Exchange Traded Concepts Trust, et al.; Notice of Application, 15982-15988 [2013-05758]
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Federal Register / Vol. 78, No. 49 / Wednesday, March 13, 2013 / Notices
For the Commission, by the Division of
Investment Management, under delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–05759 Filed 3–12–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
30415; 812–13969]
Exchange Traded Concepts Trust, et
al.; Notice of Application
March 7, 2013.
Securities and Exchange
Commission (the ‘‘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 (2) of the Act, and under section
12(d)(1)(J) for an exemption from
sections 12(d)(1)(A) and (B) of the Act.
AGENCY:
Exchange Traded Concepts
Trust, Exchange Traded Concepts Trust
II, ETF Series Solutions (each a ‘‘Trust’’
and collectively referred to as the
‘‘Trusts’’), Exchange Traded Concepts
LLC (‘‘ETC LLC’’) and SEI Investments
Distribution Company (‘‘SEI’’), Quasar
Distributors, LLC (‘‘Quasar’’) and
Foreside Fund Services, LLC
(‘‘Foreside’’ and each of SEI, Quasar and
Foreside are referred to as a
‘‘Distributor’’).
SUMMARY OF APPLICATION: Applicants
request an order that permits: (a)
Actively-managed series of the Trusts to
issue shares (‘‘Shares’’) redeemable in
large aggregations only (‘‘Creation
Units’’); (b) secondary market
transactions in Shares to occur at
negotiated market prices; (c) certain
series to pay redemption proceeds,
under certain circumstances, more than
seven days after the tender of 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
Units; and (e) certain registered
management investment companies and
unit investment trusts outside of the
same group of investment companies as
the series to acquire Shares.
DATES: Filing Dates: The application was
filed on October 18, 2011, and amended
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APPLICANTS:
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on July 24, 2012, December 21, 2012,
and March 6, 2013.
Hearing or Notification of Hearing: An
order granting the requested relief 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 April 1, 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. Applicants, c/o
W. John McGuire, Esq. and Christopher
D. Menconi, Esq., Bingham McCutchen
LLP, 2020 K Street NW., Washington,
DC 20006.
FOR FURTHER INFORMATION CONTACT:
Mark N. Zaruba, Senior Counsel, at
(202) 551–6878 or Mary Kay Frech,
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.
discretionary investment authority with
respect to the Fund or discrete portions
of a Fund that includes the ability to
appoint sub-advisers (each a ‘‘SubAdviser’’) to a Fund. Any Sub-Adviser
will be registered or not subject to
registration under the Advisers Act. SEI
is a Pennsylvania corporation and
Quasar and Foreside are each Delaware
limited liability companies. SEI, Quasar
and Foreside are each registered as a
broker-dealer (‘‘Broker) under the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’).1 A Distributor will
serve as the principal underwriter and
distributor for each of the Funds.
3. Applicants request that the order
apply to future series of the Trusts or to
any other open-end investment
company or series thereof that may be
created in the future that, in each case,
(a) is an actively managed exchangetraded fund (‘‘ETF’’), (b) is advised by
ETC LLC or an entity controlling,
controlled by, or under common control
with ETC LLC (each such entity or any
successor entity thereto, an ‘‘Adviser’’) 2
and (c) complies with the terms and
conditions of the application
(individually a ‘‘Fund,’’ and
collectively, the ‘‘Funds’’).3 The Funds
may invest in equity securities or fixed
income securities traded in the U.S. or
non-U.S. markets. Funds that invest in
equity securities or fixed income
securities traded in the U.S. or non-U.S.
markets are ‘‘Global Funds.’’ Funds that
invest solely in foreign equity securities
or foreign fixed income securities are
‘‘Foreign Funds.’’ The Funds may also
invest in ‘‘Depositary Receipts’’4 and
may engage in TBA Transactions
(defined below). Each Fund will consist
of a portfolio of securities (including
equity and fixed income securities),
currencies traded in the U.S. or in non-
Applicants’ Representations
1. Each Trust is registered as an openend management investment company
under the Act and is organized as a
Delaware statutory trust. Each Trust will
offer Funds (as defined below), each of
which will have distinct investment
strategies and will attempt to achieve its
investment objective by utilizing an
active management strategy based on
investments in equity and debt
securities, including shares of other
investment companies.
2. ETC LLC, an Oklahoma limited
liability company, is, and any other
Adviser (as defined below) will be,
registered as an investment adviser
under the Investment Advisers Act of
1940 (the ‘‘Advisers Act’’). An Adviser
will be the investment adviser to each
Fund and will, in each case, possess full
1 For purposes of the requested order, the term
‘‘Distributor’’ shall include any other entity that
acts as the distributor and principal underwriter of
the Creation Units of Shares of the Funds in the
future and complies with the terms and conditions
of the application. Any future Distributor will be a
Broker registered under the Exchange Act.
2 For the purposes of the requested order,
‘‘successor’’ is limited to those one or more entities
that would result from a reorganization into another
jurisdiction or a change in the type of business
organization.
3 All entities that currently intend to rely on the
order are named as applicants. Any entity that
relies on the order in the future will comply with
the terms and conditions of the application.
4 Depositary Receipts are typically issued by a
financial institution (a ‘‘Depositary’’) and evidence
ownership in a security or pool of securities that
have been deposited with the Depositary. A Fund
will not invest in any Depositary Receipts that the
Adviser or any Sub-Adviser deems to be illiquid or
for which pricing information is not readily
available. No affiliated persons of applicants or any
Sub-Adviser will serve as the Depositary for any
Depositary Receipts held by a Fund.
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U.S. markets (‘‘Portfolio Securities’’),
and other assets.5
4. Applicants also request that any
exemption under section 12(d)(1)(J) of
the Act from sections 12(d)(1)(A) and
(B) apply to: (i) Any Fund; (ii) any
Acquiring Fund (as defined below); and
(iii) any Brokers selling Shares of a
Fund to an Acquiring Fund or any
principal underwriter of a Fund.6 A
management investment company or
unit investment trust registered under
the Act that is not part of the same
‘‘group of investment companies’’ as the
Fund within the meaning of section
12(d)(1)(G)(ii) of the Act and that
acquires Shares of a Fund in excess of
the limits of Section 12(d)(1)(A) of the
Act is referred to as an ‘‘Acquiring
Management Company’’ or an
‘‘Acquiring Trust,’’ respectively, and the
Acquiring Management Companies and
Acquiring Trusts are referred to
collectively as ‘‘Acquiring Funds.’’7
5. A Creation Unit will consist of at
least 25,000 Shares and applicants
expect that the trading price of a Share
will range from $40 to $100. All orders
to purchase Creation Units must be
placed with the Distributor by or
through an ‘‘Authorized Participant,’’
which is either (a) a Broker or other
participant in the Continuous Net
Settlement System of the National
Securities Clearing Corporation
(‘‘NSCC’’, and such process the ‘‘NSCC
Process’’), or (b) a participant in the
Depository Trust Company (‘‘DTC,’’
such participant ‘‘DTC Participant’’ and
such process the ‘‘DTC Process’’),
which, in either case, has executed an
agreement with the Distributor with
respect to the purchase and redemption
of Creation Units.
6. Shares will be purchased and
redeemed in Creation Units and
generally on an in-kind basis. Except
where the purchase or redemption will
include cash under the limited
circumstances specified below,
purchasers will be required to purchase
Creation Units by making an in-kind
deposit of specified instruments
(‘‘Deposit Instruments’’), and
5 If a Fund invests in derivatives, then (a) the
Fund’s board of trustees or directors (for any entity,
the ‘‘Board’’) will periodically review and approve
the Fund’s use of derivatives and how the Fund’s
investment adviser assesses and manages risk with
respect to the Fund’s use of derivatives and (b) the
Fund’s disclosure of its use of derivatives in its
offering documents and periodic reports will be
consistent with relevant Commission and staff
guidance.
6 Any future principal underwriter of a Fund will
be a Broker registered under the Exchange Act and
will comply with the terms and conditions of the
application.
7 An Acquiring Fund may rely on the order only
to invest in a Fund and not in any other registered
investment company.
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shareholders redeeming their Shares
will receive an in-kind transfer of
specified instruments (‘‘Redemption
Instruments’’).8 On any given Business
Day 9 the names and quantities of the
instruments that constitute the Deposit
Instruments and the names and
quantities of the instruments that
constitute the Redemption Instruments
will be identical, and these instruments
may be referred to, in the case of either
a purchase or a redemption, as the
‘‘Creation Basket.’’ In addition, the
Creation Basket will correspond pro rata
to the positions in a Fund’s portfolio
(including cash positions),10 except: (a)
In the case of bonds, for minor
differences when it is impossible to
break up bonds beyond certain
minimum sizes needed for transfer and
settlement; (b) for minor differences
when rounding is necessary to eliminate
fractional shares or lots that are not
tradeable round lots;11 or (c) TBA
Transactions,12 short positions or other
positions that cannot be transferred in
kind 13 will be excluded from the
Creation Basket.14 If there is a difference
between the NAV attributable to a
Creation Unit and the aggregate market
value of the Creation Basket exchanged
for the Creation Unit, the party
conveying instruments with the lower
value will also pay to the other an
amount in cash equal to that difference
(the ‘‘Cash Amount’’).
7. Purchases and redemptions of
Creation Units may be made in whole or
in part on a cash basis, rather than in
8 The Funds must comply with the federal
securities laws in accepting Deposit Instruments
and satisfying redemptions with Redemption
Instruments, including that the Deposit Instruments
and Redemption Instruments are sold in
transactions that would be exempt from registration
under the Securities Act of 1933 (‘‘Securities Act’’).
In accepting Deposit Instruments and satisfying
redemptions with Redemption Instruments that are
restricted securities eligible for resale pursuant to
Rule 144A under the Securities Act, the Funds will
comply with the conditions of Rule 144A.
9 Each Fund will sell and redeem Creation Units
on any day that the Fund is open, including as
required by section 22(e) of the Act (each, a
‘‘Business Day’’).
10 The portfolio used for this purpose will be the
same portfolio used to calculate the Fund’s net asset
value (‘‘NAV’’) for that Business Day.
11 A tradeable round lot for a security will be the
standard unit of trading in that particular type of
security in its primary market.
12 A TBA Transaction is a method of trading
mortgage-backed securities. In a TBA Transaction,
the buyer and seller agree on general trade
parameters such as agency, settlement date, par
amount and price.
13 This includes instruments that can be
transferred in kind only with the consent of the
original counterparty to the extent the Fund does
not intend to seek such consents.
14 Because these instruments will be excluded
from the Creation Basket, their value will be
reflected in the determination of the Cash Amount
(defined below).
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15983
kind, solely under the following
circumstances: (a) To the extent there is
a Cash Amount, as described above; (b)
if, on a given Business Day, a Fund
announces before the open of trading
that all purchases, all redemptions or all
purchases and redemptions on that day
will be made entirely in cash; (c) if,
upon receiving a purchase or
redemption order from an Authorized
Participant, a Fund determines to
require the purchase or redemption, as
applicable, to be made entirely in cash;
(d) if, on a given Business Day, a Fund
requires all Authorized Participants
purchasing or redeeming Shares on that
day to deposit or receive (as applicable)
cash in lieu of some or all of the Deposit
Instruments or Redemption Instruments,
respectively, solely because: (i) Such
instruments are not eligible for transfer
through either the NSCC Process or DTC
Process; or (ii) in the case of Global
Funds and Foreign Funds, such
instruments are not eligible for trading
due to local trading restrictions, local
restrictions on securities transfers or
other similar circumstances; or (e) if a
Fund permits an Authorized Participant
to deposit or receive (as applicable) cash
in lieu of some or all of the Deposit
Instruments or Redemption Instruments,
respectively, solely because: (i) Such
instruments are, in the case of the
purchase of a Creation Unit, not
available in sufficient quantity; (ii) such
instruments are not eligible for trading
by an Authorized Participant or the
investor on whose behalf the
Authorized Participant is acting; or (iii)
a holder of Shares of a Global Fund or
Foreign Fund would be subject to
unfavorable income tax treatment if the
holder receives redemption proceeds in
kind.15
8. Each Business Day, before the open
of trading on a national securities
exchange, as defined in section 2(a)(26)
of the Act (a ‘‘Listing Market’’), on
which Shares are listed and traded, each
Fund will cause to be published through
the NSCC the names and quantities of
the instruments comprising the Creation
Basket, as well as the estimated Cash
Amount (if any), for that day. The
published Creation Basket will apply
until a new Creation Basket is
announced on the following Business
Day, and there will be no intra-day
changes to the Creation Basket except to
correct errors in the published Creation
Basket. For each Fund, the relevant
Listing Market will disseminate every
15 seconds throughout the trading a
calculation of the estimated NAV of a
15 A ‘‘custom order’’ is any purchase or
redemption of Shares made in whole or in part on
a cash basis in reliance on clause (e)(i) or (e)(ii).
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Share (which estimate is expected to be
accurate to within a few basis points).
9. Each Fund will recoup the
settlement costs charged by NSCC and
DTC by imposing a fee (the
‘‘Transaction Fee’’) on investors
purchasing or redeeming Creation
Units.16 All orders to purchase Creation
Units must be placed with the
Distributor by or through an Authorized
Participant and the Distributor will
transmit such orders to the Funds. The
Distributor will be responsible for
maintaining records of both the orders
placed with it and the confirmations of
acceptance furnished by it.
10. Purchasers of Shares in Creation
Units may hold such Shares or may sell
such Shares into the secondary market.
Shares will be listed and traded at
negotiated prices on a Listing Market
and it is expected that the relevant
Listing Market will designate one or
more member firms to maintain a
market for the Shares.17 The price of
Shares trading on a Listing Market will
be based on a current bid-offer in the
secondary market. Purchases and sales
of Shares in the secondary market will
not involve a Fund and will be subject
to customary brokerage commissions
and charges.
11. Applicants expect that purchasers
of Creation Units will include
institutional investors and arbitrageurs.
Applicants expect that secondary
market purchasers of Shares will
include both institutional and retail
investors.18 Applicants believe that the
structure and operation of the Funds
will be designed to enable efficient
arbitrage and, thereby, minimize the
probability that Shares will trade at a
16 Cash purchases and redemptions of Shares may
involve a higher Transaction Fee to cover the costs
of purchasing and selling the applicable Deposit
and Redemption Instruments. In all cases, the
Transaction Fee will be limited in accordance with
requirements of the Commission applicable to
management investment companies offering
redeemable securities.
17 If Shares are listed on The NASDAQ Stock
Market LLC (‘‘Nasdaq’’) or a similar electronic
Listing Market (including NYSE Arca, Inc.), one or
more member firms of that Listing Market will act
as market maker (a ‘‘Market Maker’’) and maintain
a market for Shares trading on that Listing Market.
On Nasdaq, no particular Market Maker would be
contractually obligated to make a market in Shares.
However, the listing requirements on Nasdaq
stipulate that at least two Market Makers must be
registered in Shares to maintain a listing. Registered
Market Makers are required to make a continuous
two-sided market or subject themselves to
regulatory sanctions. No Market Maker will be an
affiliated person, or an affiliated person of an
affiliated person, of the Funds, except within the
meaning of section 2(a)(3)(A) or (C) of the Act due
solely to ownership of Shares.
18 Shares will be registered in book-entry form
only. DTC or its nominee will be the registered
owner of all outstanding Shares. Beneficial
ownership of Shares will be shown on the records
of DTC or DTC Participants.
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material premium or discount to a
Fund’s NAV.
12. Shares will not be individually
redeemable and owners of Shares may
acquire those Shares from a Fund, or
tender such shares for redemption to the
Fund, in Creation Units only. To
redeem, an investor must accumulate
enough Shares to constitute a Creation
Unit. Redemption requests must be
placed by or through an Authorized
Participant. As discussed above,
redemptions of Creation Units will
generally be made on an in-kind basis,
subject to certain specified exceptions
under which redemptions may be made
in whole or in part on a cash basis, and
will be subject to a Transaction Fee.
13. Neither a Trust nor any Fund will
be advertised or marketed or otherwise
held out as a traditional open-end
investment company or mutual fund.
Instead, each Fund will be marketed as
an ‘‘exchange-traded fund.’’ All
marketing materials that describe the
features or method of obtaining, buying,
or selling Creation Units, or Shares
traded on a Listing Market, or refer to
redeemability, will prominently
disclose that Shares are not individually
redeemable and that the owners of
Shares may acquire those Shares from a
Fund or tender those Shares for
redemption to the Fund in Creation
Units only.
14. Each Trust’s Web site, which will
be publicly available prior to the
offering of Shares, will include each
Fund’s prospectus (‘‘Prospectus’’),
statement of additional information
(‘‘SAI’’), and summary prospectus, if
used. Each Web site will contain, on a
per Share basis for each Fund, the prior
Business Day’s NAV and the market
closing price or mid-point of the bid/ask
spread at the time of calculation of such
NAV (‘‘Bid/Ask Price’’), and a
calculation of the premium or discount
of the market closing price or the Bid/
Ask Price against such NAV. On each
Business Day, prior to the
commencement of trading in Shares on
a Listing Market, each Fund shall post
on its Web site the identities and
quantities of the Portfolio Securities and
other assets held by the Fund that will
form the basis for the calculation of the
NAV at the end of that Business Day.19
Applicants’ Legal Analysis
1. Applicants request an order under
section 6(c) of the Act granting an
19 Under accounting procedures followed by each
Fund, trades made on the prior Business Day (‘‘T’’)
will be booked and reflected in NAV on the current
Business Day (T+1). Accordingly, the Funds will be
able to disclose at the beginning of the Business Day
the portfolio that will form the basis for the NAV
calculation at the end of the Business Day.
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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
granting an exemption from sections
17(a)(1) and (2) of the Act, and under
section 12(d)(1)(J) for an exemption
from sections 12(d)(1)(A) and (B) of the
Act.
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 provisions 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 provision 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 a proportionate
share of the issuer’s current net assets,
or the cash equivalent. Because Shares
will not be individually redeemable,
applicants request an order that would
permit the Trusts and each Fund to
redeem Shares in Creation Units only.
Applicants state that investors may
purchase Shares in Creation Units from
each Fund and that Creation Units will
always be redeemable in accordance
with the provisions of the Act.
Applicants further state that because the
market price of Shares will be
disciplined by arbitrage opportunities,
investors should be able to sell Shares
in the secondary market at prices that
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do 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 that 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 Shares will take place at
negotiated prices, not at a current
offering price described in the
Prospectus, and not at a price based on
NAV. Thus, purchases and sales of
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 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
resulting from sales at different prices,
and (c) assure an orderly distribution of
investment company shares by
eliminating price competition from
brokers 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 Shares to trade in the
secondary market at negotiated prices.
Applicants state that (a) secondary
market trading in Shares does not
involve the Funds as parties and cannot
result in dilution of an investment in
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 Shares will not lead to
discrimination or preferential treatment
among purchasers. Finally, applicants
contend that the proposed distribution
system will be orderly because arbitrage
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activity will ensure that the difference
between the market price of Shares and
their NAV remains narrow.
Section 22(e) of the Act
7. Section 22(e) 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 observe that
the settlement of redemptions of
Creation Units of the Foreign and Global
Funds is contingent not only on the
settlement cycle of the U.S. securities
markets but also on the delivery cycles
present in foreign markets for
underlying foreign Portfolio Securities
in which those Funds invest. Applicants
have been advised that, under certain
circumstances, the delivery cycles for
transferring Portfolio Securities to
redeeming investors, coupled with local
market holiday schedules, will require a
delivery process of up to fourteen (14)
calendar days. Applicants therefore
request relief from section 22(e) in order
to provide payment or satisfaction of
redemptions within a longer number of
calendar days as required for such
payment or satisfaction in the principal
local markets where transactions in the
Portfolio Securities of each Foreign and
Global Fund customarily clear and
settle, but in all cases no later than
fourteen (14) days following the tender
of a Creation Unit.20
8. Applicants state that section 22(e)
was designed to prevent unreasonable,
undisclosed or unforeseen delays in the
actual 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
identify those instances in a given year
where, due to local holidays, more than
seven calendar days, up to a maximum
of fourteen calendar days, will be
needed to deliver redemption proceeds
and will list such holidays. Applicants
are not seeking relief from section 22(e)
for Foreign and Global Funds that do
not effect redemptions of Creation Units
in-kind.
Section 12(d)(1) of the Act
9. Section 12(d)(1)(A) of the Act
prohibits a registered investment
company from acquiring shares of an
investment company if the securities
20 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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15985
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 its 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 relief to permit
Acquiring Funds to acquire Shares in
excess of the limits in section
12(d)(1)(A) of the Act and to permit the
Funds, their principal underwriters and
any Broker to sell Shares to Acquiring
Funds in excess of the limits in section
12(d)(l)(B) of the Act.
11. Applicants assert that the
proposed transactions will not lead to
any of the abuses that section 12(d)(1)
was designed to prevent. Applicants
submit that the proposed conditions to
the requested relief address the
concerns underlying the limits in
section 12(d)(1), which include
concerns about undue influence,
excessive layering of fees and overly
complex structures.
12. Applicants submit that their
proposed conditions address any
concerns regarding the potential for
undue influence. To limit the control
that an Acquiring Fund may have over
a Fund, applicants propose a condition
prohibiting the adviser of an Acquiring
Management Company (‘‘Acquiring
Fund Adviser’’), sponsor of an
Acquiring Trust (‘‘Sponsor’’), any
person controlling, controlled by, or
under common control with the
Acquiring Fund Adviser or Sponsor,
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 that is advised or sponsored by the
Acquiring Fund Adviser, the Sponsor,
or any person controlling, controlled by,
or under common control with the
Acquiring Fund Adviser or Sponsor
(‘‘Acquiring 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 subadviser to an Acquiring Fund
(‘‘Acquiring Fund Sub-Adviser’’), any
person controlling, controlled by or
under common control with the
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Acquiring Fund Sub-Adviser, 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
Acquiring Fund Sub-Adviser or any
person controlling, controlled by or
under common control with the
Acquiring Fund Sub-Adviser
(‘‘Acquiring Fund’s Sub-Advisory
Group’’).
13. Applicants propose a condition to
ensure that no Acquiring Fund or
Acquiring Fund Affiliate 21 (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 offering of securities during the
existence of an 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,
Acquiring Fund Adviser, Acquiring
Fund Sub-Adviser, employee or
Sponsor of the Acquiring Fund, or a
person of which any such officer,
director, member of an advisory board,
Acquiring Fund Adviser, Acquiring
Fund Sub-Adviser, employee or
Sponsor is an affiliated person (except
any person whose relationship to the
Fund is covered by section 10(f) of the
Act is not an Underwriting Affiliate).
14. Applicants propose several
conditions to address the potential for
layering of fees. Applicants note that the
Board of any Acquiring 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
(for any Board, the ‘‘Independent
Trustees’’), will be required to find that
the advisory fees charged under the
contract are based on services provided
that will be in addition to, rather than
duplicative of, services provided under
the advisory contract of any Fund in
which the Acquiring Management
Company may invest. Applicants also
state that any sales charges and/or
service fees charged with respect to
shares of an Acquiring Fund will not
exceed the limits applicable to a fund of
21 An ‘‘Acquiring Fund Affiliate’’ is any
Acquiring Fund Adviser, Acquiring Fund SubAdviser, Sponsor, promoter and principal
underwriter of an Acquiring Fund, and any person
controlling, controlled by or under common control
with any of these entities. ‘‘Fund Affiliate’’ is an
investment adviser, promoter, or principal
underwriter of a Fund or any person controlling,
controlled by or under common control with any
of these entities.
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funds as set forth in NASD Conduct
Rule 2830.22
15. Applicants submit that the
proposed arrangement will not create an
overly complex fund structure.
Applicants note that a Fund will be
prohibited from acquiring securities of
any investment company or company
relying on section 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
to the extent permitted by exemptive
relief from the Commission permitting
the Fund to purchase shares of other
investment companies for short-term
cash management purposes.
16. To ensure that an Acquiring Fund
is aware of the terms and conditions of
the requested order, the Acquiring
Funds must enter into an agreement
with the respective Funds (‘‘Acquiring
Fund Agreement’’). The Acquiring Fund
Agreement will include an
acknowledgement from the Acquiring
Fund that it may rely on the order only
to invest in a Fund and not in any other
investment company.
Section 17(a) of the Act
17. Section 17(a) of the Act generally
prohibits an affiliated person of a
registered investment company, or an
affiliated person of such person
(‘‘Second Tier Affiliates’’), from selling
any security to or purchasing any
security from the company. Section
2(a)(3) of the Act defines ‘‘affiliated
person’’ to include 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 and 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. The Funds may be
deemed to be controlled by the Adviser
or an entity controlling, controlled by or
under common control with the Adviser
and hence affiliated persons of each
other. In addition, the Funds may be
deemed to be under common control
with any other registered investment
company (or series thereof) advised by
the Adviser or an entity controlling,
controlled by or under common control
with the Adviser (an ‘‘Affiliated Fund’’).
18. Applicants request an exemption
under sections 6(c) and 17(b) of the Act
from sections 17(a)(1) and 17(a)(2) of the
Act to permit in-kind purchases and
22 Any reference to NASD Conduct Rule 2830
includes any successor or replacement rule that
may be adopted by the Financial Industry
Regulatory Authority.
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redemptions of Creation Units from the
Funds by persons that 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 more than 25%, of the Shares
of a Trust 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 one or more
Affiliated Funds. Applicants also
request an exemption in order to permit
each Fund to sell Shares to and redeem
Shares from, and engage in the
transactions that would accompany
such sales and redemptions with, any
Acquiring Fund of which the Fund is an
affiliated person or Second-Tier
Affiliate.23
19. Applicants contend that no useful
purpose would be served by prohibiting
such affiliated persons or Second Tier
Affiliates from acquiring or redeeming
Creation Units through in-kind
transactions. Both the deposit
procedures for in-kind purchases of
Creation Units and the redemption
procedures for in-kind redemptions will
be the same for all purchases and
redemptions. Deposit Instruments and
Redemptions Instruments will be valued
in the same manner as the Portfolio
Securities held by the relevant Fund.
Applicants thus believe that in-kind
purchases and redemptions will not
result in self-dealing or overreaching of
the Fund.
20. Applicants also submit that the
sale of Shares to and redemption of
Shares from an Acquiring Fund satisfies
the standards for relief under sections
17(b) and 6(c) of the Act. Applicants
note that any consideration paid for the
purchase or redemption of Creation
Units directly from a Fund will be based
on the NAV of the Fund.24 The
23 Applicants anticipate that most Acquiring
Funds will purchase Shares in the secondary
market and will not purchase or redeem Creation
Units directly from a Fund. To the extent that
purchases and sales of Shares occur in the
secondary market and not through principal
transactions directly between an Acquiring Fund
and a Fund, relief from section 17(a) would not be
necessary. However, the requested relief would
apply to direct sales of Shares in Creation Units by
a Fund to an Acquiring Fund and redemptions of
those Shares in Creation Units. The requested relief
is intended to cover transactions that would
accompany such sales and redemptions. Applicants
are not seeking relief from section 17(a) for, and the
requested relief will not apply to, transactions
where a Fund could be deemed an affiliated person,
or an affiliated person of an affiliated person of an
Acquiring Fund because an investment adviser to
the Funds is also an investment adviser to that
Acquiring Fund.
24 Applicants acknowledge that the receipt of
compensation by (a) an affiliated person of an
Acquiring Fund, or an affiliated person of such
person, for the purchase by the Acquiring Fund of
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Acquiring Fund Agreement will require
any Acquiring Fund that purchases
Creation Units directly from a Fund to
represent that the purchase will be in
compliance with its investment
restrictions and consistent with the
investment policies set forth in its
registration statement. Applicants also
state that the proposed transactions are
consistent with the general purposes of
the Act and appropriate in the public
interest.
mstockstill on DSK4VPTVN1PROD with NOTICES
Applicants’ Conditions
Applicants agree that any order of the
Commission granting the requested
relief will be subject to the following
conditions:
A. Actively Managed Exchange-Traded
Fund Relief
1. Neither a Trust nor any Fund will
be advertised or marketed as an openend investment company or mutual
fund. Any advertising material that
describes the purchase or sale of
Creation Units or refers to redeemability
will prominently disclose that the
Shares are not individually redeemable
and that owners of the Shares may
acquire those Shares from the Fund and
tender those Shares for redemption to
the Fund in Creation Units only.
2. The Web site for the Funds, which
is and will be publicly accessible at no
charge, will contain, on a per Share
basis for each Fund, the prior Business
Day’s NAV and the market closing price
or the Bid/Ask Price, and a calculation
of the premium or discount of the
market closing price or Bid/Ask Price
against such NAV.
3. As long as a Fund operates in
reliance on the requested order, its
Shares will be listed on a Listing
Market.
4. On each Business Day, before
commencement of trading in Shares on
a Fund’s Listing Market, the Fund will
disclose on its Web site the identities
and quantities of the Portfolio Securities
and other assets held by the Fund that
will form the basis for the Fund’s
calculation of NAV at the end of the
Business Day.
5. The Adviser or any Sub-Advisers,
directly or indirectly, will not cause any
Authorized Participant (or any investor
on whose behalf an Authorized
Participant may transact with the Fund)
to acquire any Deposit Instrument for a
Fund through a transaction in which the
Fund could not engage directly.
Shares of a Fund or (b) an affiliated person of a
Fund, or an affiliated person of such person, for the
sale by the Fund of its Shares to an Acquiring Fund,
may be prohibited by section 17(e)(1) of the Act.
The Acquiring Fund Agreement also will include
this acknowledgment.
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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 actively-managed
exchange-traded funds.
B. Section 12(d)(1) Relief
7. The members of an Acquiring
Fund’s Advisory Group will not control
(individually or in the aggregate) a Fund
within the meaning of section 2(a)(9) of
the Act. The members of an Acquiring
Fund’s Sub-Advisory Group will not
control (individually or in the aggregate)
a Fund within the meaning of section
2(a)(9) of the Act. If, as a result of a
decrease in the outstanding voting
securities of a Fund, the Acquiring
Fund’s Advisory Group or the Acquiring
Fund’s Sub-Advisory Group, each in the
aggregate, becomes a holder of more
than 25 percent of the outstanding
voting securities of a Fund, it will vote
its Shares of the Fund in the same
proportion as the vote of all other
holders of that Fund’s Shares. This
condition does not apply to the
Acquiring Fund’s Sub-Advisory Group
with respect to a Fund for which the
Acquiring Fund Sub-Adviser or a
person controlling, controlled by, or
under common control with the
Acquiring Fund Sub-Adviser acts as the
investment adviser within the meaning
of section 2(a)(20)(A) of the Act.
8. No Acquiring Fund or Acquiring
Fund Affiliate will cause any existing or
potential investment by the Acquiring
Fund in a Fund to influence the terms
of any services or transactions between
the Acquiring Fund or an Acquiring
Fund Affiliate and the Fund or a Fund
Affiliate.
9. The Board of an Acquiring
Management Company, including a
majority of the Independent Trustees,
will adopt procedures reasonably
designed to ensure that the Acquiring
Fund Adviser and any Acquiring Fund
Sub-Adviser are conducting the
investment program of the Acquiring
Management Company without taking
into account any consideration received
by the Acquiring Management Company
or an Acquiring Fund Affiliate from a
Fund or a Fund Affiliate in connection
with any services or transactions.
10. Once an investment by an
Acquiring Fund in the Shares of a Fund
exceeds the limits in section
l2(d)(1)(A)(i) of the Act, the Board of the
Fund, including a majority of the
Independent Trustees, will determine
that any consideration paid by the Fund
to an Acquiring Fund or an Acquiring
Fund Affiliate in connection with any
services or transactions: (i) Is fair and
reasonable in relation to the nature and
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15987
quality of the services and benefits
received by the Fund; (ii) 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
(iii) 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(s).
11. No Acquiring Fund or Acquiring
Fund Affiliate (except to the extent it is
acting in its capacity as an investment
adviser to a Fund) will cause the Fund
to purchase a security in any Affiliated
Underwriting.
12. The Board of a Fund, including a
majority of the Independent Trustees,
will adopt procedures reasonably
designed to monitor any purchases of
securities by the Fund in an Affiliated
Underwriting, once an investment by an
Acquiring Fund in the securities of the
Fund exceeds the limit of section
12(d)(1)(A)(i) of the Act, including any
purchases made directly from an
Underwriting Affiliate. The Board of the
Fund will review these purchases
periodically, but no less frequently than
annually, to determine whether the
purchases were influenced by the
investment by the Acquiring Fund in
the Fund. The Board of the Fund will
consider, among other things: (i)
Whether the purchases were consistent
with the investment objectives and
policies of the Fund; (ii) 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 (iii)
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 of the Fund 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 interest of
shareholders of the Fund.
13. 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 of not less than six
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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 Acquiring
Fund in the securities of the Fund
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 materials upon which
the determinations of the Board of the
Fund were made.
14. Before investing in Shares of a
Fund in excess of the limits in section
12(d)(1)(A), each Acquiring Fund and
the Fund will execute an Acquiring
Fund Agreement stating, without
limitation, that their Boards and their
investment adviser(s), or their Sponsors
or trustees (‘‘Trustee’’), as applicable,
understand the terms and conditions of
the requested order, and agree to fulfill
their responsibilities under the
requested order. At the time of its
investment in Shares of a Fund in
excess of the limit in section
12(d)(1)(A)(i), an Acquiring Fund will
notify the Fund of the investment. At
such time, the Acquiring Fund will also
transmit to the Fund a list of the names
of each Acquiring Fund Affiliate and
Underwriting Affiliate. The Acquiring
Fund will notify the Fund of any
changes to the list of the names as soon
as reasonably practicable after a change
occurs. The Fund and the Acquiring
Fund will maintain and preserve a copy
of the requested order, the Acquiring
Fund 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.
15. The Acquiring Fund Adviser,
Trustee or Sponsor, as applicable, will
waive fees otherwise payable to it by the
Acquiring Fund in an amount at least
equal to any compensation (including
fees received pursuant to any plan
adopted under rule 12b–l under the Act)
received from the Fund by the
Acquiring Fund Adviser, Trustee or
Sponsor, or an affiliated person of the
Acquiring Fund Adviser, Trustee or
Sponsor, other than any advisory fees
paid to the Acquiring Fund Adviser,
Trustee or Sponsor, or its affiliated
person by the Fund, in connection with
the investment by the Acquiring Fund
in the Fund. Any Acquiring Fund SubAdviser will waive fees otherwise
payable to the Acquiring Fund SubAdviser, directly or indirectly, by the
Acquiring Management Company in an
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amount at least equal to any
compensation received from a Fund by
the Acquiring Fund Sub-Adviser, or an
affiliated person of the Acquiring Fund
Sub-Adviser, other than any advisory
fees paid to the Acquiring Fund SubAdviser or its affiliated person by the
Fund, in connection with any
investment by the Acquiring
Management Company in the Fund
made at the direction of the Acquiring
Fund Sub-Adviser. In the event that the
Acquiring Fund Sub-Adviser waives
fees, the benefit of the waiver will be
passed through to the Acquiring
Management Company.
16. Any sales charges and/or service
fees charged with respect to shares of an
Acquiring Fund will not exceed the
limits applicable to a fund of funds as
set forth in NASD Conduct Rule 2830.
17. No Fund will acquire securities of
any other investment company or
company relying on section 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 to the extent permitted by
exemptive relief from the Commission
permitting the Fund to purchase shares
of other investment companies for shortterm cash management purposes.
18. Before approving any advisory
contract under section 15 of the Act, the
Board of of each Acquiring Management
Company, including a majority of the
Independent 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 Acquiring
Management Company may invest.
These findings and their basis will be
recorded fully in the minute books of
the appropriate Acquiring Management
Company.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–05758 Filed 3–12–13; 8:45 am]
BILLING CODE 8011–01–P
PO 00000
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69055; File No. SR–
NASDAQ–2013–038]
Self-Regulatory Organizations; the
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Modify the
Fee Schedule Governing Order
Routing
March 7, 2013.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
26, 2013, The NASDAQ Stock Market
LLC (‘‘NASDAQ’’ or the ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
NASDAQ is proposing [sic] proposed
changes to amend NASDAQ’s fee
schedule governing order routing.
NASDAQ will implement the proposed
change on February 27, 2013.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item III [sic]
below. The Exchange has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
parts of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
NASDAQ is amending its fee
schedule governing order routing to
establish fees for routing orders using its
two new order routing strategies, QDRK
and QCST.3 All of the changes pertain
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 QDRK orders, pursuant to Rule
4758(a)(1)(A)(xii), check the System for available
2 17
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]]>Agencies
[Federal Register Volume 78, Number 49 (Wednesday, March 13, 2013)]
[Notices]
[Pages 15982-15988]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05758]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30415; 812-13969]
Exchange Traded Concepts Trust, et al.; Notice of Application
March 7, 2013.
AGENCY: Securities and Exchange Commission (the ``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 (2) of the Act, and under section
12(d)(1)(J) for an exemption from sections 12(d)(1)(A) and (B) of the
Act.
-----------------------------------------------------------------------
Applicants: Exchange Traded Concepts Trust, Exchange Traded Concepts
Trust II, ETF Series Solutions (each a ``Trust'' and collectively
referred to as the ``Trusts''), Exchange Traded Concepts LLC (``ETC
LLC'') and SEI Investments Distribution Company (``SEI''), Quasar
Distributors, LLC (``Quasar'') and Foreside Fund Services, LLC
(``Foreside'' and each of SEI, Quasar and Foreside are referred to as a
``Distributor'').
Summary of Application: Applicants request an order that permits: (a)
Actively-managed series of the Trusts to issue shares (``Shares'')
redeemable in large aggregations only (``Creation Units''); (b)
secondary market transactions in Shares to occur at negotiated market
prices; (c) certain series to pay redemption proceeds, under certain
circumstances, more than seven days after the tender of 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 Units; and (e) certain
registered management investment companies and unit investment trusts
outside of the same group of investment companies as the series to
acquire Shares.
DATES: Filing Dates: The application was filed on October 18, 2011, and
amended on July 24, 2012, December 21, 2012, and March 6, 2013.
Hearing or Notification of Hearing: An order granting the requested
relief 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 April 1, 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. Applicants, c/o W.
John McGuire, Esq. and Christopher D. Menconi, Esq., Bingham McCutchen
LLP, 2020 K Street NW., Washington, DC 20006.
FOR FURTHER INFORMATION CONTACT: Mark N. Zaruba, Senior Counsel, at
(202) 551-6878 or Mary Kay Frech, 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. Each Trust is registered as an open-end management investment
company under the Act and is organized as a Delaware statutory trust.
Each Trust will offer Funds (as defined below), each of which will have
distinct investment strategies and will attempt to achieve its
investment objective by utilizing an active management strategy based
on investments in equity and debt securities, including shares of other
investment companies.
2. ETC LLC, an Oklahoma limited liability company, is, and any
other Adviser (as defined below) will be, registered as an investment
adviser under the Investment Advisers Act of 1940 (the ``Advisers
Act''). An Adviser will be the investment adviser to each Fund and
will, in each case, possess full discretionary investment authority
with respect to the Fund or discrete portions of a Fund that includes
the ability to appoint sub-advisers (each a ``Sub-Adviser'') to a Fund.
Any Sub-Adviser will be registered or not subject to registration under
the Advisers Act. SEI is a Pennsylvania corporation and Quasar and
Foreside are each Delaware limited liability companies. SEI, Quasar and
Foreside are each registered as a broker-dealer (``Broker) under the
Securities Exchange Act of 1934 (the ``Exchange Act'').\1\ A
Distributor will serve as the principal underwriter and distributor for
each of the Funds.
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\1\ For purposes of the requested order, the term
``Distributor'' shall include any other entity that acts as the
distributor and principal underwriter of the Creation Units of
Shares of the Funds in the future and complies with the terms and
conditions of the application. Any future Distributor will be a
Broker registered under the Exchange Act.
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3. Applicants request that the order apply to future series of the
Trusts or to any other open-end investment company or series thereof
that may be created in the future that, in each case, (a) is an
actively managed exchange-traded fund (``ETF''), (b) is advised by ETC
LLC or an entity controlling, controlled by, or under common control
with ETC LLC (each such entity or any successor entity thereto, an
``Adviser'') \2\ and (c) complies with the terms and conditions of the
application (individually a ``Fund,'' and collectively, the
``Funds'').\3\ The Funds may invest in equity securities or fixed
income securities traded in the U.S. or non-U.S. markets. Funds that
invest in equity securities or fixed income securities traded in the
U.S. or non-U.S. markets are ``Global Funds.'' Funds that invest solely
in foreign equity securities or foreign fixed income securities are
``Foreign Funds.'' The Funds may also invest in ``Depositary
Receipts''\4\ and may engage in TBA Transactions (defined below). Each
Fund will consist of a portfolio of securities (including equity and
fixed income securities), currencies traded in the U.S. or in non-
[[Page 15983]]
U.S. markets (``Portfolio Securities''), and other assets.\5\
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\2\ For the purposes of the requested order, ``successor'' is
limited to those one or more entities that would result from a
reorganization into another jurisdiction or a change in the type of
business organization.
\3\ All entities that currently intend to rely on the order are
named as applicants. Any entity that relies on the order in the
future will comply with the terms and conditions of the application.
\4\ Depositary Receipts are typically issued by a financial
institution (a ``Depositary'') and evidence ownership in a security
or pool of securities that have been deposited with the Depositary.
A Fund will not invest in any Depositary Receipts that the Adviser
or any Sub-Adviser deems to be illiquid or for which pricing
information is not readily available. No affiliated persons of
applicants or any Sub-Adviser will serve as the Depositary for any
Depositary Receipts held by a Fund.
\5\ If a Fund invests in derivatives, then (a) the Fund's board
of trustees or directors (for any entity, the ``Board'') will
periodically review and approve the Fund's use of derivatives and
how the Fund's investment adviser assesses and manages risk with
respect to the Fund's use of derivatives and (b) the Fund's
disclosure of its use of derivatives in its offering documents and
periodic reports will be consistent with relevant Commission and
staff guidance.
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4. Applicants also request that any exemption under section
12(d)(1)(J) of the Act from sections 12(d)(1)(A) and (B) apply to: (i)
Any Fund; (ii) any Acquiring Fund (as defined below); and (iii) any
Brokers selling Shares of a Fund to an Acquiring Fund or any principal
underwriter of a Fund.\6\ A management investment company or unit
investment trust registered under the Act that is not part of the same
``group of investment companies'' as the Fund within the meaning of
section 12(d)(1)(G)(ii) of the Act and that acquires Shares of a Fund
in excess of the limits of Section 12(d)(1)(A) of the Act is referred
to as an ``Acquiring Management Company'' or an ``Acquiring Trust,''
respectively, and the Acquiring Management Companies and Acquiring
Trusts are referred to collectively as ``Acquiring Funds.''\7\
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\6\ Any future principal underwriter of a Fund will be a Broker
registered under the Exchange Act and will comply with the terms and
conditions of the application.
\7\ An Acquiring Fund may rely on the order only to invest in a
Fund and not in any other registered investment company.
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5. A Creation Unit will consist of at least 25,000 Shares and
applicants expect that the trading price of a Share will range from $40
to $100. All orders to purchase Creation Units must be placed with the
Distributor by or through an ``Authorized Participant,'' which is
either (a) a Broker or other participant in the Continuous Net
Settlement System of the National Securities Clearing Corporation
(``NSCC'', and such process the ``NSCC Process''), or (b) a participant
in the Depository Trust Company (``DTC,'' such participant ``DTC
Participant'' and such process the ``DTC Process''), which, in either
case, has executed an agreement with the Distributor with respect to
the purchase and redemption of Creation Units.
6. Shares will be purchased and redeemed in Creation Units and
generally on an in-kind basis. Except where the purchase or redemption
will include cash under the limited circumstances specified below,
purchasers will be required to purchase Creation Units by making an in-
kind deposit of specified instruments (``Deposit Instruments''), and
shareholders redeeming their Shares will receive an in-kind transfer of
specified instruments (``Redemption Instruments'').\8\ On any given
Business Day \9\ the names and quantities of the instruments that
constitute the Deposit Instruments and the names and quantities of the
instruments that constitute the Redemption Instruments will be
identical, and these instruments may be referred to, in the case of
either a purchase or a redemption, as the ``Creation Basket.'' In
addition, the Creation Basket will correspond pro rata to the positions
in a Fund's portfolio (including cash positions),\10\ except: (a) In
the case of bonds, for minor differences when it is impossible to break
up bonds beyond certain minimum sizes needed for transfer and
settlement; (b) for minor differences when rounding is necessary to
eliminate fractional shares or lots that are not tradeable round
lots;\11\ or (c) TBA Transactions,\12\ short positions or other
positions that cannot be transferred in kind \13\ will be excluded from
the Creation Basket.\14\ If there is a difference between the NAV
attributable to a Creation Unit and the aggregate market value of the
Creation Basket exchanged for the Creation Unit, the party conveying
instruments with the lower value will also pay to the other an amount
in cash equal to that difference (the ``Cash Amount'').
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\8\ The Funds must comply with the federal securities laws in
accepting Deposit Instruments and satisfying redemptions with
Redemption Instruments, including that the Deposit Instruments and
Redemption Instruments are sold in transactions that would be exempt
from registration under the Securities Act of 1933 (``Securities
Act''). In accepting Deposit Instruments and satisfying redemptions
with Redemption Instruments that are restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act, the Funds
will comply with the conditions of Rule 144A.
\9\ Each Fund will sell and redeem Creation Units on any day
that the Fund is open, including as required by section 22(e) of the
Act (each, a ``Business Day'').
\10\ The portfolio used for this purpose will be the same
portfolio used to calculate the Fund's net asset value (``NAV'') for
that Business Day.
\11\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
\12\ A TBA Transaction is a method of trading mortgage-backed
securities. In a TBA Transaction, the buyer and seller agree on
general trade parameters such as agency, settlement date, par amount
and price.
\13\ This includes instruments that can be transferred in kind
only with the consent of the original counterparty to the extent the
Fund does not intend to seek such consents.
\14\ Because these instruments will be excluded from the
Creation Basket, their value will be reflected in the determination
of the Cash Amount (defined below).
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7. Purchases and redemptions of Creation Units may be made in whole
or in part on a cash basis, rather than in kind, solely under the
following circumstances: (a) To the extent there is a Cash Amount, as
described above; (b) if, on a given Business Day, a Fund announces
before the open of trading that all purchases, all redemptions or all
purchases and redemptions on that day will be made entirely in cash;
(c) if, upon receiving a purchase or redemption order from an
Authorized Participant, a Fund determines to require the purchase or
redemption, as applicable, to be made entirely in cash; (d) if, on a
given Business Day, a Fund requires all Authorized Participants
purchasing or redeeming Shares on that day to deposit or receive (as
applicable) cash in lieu of some or all of the Deposit Instruments or
Redemption Instruments, respectively, solely because: (i) Such
instruments are not eligible for transfer through either the NSCC
Process or DTC Process; or (ii) in the case of Global Funds and Foreign
Funds, such instruments are not eligible for trading due to local
trading restrictions, local restrictions on securities transfers or
other similar circumstances; or (e) if a Fund permits an Authorized
Participant to deposit or receive (as applicable) cash in lieu of some
or all of the Deposit Instruments or Redemption Instruments,
respectively, solely because: (i) Such instruments are, in the case of
the purchase of a Creation Unit, not available in sufficient quantity;
(ii) such instruments are not eligible for trading by an Authorized
Participant or the investor on whose behalf the Authorized Participant
is acting; or (iii) a holder of Shares of a Global Fund or Foreign Fund
would be subject to unfavorable income tax treatment if the holder
receives redemption proceeds in kind.\15\
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\15\ A ``custom order'' is any purchase or redemption of Shares
made in whole or in part on a cash basis in reliance on clause
(e)(i) or (e)(ii).
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8. Each Business Day, before the open of trading on a national
securities exchange, as defined in section 2(a)(26) of the Act (a
``Listing Market''), on which Shares are listed and traded, each Fund
will cause to be published through the NSCC the names and quantities of
the instruments comprising the Creation Basket, as well as the
estimated Cash Amount (if any), for that day. The published Creation
Basket will apply until a new Creation Basket is announced on the
following Business Day, and there will be no intra-day changes to the
Creation Basket except to correct errors in the published Creation
Basket. For each Fund, the relevant Listing Market will disseminate
every 15 seconds throughout the trading a calculation of the estimated
NAV of a
[[Page 15984]]
Share (which estimate is expected to be accurate to within a few basis
points).
9. Each Fund will recoup the settlement costs charged by NSCC and
DTC by imposing a fee (the ``Transaction Fee'') on investors purchasing
or redeeming Creation Units.\16\ All orders to purchase Creation Units
must be placed with the Distributor by or through an Authorized
Participant and the Distributor will transmit such orders to the Funds.
The Distributor will be responsible for maintaining records of both the
orders placed with it and the confirmations of acceptance furnished by
it.
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\16\ Cash purchases and redemptions of Shares may involve a
higher Transaction Fee to cover the costs of purchasing and selling
the applicable Deposit and Redemption Instruments. In all cases, the
Transaction Fee will be limited in accordance with requirements of
the Commission applicable to management investment companies
offering redeemable securities.
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10. Purchasers of Shares in Creation Units may hold such Shares or
may sell such Shares into the secondary market. Shares will be listed
and traded at negotiated prices on a Listing Market and it is expected
that the relevant Listing Market will designate one or more member
firms to maintain a market for the Shares.\17\ The price of Shares
trading on a Listing Market will be based on a current bid-offer in the
secondary market. Purchases and sales of Shares in the secondary market
will not involve a Fund and will be subject to customary brokerage
commissions and charges.
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\17\ If Shares are listed on The NASDAQ Stock Market LLC
(``Nasdaq'') or a similar electronic Listing Market (including NYSE
Arca, Inc.), one or more member firms of that Listing Market will
act as market maker (a ``Market Maker'') and maintain a market for
Shares trading on that Listing Market. On Nasdaq, no particular
Market Maker would be contractually obligated to make a market in
Shares. However, the listing requirements on Nasdaq stipulate that
at least two Market Makers must be registered in Shares to maintain
a listing. Registered Market Makers are required to make a
continuous two-sided market or subject themselves to regulatory
sanctions. No Market Maker will be an affiliated person, or an
affiliated person of an affiliated person, of the Funds, except
within the meaning of section 2(a)(3)(A) or (C) of the Act due
solely to ownership of Shares.
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11. Applicants expect that purchasers of Creation Units will
include institutional investors and arbitrageurs. Applicants expect
that secondary market purchasers of Shares will include both
institutional and retail investors.\18\ Applicants believe that the
structure and operation of the Funds will be designed to enable
efficient arbitrage and, thereby, minimize the probability that Shares
will trade at a material premium or discount to a Fund's NAV.
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\18\ Shares will be registered in book-entry form only. DTC or
its nominee will be the registered owner of all outstanding Shares.
Beneficial ownership of Shares will be shown on the records of DTC
or DTC Participants.
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12. Shares will not be individually redeemable and owners of Shares
may acquire those Shares from a Fund, or tender such shares for
redemption to the Fund, in Creation Units only. To redeem, an investor
must accumulate enough Shares to constitute a Creation Unit. Redemption
requests must be placed by or through an Authorized Participant. As
discussed above, redemptions of Creation Units will generally be made
on an in-kind basis, subject to certain specified exceptions under
which redemptions may be made in whole or in part on a cash basis, and
will be subject to a Transaction Fee.
13. Neither a Trust nor any Fund will be advertised or marketed or
otherwise held out as a traditional open-end investment company or
mutual fund. Instead, each Fund will be marketed as an ``exchange-
traded fund.'' All marketing materials that describe the features or
method of obtaining, buying, or selling Creation Units, or Shares
traded on a Listing Market, or refer to redeemability, will prominently
disclose that Shares are not individually redeemable and that the
owners of Shares may acquire those Shares from a Fund or tender those
Shares for redemption to the Fund in Creation Units only.
14. Each Trust's Web site, which will be publicly available prior
to the offering of Shares, will include each Fund's prospectus
(``Prospectus''), statement of additional information (``SAI''), and
summary prospectus, if used. Each Web site will contain, on a per Share
basis for each Fund, the prior Business Day's NAV and the market
closing price or mid-point of the bid/ask spread at the time of
calculation of such NAV (``Bid/Ask Price''), and a calculation of the
premium or discount of the market closing price or the Bid/Ask Price
against such NAV. On each Business Day, prior to the commencement of
trading in Shares on a Listing Market, each Fund shall post on its Web
site the identities and quantities of the Portfolio Securities and
other assets held by the Fund that will form the basis for the
calculation of the NAV at the end of that Business Day.\19\
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\19\ Under accounting procedures followed by each Fund, trades
made on the prior Business Day (``T'') will be booked and reflected
in NAV on the current Business Day (T+1). Accordingly, the Funds
will be able to disclose at the beginning of the Business Day the
portfolio that will form the basis for the NAV calculation at the
end of the Business Day.
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Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the Act
granting 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 granting an exemption from sections 17(a)(1) and (2)
of the Act, and under section 12(d)(1)(J) for an exemption from
sections 12(d)(1)(A) and (B) of the Act.
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 provisions 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 provision 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 a
proportionate share of the issuer's current net assets, or the cash
equivalent. Because Shares will not be individually redeemable,
applicants request an order that would permit the Trusts and each Fund
to redeem Shares in Creation Units only. Applicants state that
investors may purchase Shares in Creation Units from each Fund and that
Creation Units will always be redeemable in accordance with the
provisions of the Act. Applicants further state that because the market
price of Shares will be disciplined by arbitrage opportunities,
investors should be able to sell Shares in the secondary market at
prices that
[[Page 15985]]
do 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 that 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 Shares will take
place at negotiated prices, not at a current offering price described
in the Prospectus, and not at a price based on NAV. Thus, purchases and
sales of 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 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 resulting from sales at different prices, and (c) assure
an orderly distribution of investment company shares by eliminating
price competition from brokers 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 Shares to trade in the secondary market at negotiated
prices. Applicants state that (a) secondary market trading in Shares
does not involve the Funds as parties and cannot result in dilution of
an investment in 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
Shares will not lead to discrimination or preferential treatment among
purchasers. Finally, applicants contend that the proposed distribution
system will be orderly because arbitrage activity will ensure that the
difference between the market price of Shares and their NAV remains
narrow.
Section 22(e) of the Act
7. Section 22(e) 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 observe that the
settlement of redemptions of Creation Units of the Foreign and Global
Funds is contingent not only on the settlement cycle of the U.S.
securities markets but also on the delivery cycles present in foreign
markets for underlying foreign Portfolio Securities in which those
Funds invest. Applicants have been advised that, under certain
circumstances, the delivery cycles for transferring Portfolio
Securities to redeeming investors, coupled with local market holiday
schedules, will require a delivery process of up to fourteen (14)
calendar days. Applicants therefore request relief from section 22(e)
in order to provide payment or satisfaction of redemptions within a
longer number of calendar days as required for such payment or
satisfaction in the principal local markets where transactions in the
Portfolio Securities of each Foreign and Global Fund customarily clear
and settle, but in all cases no later than fourteen (14) days following
the tender of a Creation Unit.\20\
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\20\ 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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8. Applicants state that section 22(e) was designed to prevent
unreasonable, undisclosed or unforeseen delays in the actual 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 identify those instances in a given
year where, due to local holidays, more than seven calendar days, up to
a maximum of fourteen calendar days, will be needed to deliver
redemption proceeds and will list such holidays. Applicants are not
seeking relief from section 22(e) for Foreign and Global Funds that do
not effect redemptions of Creation Units in-kind.
Section 12(d)(1) of the Act
9. Section 12(d)(1)(A) of the Act 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 Act prohibits a
registered open-end investment company, its principal underwriter, or
any other broker or dealer from selling its 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 relief to permit Acquiring Funds to acquire
Shares in excess of the limits in section 12(d)(1)(A) of the Act and to
permit the Funds, their principal underwriters and any Broker to sell
Shares to Acquiring Funds in excess of the limits in section
12(d)(l)(B) of the Act.
11. Applicants assert that the proposed transactions will not lead
to any of the abuses that section 12(d)(1) was designed to prevent.
Applicants submit that the proposed conditions to the requested relief
address the concerns underlying the limits in section 12(d)(1), which
include concerns about undue influence, excessive layering of fees and
overly complex structures.
12. Applicants submit that their proposed conditions address any
concerns regarding the potential for undue influence. To limit the
control that an Acquiring Fund may have over a Fund, applicants propose
a condition prohibiting the adviser of an Acquiring Management Company
(``Acquiring Fund Adviser''), sponsor of an Acquiring Trust
(``Sponsor''), any person controlling, controlled by, or under common
control with the Acquiring Fund Adviser or Sponsor, 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 that is advised or sponsored by the
Acquiring Fund Adviser, the Sponsor, or any person controlling,
controlled by, or under common control with the Acquiring Fund Adviser
or Sponsor (``Acquiring 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 sub-adviser
to an Acquiring Fund (``Acquiring Fund Sub-Adviser''), any person
controlling, controlled by or under common control with the
[[Page 15986]]
Acquiring Fund Sub-Adviser, 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 Acquiring Fund Sub-Adviser or any person controlling,
controlled by or under common control with the Acquiring Fund Sub-
Adviser (``Acquiring Fund's Sub-Advisory Group'').
13. Applicants propose a condition to ensure that no Acquiring Fund
or Acquiring Fund Affiliate \21\ (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 offering of securities during the existence
of an 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, Acquiring Fund Adviser, Acquiring Fund Sub-
Adviser, employee or Sponsor of the Acquiring Fund, or a person of
which any such officer, director, member of an advisory board,
Acquiring Fund Adviser, Acquiring Fund Sub-Adviser, employee or Sponsor
is an affiliated person (except any person whose relationship to the
Fund is covered by section 10(f) of the Act is not an Underwriting
Affiliate).
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\21\ An ``Acquiring Fund Affiliate'' is any Acquiring Fund
Adviser, Acquiring Fund Sub-Adviser, Sponsor, promoter and principal
underwriter of an Acquiring Fund, and any person controlling,
controlled by or under common control with any of these entities.
``Fund Affiliate'' is an investment adviser, promoter, or principal
underwriter of a Fund or any person controlling, controlled by or
under common control with any of these entities.
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14. Applicants propose several conditions to address the potential
for layering of fees. Applicants note that the Board of any Acquiring
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 (for any Board, the ``Independent Trustees''), will
be required to find that the advisory fees charged under the contract
are based on services provided that will be in addition to, rather than
duplicative of, services provided under the advisory contract of any
Fund in which the Acquiring Management Company may invest. Applicants
also state that any sales charges and/or service fees charged with
respect to shares of an Acquiring Fund will not exceed the limits
applicable to a fund of funds as set forth in NASD Conduct Rule
2830.\22\
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\22\ Any reference to NASD Conduct Rule 2830 includes any
successor or replacement rule that may be adopted by the Financial
Industry Regulatory Authority.
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15. Applicants submit that the proposed arrangement will not create
an overly complex fund structure. Applicants note that a Fund will be
prohibited from acquiring securities of any investment company or
company relying on section 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 to the
extent permitted by exemptive relief from the Commission permitting the
Fund to purchase shares of other investment companies for short-term
cash management purposes.
16. To ensure that an Acquiring Fund is aware of the terms and
conditions of the requested order, the Acquiring Funds must enter into
an agreement with the respective Funds (``Acquiring Fund Agreement'').
The Acquiring Fund Agreement will include an acknowledgement from the
Acquiring Fund that it may rely on the order only to invest in a Fund
and not in any other investment company.
Section 17(a) of the Act
17. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such person (``Second Tier Affiliates''), from selling any security to
or purchasing any security from the company. Section 2(a)(3) of the Act
defines ``affiliated person'' to include 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 and 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. The Funds may
be deemed to be controlled by the Adviser or an entity controlling,
controlled by or under common control with the Adviser and hence
affiliated persons of each other. In addition, the Funds may be deemed
to be under common control with any other registered investment company
(or series thereof) advised by the Adviser or an entity controlling,
controlled by or under common control with the Adviser (an ``Affiliated
Fund'').
18. Applicants request an exemption under sections 6(c) and 17(b)
of the Act from sections 17(a)(1) and 17(a)(2) of the Act to permit in-
kind purchases and redemptions of Creation Units from the Funds by
persons that 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 more than 25%, of the Shares of a Trust 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 one or more Affiliated Funds. Applicants also request
an exemption in order to permit each Fund to sell Shares to and redeem
Shares from, and engage in the transactions that would accompany such
sales and redemptions with, any Acquiring Fund of which the Fund is an
affiliated person or Second-Tier Affiliate.\23\
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\23\ Applicants anticipate that most Acquiring Funds will
purchase Shares in the secondary market and will not purchase or
redeem Creation Units directly from a Fund. To the extent that
purchases and sales of Shares occur in the secondary market and not
through principal transactions directly between an Acquiring Fund
and a Fund, relief from section 17(a) would not be necessary.
However, the requested relief would apply to direct sales of Shares
in Creation Units by a Fund to an Acquiring Fund and redemptions of
those Shares in Creation Units. The requested relief is intended to
cover transactions that would accompany such sales and redemptions.
Applicants are not seeking relief from section 17(a) for, and the
requested relief will not apply to, transactions where a Fund could
be deemed an affiliated person, or an affiliated person of an
affiliated person of an Acquiring Fund because an investment adviser
to the Funds is also an investment adviser to that Acquiring Fund.
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19. Applicants contend that no useful purpose would be served by
prohibiting such affiliated persons or Second Tier Affiliates from
acquiring or redeeming Creation Units through in-kind transactions.
Both the deposit procedures for in-kind purchases of Creation Units and
the redemption procedures for in-kind redemptions will be the same for
all purchases and redemptions. Deposit Instruments and Redemptions
Instruments will be valued in the same manner as the Portfolio
Securities held by the relevant Fund. Applicants thus believe that in-
kind purchases and redemptions will not result in self-dealing or
overreaching of the Fund.
20. Applicants also submit that the sale of Shares to and
redemption of Shares from an Acquiring Fund satisfies the standards for
relief under sections 17(b) and 6(c) of the Act. Applicants note that
any consideration paid for the purchase or redemption of Creation Units
directly from a Fund will be based on the NAV of the Fund.\24\ The
[[Page 15987]]
Acquiring Fund Agreement will require any Acquiring Fund that purchases
Creation Units directly from a Fund to represent that the purchase will
be in compliance with its investment restrictions and consistent with
the investment policies set forth in its registration statement.
Applicants also state that the proposed transactions are consistent
with the general purposes of the Act and appropriate in the public
interest.
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\24\ Applicants acknowledge that the receipt of compensation by
(a) an affiliated person of an Acquiring Fund, or an affiliated
person of such person, for the purchase by the Acquiring Fund of
Shares of a Fund or (b) an affiliated person of a Fund, or an
affiliated person of such person, for the sale by the Fund of its
Shares to an Acquiring Fund, may be prohibited by section 17(e)(1)
of the Act. The Acquiring Fund Agreement also will include this
acknowledgment.
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Applicants' Conditions
Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
A. Actively Managed Exchange-Traded Fund Relief
1. Neither a Trust nor any Fund will be advertised or marketed as
an open-end investment company or mutual fund. Any advertising material
that describes the purchase or sale of Creation Units or refers to
redeemability will prominently disclose that the Shares are not
individually redeemable and that owners of the Shares may acquire those
Shares from the Fund and tender those Shares for redemption to the Fund
in Creation Units only.
2. The Web site for the Funds, which is and will be publicly
accessible at no charge, will contain, on a per Share basis for each
Fund, the prior Business Day's NAV and the market closing price or the
Bid/Ask Price, and a calculation of the premium or discount of the
market closing price or Bid/Ask Price against such NAV.
3. As long as a Fund operates in reliance on the requested order,
its Shares will be listed on a Listing Market.
4. On each Business Day, before commencement of trading in Shares
on a Fund's Listing Market, the Fund will disclose on its Web site the
identities and quantities of the Portfolio Securities and other assets
held by the Fund that will form the basis for the Fund's calculation of
NAV at the end of the Business Day.
5. The Adviser or any Sub-Advisers, directly or indirectly, will
not cause any Authorized Participant (or any investor on whose behalf
an Authorized Participant may transact with the Fund) to acquire any
Deposit Instrument for a Fund through a transaction in which the Fund
could not engage directly.
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 actively-managed exchange-traded
funds.
B. Section 12(d)(1) Relief
7. The members of an Acquiring Fund's Advisory Group will not
control (individually or in the aggregate) a Fund within the meaning of
section 2(a)(9) of the Act. The members of an Acquiring Fund's Sub-
Advisory Group will not control (individually or in the aggregate) a
Fund within the meaning of section 2(a)(9) of the Act. If, as a result
of a decrease in the outstanding voting securities of a Fund, the
Acquiring Fund's Advisory Group or the Acquiring Fund's Sub-Advisory
Group, each in the aggregate, becomes a holder of more than 25 percent
of the outstanding voting securities of a Fund, it will vote its Shares
of the Fund in the same proportion as the vote of all other holders of
that Fund's Shares. This condition does not apply to the Acquiring
Fund's Sub-Advisory Group with respect to a Fund for which the
Acquiring Fund Sub-Adviser or a person controlling, controlled by, or
under common control with the Acquiring Fund Sub-Adviser acts as the
investment adviser within the meaning of section 2(a)(20)(A) of the
Act.
8. No Acquiring Fund or Acquiring Fund Affiliate will cause any
existing or potential investment by the Acquiring Fund in a Fund to
influence the terms of any services or transactions between the
Acquiring Fund or an Acquiring Fund Affiliate and the Fund or a Fund
Affiliate.
9. The Board of an Acquiring Management Company, including a
majority of the Independent Trustees, will adopt procedures reasonably
designed to ensure that the Acquiring Fund Adviser and any Acquiring
Fund Sub-Adviser are conducting the investment program of the Acquiring
Management Company without taking into account any consideration
received by the Acquiring Management Company or an Acquiring Fund
Affiliate from a Fund or a Fund Affiliate in connection with any
services or transactions.
10. Once an investment by an Acquiring Fund in the Shares of a Fund
exceeds the limits in section l2(d)(1)(A)(i) of the Act, the Board of
the Fund, including a majority of the Independent Trustees, will
determine that any consideration paid by the Fund to an Acquiring Fund
or an Acquiring Fund Affiliate in connection with any services or
transactions: (i) Is fair and reasonable in relation to the nature and
quality of the services and benefits received by the Fund; (ii) 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 (iii) 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(s).
11. No Acquiring Fund or Acquiring Fund Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Fund)
will cause the Fund to purchase a security in any Affiliated
Underwriting.
12. The Board of a Fund, including a majority of the Independent
Trustees, will adopt procedures reasonably designed to monitor any
purchases of securities by the Fund in an Affiliated Underwriting, once
an investment by an Acquiring Fund in the securities of the Fund
exceeds the limit of section 12(d)(1)(A)(i) of the Act, including any
purchases made directly from an Underwriting Affiliate. The Board of
the Fund will review these purchases periodically, but no less
frequently than annually, to determine whether the purchases were
influenced by the investment by the Acquiring Fund in the Fund. The
Board of the Fund will consider, among other things: (i) Whether the
purchases were consistent with the investment objectives and policies
of the Fund; (ii) 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 (iii) 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 of the Fund 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 interest of
shareholders of the Fund.
13. 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 of not less than six
[[Page 15988]]
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 Acquiring Fund in
the securities of the Fund 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 materials upon which the
determinations of the Board of the Fund were made.
14. Before investing in Shares of a Fund in excess of the limits in
section 12(d)(1)(A), each Acquiring Fund and the Fund will execute an
Acquiring Fund Agreement stating, without limitation, that their Boards
and their investment adviser(s), or their Sponsors or trustees
(``Trustee''), as applicable, understand the terms and conditions of
the requested order, and agree to fulfill their responsibilities under
the requested order. At the time of its investment in Shares of a Fund
in excess of the limit in section 12(d)(1)(A)(i), an Acquiring Fund
will notify the Fund of the investment. At such time, the Acquiring
Fund will also transmit to the Fund a list of the names of each
Acquiring Fund Affiliate and Underwriting Affiliate. The Acquiring Fund
will notify the Fund of any changes to the list of the names as soon as
reasonably practicable after a change occurs. The Fund and the
Acquiring Fund will maintain and preserve a copy of the requested
order, the Acquiring Fund 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.
15. The Acquiring Fund Adviser, Trustee or Sponsor, as applicable,
will waive fees otherwise payable to it by the Acquiring Fund in an
amount at least equal to any compensation (including fees received
pursuant to any plan adopted under rule 12b-l under the Act) received
from the Fund by the Acquiring Fund Adviser, Trustee or Sponsor, or an
affiliated person of the Acquiring Fund Adviser, Trustee or Sponsor,
other than any advisory fees paid to the Acquiring Fund Adviser,
Trustee or Sponsor, or its affiliated person by the Fund, in connection
with the investment by the Acquiring Fund in the Fund. Any Acquiring
Fund Sub-Adviser will waive fees otherwise payable to the Acquiring
Fund Sub-Adviser, directly or indirectly, by the Acquiring Management
Company in an amount at least equal to any compensation received from a
Fund by the Acquiring Fund Sub-Adviser, or an affiliated person of the
Acquiring Fund Sub-Adviser, other than any advisory fees paid to the
Acquiring Fund Sub-Adviser or its affiliated person by the Fund, in
connection with any investment by the Acquiring Management Company in
the Fund made at the direction of the Acquiring Fund Sub-Adviser. In
the event that the Acquiring Fund Sub-Adviser waives fees, the benefit
of the waiver will be passed through to the Acquiring Management
Company.
16. Any sales charges and/or service fees charged with respect to
shares of an Acquiring Fund will not exceed the limits applicable to a
fund of funds as set forth in NASD Conduct Rule 2830.
17. No Fund will acquire securities of any other investment company
or company relying on section 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 to
the extent permitted by exemptive relief from the Commission permitting
the Fund to purchase shares of other investment companies for short-
term cash management purposes.
18. Before approving any advisory contract under section 15 of the
Act, the Board of of each Acquiring Management Company, including a
majority of the Independent 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
Acquiring Management Company may invest. These findings and their basis
will be recorded fully in the minute books of the appropriate Acquiring
Management Company.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05758 Filed 3-12-13; 8:45 am]
BILLING CODE 8011-01-P
