliated Fund for which the Sub-Adviser or a person 
controlling, controlled by or under common control with the Sub-Adviser 
acts as the investment adviser within the meaning of section 
2(a)(20)(A) of the 1940 Act (in the case of an Unaffiliated Investment 
Company) or as the sponsor (in the case of an Unaffiliated Trust).
    A Registered Separate Account will seek voting instructions from 
its contract holders and will vote its shares of an Unaffiliated Fund 
in accordance with the instructions received and will vote those shares 
for which no instructions were received in the same proportion as the 
shares for which instructions were received. An Unregistered Separate 
Account will either (a) vote its shares of the Unaffiliated Fund in the 
same proportion as the vote of all other holders of the Unaffiliated 
Fund's shares or (b) seek voting instructions from its contract holders 
and vote its shares in accordance with the instructions received and 
vote those shares for which no instructions were received in the same 
proportion as the shares for which instructions were received.
    2. No Fund of Funds or Fund of Funds Affiliate will cause any 
existing or potential investment by the Fund of Funds in an 
Unaffiliated Fund to influence the terms of any services or 
transactions between the Fund of Funds or a Fund of Funds Affiliate and 
the Unaffiliated Fund or an Unaffiliated Fund Affiliate.
    3. The Board of each Fund of Funds, including a majority of the 
Independent Trustees, will adopt procedures reasonably designed to 
ensure that its Advisor and any Sub-Adviser to the Fund of Funds are 
conducting the investment program of the Fund of Funds without taking 
into account any consideration received by the Fund of Funds or Fund of 
Funds Affiliate from an Unaffiliated Investment Company or Unaffiliated 
Trust or any Unaffiliated Fund Affiliate of such Unaffiliated 
Investment Company or Unaffiliated Trust in connection with any 
services or transactions.
    4. Once an investment by a Fund of Funds in the securities of an 
Unaffiliated Investment Company exceeds the limit of section 
12(d)(1)(A)(i) of the 1940 Act, the Board of the Unaffiliated 
Investment Company, including a majority of the Independent Trustees, 
will determine that any consideration paid by the Unaffiliated 
Investment Company to a Fund of Funds or a Fund of Funds 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 Unaffiliated Investment Company; (b) is within 
the range of consideration that the Unaffiliated Investment Company 
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 an 
Unaffiliated Investment Company and its investment adviser(s), or any 
person controlling, controlled by, or under common control with such 
investment adviser(s).
    5. No Fund of Funds or Fund of Funds Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to an 
Unaffiliated Investment

[[Page 2705]]

Company or sponsor to an Unaffiliated Trust) will cause an Unaffiliated 
Fund to purchase a security in any Affiliated Underwriting.
    6. The Board of an Unaffiliated Investment Company, including a 
majority of the Independent Trustees, will adopt procedures reasonably 
designed to monitor any purchases of securities by the Unaffiliated 
Investment Company in an Affiliated Underwriting once an investment by 
a Fund of Funds in the securities of the Unaffiliated Investment 
Company exceeds the limit of section 12(d)(1)(A)(i) of the 1940 Act, 
including any purchases made directly from an Underwriting Affiliate. 
The Board of the Unaffiliated Investment Company will review these 
purchases periodically, but no less frequently than annually, to 
determine whether the purchases were influenced by the investment by 
the Fund of Funds in the Unaffiliated Investment Company. The Board of 
the Unaffiliated Investment Company will consider, among other things: 
(a) whether the purchases were consistent with the investment 
objectives and policies of the Unaffiliated Investment Company; (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 Unaffiliated 
Investment Company in Affiliated Underwritings and the amount purchased 
directly from an Underwriting Affiliate have changed significantly from 
prior years. The Board of the Unaffiliated Investment Company will take 
any appropriate actions based on its review, including, if appropriate, 
the institution of procedures designed to ensure that purchases of 
securities in Affiliated Underwritings are in the best interests of 
shareholders.
    7. Each Unaffiliated Investment Company 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 of 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 an Affiliated Underwriting once an investment by a Fund 
of Funds in the securities of an Unaffiliated Investment Company 
exceeds the limit of section 12(d)(1)(A)(i) of the 1940 Act, setting 
forth (1) the party from whom the securities were acquired, (2) the 
identity of the underwriting syndicate's members, (3) the terms of the 
purchase, and (4) the information or materials upon which the 
determinations of the Board of the Unaffiliated Investment Company were 
made.
    8. Prior to its investment in shares of an Unaffiliated Investment 
Company in excess of the limit set forth in section 12(d)(1)(A)(i) of 
the 1940 Act, the Fund of Funds and the Unaffiliated Investment Company 
will execute a Participation Agreement stating, without limitation, 
that their Boards and their investment advisers understand the terms 
and conditions of the order and agree to fulfill their responsibilities 
under the order. At the time of its investment in shares of an 
Unaffiliated Investment Company in excess of the limit set forth in 
section 12(d)(1)(A)(i), a Fund of Funds will notify the Unaffiliated 
Investment Company of the investment. At such time, the Fund of Funds 
will also transmit to the Unaffiliated Investment Company a list of the 
names of each Fund of Funds Affiliate and Underwriting Affiliate. The 
Fund of Funds will notify the Unaffiliated Investment Company of any 
changes to the list as soon as reasonably practicable after a change 
occurs. The Unaffiliated Investment Company and the Fund of Funds 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.
    9. Before approving any advisory contract under section 15 of the 
1940 Act, the Board of each Fund of Funds, including a majority of the 
Independent Trustees, shall find that the advisory fees charged under 
the advisory contract are based on services provided that are in 
addition to, rather than duplicative of, services provided under the 
advisory contract(s) of any Underlying Fund in which the Fund of Funds 
may invest. Such finding, and the basis upon which the finding was 
made, will be recorded fully in the minute books of the appropriate 
Fund of Funds.
    10. The Advisor will waive fees otherwise payable to it by a Fund 
of Funds in an amount at least equal to any compensation (including 
fees received pursuant to any plan adopted by an Unaffiliated 
Investment Company pursuant to rule 12b-1 under the 1940 Act) received 
from an Unaffiliated Fund by the Advisor, or an affiliated person of 
the Advisor, other than any advisory fees paid to the Advisor or its 
affiliated person by the Unaffiliated Investment Company, in connection 
with the investment by the Fund of Funds in the Unaffiliated Fund. Any 
Sub-Adviser will waive fees otherwise payable to the Sub-Adviser, 
directly or indirectly, by the Fund of Funds in an amount at least 
equal to any compensation received by the Sub-Adviser, or an affiliated 
person of the Sub-Adviser, from an Unaffiliated Fund, other than any 
advisory fees paid to the Sub-Adviser or its affiliated person by the 
Unaffiliated Investment Company, in connection with the investment by 
the Fund of Funds in the Unaffiliated Fund made at the direction of the 
Sub-Adviser. In the event that the Sub-Adviser waives fees, the benefit 
of the waiver will be passed through to the Fund of Funds.
    11. With respect to Registered Separate Accounts that invest in a 
Fund of Funds, no sales load will be charged at the Fund of Funds level 
or at the Underlying Fund level. Other sales charges and service fees, 
as defined in NASD Conduct Rule 2830, if any, will only be charged at 
the Fund of Funds level or at the Underlying Fund level, not both. With 
respect to other investments in a Fund of Funds, any sales charges and/
or service fees charged with respect to shares of a Fund of Funds will 
not exceed the limits applicable to funds of funds set forth in NASD 
Conduct Rule 2830.
    12. No Underlying Fund will acquire securities of any other 
investment company or company relying on section 3(c)(1) or 3(c)(7) of 
the 1940 Act, in excess of the limits contained in section 12(d)(1)(A) 
of the 1940 Act, except to the extent that such Underlying Fund: (a) 
Acquires such securities in compliance with section 12(d)(1)(E) of the 
1940 Act and either is an Affiliated Fund or is in the same ``group of 
investment companies'' as its corresponding master fund; (b) receives 
securities of another investment company as a dividend or as a result 
of a plan of reorganization of a company (other than a plan devised for 
the purpose of evading section 12(d)(1) of the 1940 Act); or (c) 
acquires (or is deemed to have acquired) securities of another 
investment company pursuant to exemptive relief from the Commission 
permitting such Underlying Fund to: (i) Acquire securities of one or 
more investment companies for short-term cash management purposes or 
(ii) engage in inter-fund borrowing and lending transactions.

[[Page 2706]]

B. Other Investments by Section 12(d)(1)(G) Funds of Funds

    Applicants agree that the order granting the requested relief to 
permit Section 12(d)(1)(G) Funds of Funds to invest in Other 
Investments shall be subject to the following condition:
    1. Applicants will comply with all provisions of rule 12d1-2 under 
the 1940 Act, except for paragraph (a)(2) to the extent that it 
restricts any Section 12(d)(1)(G) Fund of Funds from investing in Other 
Investments as described in the application.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00516 Filed 1-11-13; 8:45 am]
BILLING CODE 8011-01-P