First Trust Exchange-Traded Fund, et al.; Notice of Application, 39799-39804 [2013-15846]
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Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Notices
the Fund. Any Investing Fund
Subadvisor will waive fees otherwise
payable to the Investing Fund
Subadvisor, directly or indirectly, by the
Investing Management Company in an
amount at least equal to any
compensation received from a Fund by
the Investing Fund Subadvisor, or an
affiliated person of the Investing Fund
Subadvisor, other than any advisory fees
paid to the Investing Fund Subadvisor
or its affiliated person by the Fund, in
connection with the investment by the
Investing Management Company in the
Fund made at the direction of the
Investing Fund Subadvisor. In the event
that the Investing Fund Subadvisor
waives fees, the benefit of the waiver
will be passed through to the Investing
Management Company.
6. No Investing Fund or Investing
Fund Affiliate (except to the extent it is
acting in its capacity as an investment
adviser to a Fund) will cause a Fund to
purchase a security in an Affiliated
Underwriting.
7. The Board of a Fund, including a
majority of the independent directors or
trustees, will adopt procedures
reasonably designed to monitor any
purchases of securities by the Fund in
an Affiliated Underwriting, once an
investment by an Investing 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 will review these purchases
periodically, but no less frequently than
annually, to determine whether the
purchases were influenced by the
investment by the Investing Fund in the
Fund. The Board will consider, among
other things: (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 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.
8. Each Fund will maintain and
preserve permanently in an easily
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accessible place a written copy of the
procedures described in the preceding
condition, and any modifications to
such procedures, and will maintain and
preserve for a period of not less than six
years from the end of the fiscal year in
which any purchase in an Affiliated
Underwriting occurred, the first two
years in an easily accessible place, a
written record of each purchase of
securities in Affiliated Underwritings
once an investment by an Investing
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 Board’s determinations were made.
9. Before investing in Shares in excess
of the limits in Section 12(d)(1)(A), each
Investing Fund and the Fund will
execute an FOF Participation Agreement
stating, without limitation, that their
boards of directors or trustees and their
investment advisers, or Trustee and
Sponsor, as applicable, understand the
terms and conditions of the order, and
agree to fulfill their responsibilities
under the order. At the time of its
investment in Shares in excess of the
limit in Section 12(d)(1)(A)(i), an
Investing Fund will notify the Fund of
the investment. At such time, the
Investing Fund will also transmit to the
Fund a list of the names of each
Investing Fund Affiliate and
Underwriting Affiliate. The Investing
Fund will notify the Fund of any
changes to the list as soon as reasonably
practicable after a change occurs. The
Fund and the Investing Fund will
maintain and preserve a copy of the
order, the FOF Participation Agreement,
and the list with any updated
information for the duration of the
investment and for a period of not less
than six years thereafter, the first two
years in an easily accessible place.
10. Before approving any advisory
contract under Section 15 of the Act, the
board of directors or trustees of each
Investing Management Company,
including a majority of the independent
directors or trustees, will find that the
advisory fees charged under such
contract are based on services provided
that will be in addition to, rather than
duplicative of, the services provided
under the advisory contract(s) of any
Fund in which the Investing
Management Company may invest.
These findings and their basis will be
recorded fully in the minute books of
the appropriate Investing Management
Company.
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39799
11. Any sales charges and/or service
fees charged with respect to shares of an
Investing Fund will not exceed the
limits applicable to a fund of funds as
set forth in NASD Conduct Rule 2830.
12. No Fund relying on the 12(d)(1)
Relief will acquire 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.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–15781 Filed 7–1–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
30582; File No. 812–14088]
First Trust Exchange-Traded Fund, et
al.; Notice of Application
June 26, 2013.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of an application for an
order under section 6(c) of the
Investment Company Act of 1940 (the
‘‘Act’’) for an exemption from sections
2(a)(32), 5(a)(1), 22(d), and 22(e) of the
Act and rule 22c–1 under the Act, and
under sections 6(c) and 17(b) of the Act
for an exemption from sections 17(a)(1)
and (a)(2) of the Act.
AGENCY:
Applicants
request an order that would permit (a)
certain open-end management
investment companies or series thereof
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
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 (d) certain series to pay
redemption proceeds, under certain
circumstances, more than seven days
after the tender of Shares for
redemption.
APPLICANTS: First Trust ExchangeTraded Fund, First Trust ExchangeTraded Fund II, First Trust ExchangeTraded Fund III, First Trust ExchangeSUMMARY OF APPLICATION:
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Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Notices
and expenses, of a specified securities
index (‘‘Underlying Index’’).
2. Applicants request that the order
apply to the Existing Trusts and the
Initial Fund and any other open-end
management investment company
existing or created in the future
(together with the Existing Trusts, the
‘‘Trusts’’ and each, a ‘‘Trust’’) and any
existing or future series of the Trusts,
DATES: Filing Dates: The application was advised by First Trust Advisors or an
filed on October 25, 2012, and amended entity controlling, controlled by or
on April 23, 2013. Applicants have
under common control with First Trust
agreed to file an amendment during the
Advisors (each, an ‘‘Adviser’’) that
notice period, the substance of which is tracks an Underlying Index (‘‘Future
reflected in this notice.
Funds’’).1 Any Future Fund will be (a)
HEARING OR NOTIFICATION OF HEARING:
advised by an Adviser and (b) comply
An order granting the requested relief
with the terms and conditions of the
will be issued unless the Commission
application. The Initial Fund and any
orders a hearing. Interested persons may Future Funds together are the ‘‘Funds.’’
request a hearing by writing to the
3. Certain of the Funds will be based
Commission’s Secretary and serving
on Underlying Indexes which will be
applicants with a copy of the request,
comprised of securities traded in the
personally or by mail. Hearing requests
U.S. markets (‘‘Domestic Indexes’’).
should be received by the Commission
Other Funds will be based on
by 5:30 p.m. on July 22, 2013, and
Underlying Indexes which will be
should be accompanied by proof of
comprised of foreign and domestic
service on applicants, in the form of an
securities or solely of securities not
affidavit, or for lawyers, a certificate of
traded in the U.S. markets (‘‘Foreign
service. Hearing requests should state
Indexes’’). Funds which track Domestic
the nature of the writer’s interest, the
Indexes are referred to as ‘‘Domestic
reason for the request, and the issues
contested. Persons who wish to be
Funds’’ and Funds which track Foreign
notified of a hearing may request
Indexes are referred to as ‘‘Foreign
notification by writing to the
Funds.’’ Underlying Indexes that
Commission’s Secretary.
include both long and short positions in
securities are referred to as ‘‘Long/Short
ADDRESSES: Elizabeth M. Murphy,
Indexes.’’ Funds based on Long/Short
Secretary, Securities and Exchange
Indexes are ‘‘Long/Short Funds.’’
Commission, 100 F Street NE.,
Washington, DC 20549–1090;
Underlying Indexes that use a 130/30
Applicants, 120 East Liberty Drive,
investment strategy are referred to as
Suite 400, Wheaton, IL 60187.
‘‘130/30 Indexes.’’ Funds based on 130/
30 Indexes are ‘‘130/30 Funds.’’
FOR FURTHER INFORMATION CONTACT:
Bruce R. MacNeil, Senior Counsel at
4. An Adviser registered as an
(202) 551–6817, or Daniele Marchesani, investment adviser under the
Branch Chief, at (202) 551–6821
Investment Advisers Act of 1940 (the
(Division of Investment Management,
‘‘Advisers Act’’) will serve as
Exemptive Applications Office).
investment adviser to the Funds. The
SUPPLEMENTARY INFORMATION: The
Adviser may enter into sub-advisory
following is a summary of the
agreements with one or more
application. The complete application
investment advisers to act as a submay be obtained via the Commission’s
adviser to a Fund (each, a ‘‘SubWeb site by searching for the file
Adviser’’). Each Sub-Adviser will be
number, or an applicant using the
registered or not subject to registration
Company name box, at https://
under the Advisers Act. The Distributor
www.sec.gov/search/search.htm or by
is a broker-dealer registered under the
calling (202) 551–8090.
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’) and will act as the
Applicants’ Representations
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Traded Fund IV, First Trust ExchangeTraded Fund V, First Trust ExchangeTraded Fund VI, First Trust ExchangeTraded Fund VII, First Trust ExchangeTraded AlphaDEX® Fund, First Trust
Exchange-Traded AlphaDEX® Fund II
(the ‘‘Existing Trusts’’), First Trust
Advisors L.P. (‘‘First Trust Advisors’’),
and First Trust Portfolios, L.P. (the
‘‘Distributor’’).
1. Each Existing Trust is registered
under the Act as an open-end
management investment company. An
Existing Trust initially will offer one
Fund (defined below) identified in the
application (‘‘Initial Fund’’), whose
performance will correspond to the
price and yield performance, before fees
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1 All entities that currently intend to rely on the
order have been named as applicants. Any other
existing or future entity that subsequently relies on
the order will comply with the terms and
conditions of the application. Any existing series of
a Trust or any other registered open-end
management investment company that seeks to rely
on the requested relief in the future will be an
exchange-traded fund, not a mutual fund.
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principal underwriter and distributor
for the Funds.2
5. Each Fund will hold certain
securities and other assets and positions
(‘‘Portfolio Positions’’) selected to
correspond to the performance of its
Underlying Index.3 Except with respect
to Affiliated Index Funds (defined
below), no entity that creates, compiles,
sponsors or maintains an Underlying
Index (‘‘Index Provider’’) will be an
affiliated person, as defined in section
2(a)(3) of the Act, or an affiliated person
of an affiliated person, of the Trust, a
Fund, the Adviser, any Sub-adviser, or
promoter of a Fund, or of the
Distributor.
6. A Fund will utilize either a
replication or representative sampling
strategy to track its Underlying Index. A
Fund using a replication strategy will
invest in substantially all of the
Component Securities in its Underlying
Index in the same approximate
proportions as in the Underlying Index.
A Fund using a representative sampling
strategy will hold some, but may not
hold all, of the Component Securities of
its Underlying Index. Applicants state
that use of the representative sampling
strategy may prevent a Fund from
tracking the performance of its
Underlying Index with the same degree
of accuracy as would a Fund that
invests in every Component Security of
the Underlying Index. Applicants
expect that each Fund will have an
annual tracking error relative to the
performance of its Underlying Index of
less than 5 percent.
7. Each Fund will issue, on a
continuous basis, Creation Units, (e.g.,
at least 25,000 Shares) with an initial
price per Share of $25 to $100. All
orders to purchase Creation Units must
be placed with the Distributor by or
through a party that has entered into an
agreement with the Distributor
(‘‘Authorized Participant’’). The
Distributor will be responsible for
delivering the Fund’s prospectus to
those persons acquiring Creation Units
and for maintaining records of both the
orders placed with it and the
confirmations of acceptance furnished
2 Applicants request that the order also apply to
future distributors that comply with the terms and
conditions of the application.
3 Applicants represent that each Fund will invest
at least 80% of its total assets in the component
securities that comprise its Underlying Index
(‘‘Component Securities’’) or, as applicable,
depositary receipts or TBA Transactions (as defined
below) representing Component Securities. Each
Fund also may invest up to 20% of its total assets
(the ‘‘20% Asset Basket’’) in a broad variety of other
instruments, including securities and other
instruments not included in its Underlying Index,
which the Adviser believes will help the Fund track
its Underlying Index.
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by it. In addition, the Distributor will
maintain a record of the instructions
given to the applicable Fund to
implement the delivery of its Shares. An
Authorized Participant must be either
(a) a ‘‘Participating Party,’’ (i.e., a
broker-dealer or other participant in the
Continuous Net Settlement System of
the National Securities Clearing
Corporation (‘‘NSCC’’), a clearing house
registered with the Commission, or (b)
a participant in the Depository Trust
Company (‘‘DTC,’’ and such participant,
‘‘DTC Participant’’), which, in either
case, has signed a ‘‘Participant
Agreement’’ with the Distributor.
8. The 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’’).4 On any given Business
Day 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, unless the Fund is
Rebalancing (as defined below). In
addition, the Deposit Instruments and
the Redemption Instruments will each
correspond pro rata to the positions in
a Fund’s portfolio (including cash
positions),5 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; 6 (c) ‘‘to be
announced’’ transactions (‘‘TBA
Transactions’’),7 short positions,
4 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.
5 The portfolio used for this purpose will be the
same portfolio used to calculate the Fund’s NAV for
that Business Day.
6 A tradeable round lot for a security will be the
standard unit of trading in that particular type of
security in its primary market.
7 A TBA Transaction is a method of trading
mortgage-backed securities. In a TBA Transaction,
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derivatives and other positions that
cannot be transferred in kind 8 will be
excluded from the Deposit Instruments
and the Redemption Instruments; 9 (d)
to the extent the Fund determines, on a
given Business Day, to use a
representative sampling of the Fund’s
portfolio; 10 or (e) for temporary periods,
to effect changes in the Fund’s portfolio
as a result of the rebalancing of its
Underlying Index (any such change, a
‘‘Rebalancing’’). If there is a difference
between the net asset value (‘‘NAV’’)
attributable to a Creation Unit and the
aggregate market value of the Deposit
Instruments or Redemption Instruments
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 ‘‘Balancing Amount’’).
9. 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 Balancing 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; 11 (d) if, on a given
the buyer and seller agree on general trade
parameters such as agency, settlement date, par
amount and price. The actual pools delivered
generally are determined two days prior to the
settlement date.
8 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.
9 Because these instruments will be excluded
from the Deposit Instruments and the Redemption
Instruments, their value will be reflected in the
determination of the Balancing Amount (defined
below).
10 A Fund may only use sampling for this purpose
if the sample: (a) Is designed to generate
performance that is highly correlated to the
performance of the Fund’s portfolio; (b) consists
entirely of instruments that are already included in
the Fund’s portfolio; and (c) is the same for all
Authorized Participants on a given Business Day.
11 In determining whether a particular Fund will
sell or redeem Creation Units entirely on a cash or
in-kind basis (whether for a given day or a given
order), the key consideration will be the benefit that
would accrue to the Fund and its investors. For
instance, in bond transactions, the Adviser may be
able to obtain better execution than Share
purchasers because of the Adviser’s size, experience
and potentially stronger relationships in the fixed
income markets. Purchases of Creation Units either
on an all cash basis or in-kind are expected to be
neutral to the Funds from a tax perspective. In
contrast, cash redemptions typically require selling
portfolio holdings, which may result in adverse tax
consequences for the remaining Fund shareholders
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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 or DTC; or (ii)
in the case of 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 Foreign Fund
would be subject to unfavorable income
tax treatment if the holder receives
redemption proceeds in kind.12
10. Each Business Day, before the
open of trading on a national securities
exchange, as defined in section 2(a)(26)
of the Act (‘‘Exchange’’) on which
Shares are listed (‘‘Listing Exchange’’),
each Fund will cause to be published
through the NSCC the names and
quantities of the instruments comprising
the Deposit Instruments and the
Redemption Instruments, as well as the
estimated Balancing Amount (if any),
for that day. The list of Deposit
Instruments and the list of Redemption
Instruments will apply until new lists
are announced on the following
Business Day, and there will be no intraday changes to the lists except to correct
errors in the published lists.
11. For the Long/Short Funds and
130/30 Funds, the Adviser will provide
full portfolio holdings disclosure on a
daily basis on the Funds’ publicly
available Web site (‘‘Web site’’) and will
develop an ‘‘IIV File,’’ which it will use
to disclose the Funds’ full portfolio
holdings, including short positions.
Before the opening of business on each
Business Day, the Trust, Adviser or
other third party, will make the IIV File
available by email upon request.
Applicants state that given either the IIV
that would not occur with an in-kind redemption.
As a result, tax considerations may warrant in-kind
redemptions.
12 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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File or the Web site disclosure,13 anyone
will be able to know in real time the
intraday value of the Long/Short Funds
and 130/30 Funds.14 With respect to the
Long/Short Funds and 130/30 Funds,
the investment characteristics of any
financial instruments and short
positions used to achieve short and long
exposures will be described in sufficient
detail for market participants to
understand the principal investment
strategies of the Funds and to permit
informed trading of their Shares.
12. Shares of each Fund will be listed
and traded individually on an
Exchange. It is expected that one or
more member firms of an Exchange will
be designated to act as a market maker
(‘‘Market Maker’’) and maintain a
market in Shares trading on the
Exchange. Prices of Shares trading on an
Exchange will be based on the current
bid/offer market. Shares sold in the
secondary market will be subject to
customary brokerage commissions and
charges.
13. Applicants expect that purchasers
of Creation Units will include
institutional investors and arbitrageurs.
Market Makers also may purchase
Creation Units for use in market-making
activities. Applicants expect that
secondary market purchasers of Shares
will include both institutional investors
and retail investors.15 Applicants expect
that the price at which Shares trade will
be disciplined by arbitrage
opportunities created by the option to
continually purchase or redeem
Creation Units at their NAV, which
should ensure that Shares will not trade
at a material discount or premium in
relation to their NAV.
14. Shares will not be individually
redeemable. To redeem, an investor
must accumulate enough Shares to
constitute a Creation Unit. Redemption
orders must be placed by or through an
Authorized Participant.
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13 The
information on the Web site will be the
same as that disclosed to Authorized Participants in
the IIV File, except that (a) the information
provided on the Web site will be formatted to be
reader-friendly and (b) the portfolio holdings data
on the Web site will be calculated and displayed
on a per Fund basis, while the information in the
IIV File will be calculated and displayed on a per
Creation Unit basis.
14 Each Listing Exchange or other major market
data provider will disseminate, every 15 seconds
during regular Exchange trading hours, through the
facilities of the Consolidated Tape Association, an
amount for each Fund representing the sum of (a)
the estimated Balancing Amount and (b) the current
value of the Deposit Instruments and any short
positions, on a per individual Share basis.
15 Shares will be registered in book-entry form
only. DTC or its nominee will be the registered
owner of all outstanding Shares. DTC or DTC
Participants will maintain records reflecting
beneficial owners of Shares.
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15. An investor purchasing or
redeeming a Creation Unit from a Fund
may be charged a fee (‘‘Transaction
Fee’’) to protect existing shareholders of
the Funds from the dilutive costs
associated with the purchase and
redemption of Creation Units.16
16. None of the Funds will be
advertised, marketed or otherwise held
out as a traditional open-end investment
company or a mutual fund. Instead,
each Fund will be marketed as an
‘‘exchange traded fund (‘‘ETF’’). All
marketing materials that describe the
features or method of obtaining, buying
or selling Creation Units, or Shares
traded on an Exchange, or refer to
redeemability, will prominently
disclose that Shares are not individually
redeemable and that the owners of
Shares may purchase or redeem Shares
from the Fund in Creation Units. The
same approach will be followed in the
shareholder reports issued or circulated
in connection with the Shares. The
Funds will provide copies of their
annual and semi-annual shareholder
reports to DTC Participants for
distribution to shareholders.
17. Applicants also request that the
order allow them to offer Funds for
which the Adviser or an affiliated
person, as defined in section 2(a)(3) of
the Act, or an affiliated person of an
affiliated person, of a Trust or a Fund,
the Adviser, any Sub-Adviser, the
Distributor or a promoter of the Fund
(each, other than the Adviser, an
‘‘Affiliated Person’’) will serve as the
Index Provider (‘‘Affiliated Index
Fund’’). The Index Provider to an
Affiliated Index Fund (the ‘‘Affiliated
Index Provider’’), will create a
proprietary, rules based methodology
(‘‘Rules-Based Process’’) to create
Underlying Indexes for use by the
Affiliated Index Funds and other
investors (an ‘‘Affiliated Index’’).17 The
16 Where a Fund permits an in-kind purchaser to
substitute cash in lieu of depositing one or more
Deposit Instruments, the Transaction Fee imposed
on a purchaser or redeemer may be higher.
17 The Affiliated Indexes may be made available
to registered investment companies, as well as
separately managed accounts of institutional
investors and privately offered funds that are not
deemed to be ‘‘investment companies’’ in reliance
on section 3(c)(1) or 3(c)(7) of the Act and other
pooled investment vehicles for which the Adviser
acts as adviser or sub-adviser (‘‘Affiliated
Accounts’’) as well as other such registered
investment companies, separately managed
accounts, privately offered funds and other pooled
investment vehicles for which it does not act either
as adviser or sub-adviser (‘‘Unaffiliated Accounts’’).
The Affiliated Accounts and the Unaffiliated
Accounts (collectively, ‘‘Accounts’’), like the
Funds, would seek to track the performance of one
or more Underlying Index(es) by investing in the
constituents of such Underlying Index(es) or a
representative sample of such constituents of the
index. Consistent with the relief requested from
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Adviser, if it is the Affiliated Index
Provider, will be the owner of the
Affiliated Indexes and all related
intellectual property thereto, or the
Adviser will enter into a license
agreement with any Affiliated Person
that is an Affiliated Index Provider for
the use of the Underlying Indexes and
related intellectual property at no cost
to a Trust and Affiliated Index Funds.
18. Applicants contend that the
potential conflicts of interest arising
from the fact that the Affiliated Index
Provider will be the Adviser or an
Affiliated Person are not actual
concerns, and will not have any impact
on the operation of the Affiliated Index
Funds, because the Affiliated Indexes
will maintain transparency. Applicants
further state that the Affiliated Index
Funds’ portfolios will be transparent,
and the Adviser, any Affiliated Person
who is an Affiliated Index Provider, any
Sub-Adviser and the Affiliated Index
Funds each will adopt policies and
procedures to address any potential
conflicts of interest (‘‘Policies and
Procedures’’). The Affiliated Index
Provider will publish in the public
domain, including on its Web site and/
or the Affiliated Index Funds’ Web site,
the rules that governing the construction
and maintenance of each of its Affiliated
Indexes. Applicants believe that this
public disclosure will prevent the
Adviser from possessing any advantage
over other market participants by virtue
of being the Affiliated Index Provider or
being affiliated with the Affiliated Index
Provider. Applicants note that the
identity and weightings of the securities
of any Affiliated Index will be readily
ascertainable by any third party because
the Rules-Based Process will be freely
available.
19. Like other index providers, the
Affiliated Index Provider may modify
the Rules-Based Process in the future.
The Rules-Based Process could be
modified, for example, to reflect
changes in the underlying market
tracked by an Affiliated Index, the way
in which the Rules-Based Process takes
into account market events or to change
the way a corporate action, such as a
stock split, is handled. Such changes
would not take effect until the Affiliated
Index Provider has given (a) the
Calculation Agent (defined below)
reasonable prior written notice of such
rule changes, and (b) the investing
public at least sixty (60) days published
notice that such changes will be
implemented. Affiliated Indexes may
have reconstitution dates and rebalance
dates that occur on a periodic basis
section 17(a), the Affiliated Accounts will not
engage in Creation Unit transactions with a Fund.
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more frequently than once yearly, but
no more frequently than monthly.
20. As owner of the Affiliated
Indexes, the Affiliated Index Provider
will hire a calculation agent
(‘‘Calculation Agent’’). The Calculation
Agent will not be an affiliated person,
as such term is defined in the Act, or an
affiliated person of an affiliated person,
of the Affiliated Index Funds, the
Adviser, any Sub-Adviser, any promoter
of a Fund or the Distributor. The
Affiliated Index Provider will initially
apply the Rules Based Process to the
universe of equity and/or fixed income
securities and will determine the
number, type, and weight of securities
that will comprise each Affiliated Index,
and will perform all calculations
necessary to determine the proper makeup of the Affiliated Index. Thereafter,
the Calculation Agent will be solely
responsible for the calculation and
maintenance of each Affiliated Index, as
well as the dissemination of the values
of each Affiliated Index. The Affiliated
Index Provider will be responsible
solely for performing the reconstitution
updates and rebalance updates for each
Affiliated Index.
21. The Adviser, any Affiliated Person
who is an Affiliated Index Provider, any
Sub-Adviser and the Affiliated Index
Funds will adopt and implement
Policies and Procedures to address any
potential conflicts of interest. Among
other things, the Policies and
Procedures will be designed to limit or
prohibit communication with respect to
issues/information related to
management, calculation and
reconstitution of the Affiliated Indexes
between the personnel of the Index
Provider who have responsibility for the
Affiliated Indexes and the Rules Based
Process (‘‘Index Personnel’’) and the
personnel who have responsibility for
the maintenance of the Affiliated Index
Funds or any Affiliated Accounts. The
Index Personnel (a) will not have any
responsibility for the management of the
Affiliated Index Funds, or the Affiliated
Accounts, (b) will be expressly
prohibited from sharing this information
with those employees of the Adviser or
those of any Sub-Adviser, that have
responsibility for the management of the
Affiliated Index Funds, or any Affiliated
Account until such information is
publicly announced, and (c) will be
expressly prohibited from sharing or
using this non-public information in
any way except in connection with the
performance of their respective duties.
In addition, the Adviser and any SubAdviser will adopt and implement,
pursuant to rule 206(4)–7 under the
Advisers Act, written policies and
procedures designed to prevent
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violations of the Advisers Act and the
rules thereunder. Also, the Adviser has
adopted a code of ethics pursuant to
rule 17j–1 under the Act and rule 204A–
1 under the Advisers Act (‘‘Code of
Ethics’’). Any Sub-Adviser will be
required to adopt a Code of Ethics and
provide the Trust with the certification
required by rule 17j–1 under the Act. In
conclusion, Applicants submit that the
Affiliated Index Funds will operate in a
manner very similar to the other indexbased ETFs which are currently traded.
Applicants’ Legal Analysis
1. Applicants request an order under
section 6(c) of the Act for an exemption
from sections 2(a)(32), 5(a)(1), 22(d), and
22(e) of the Act and rule 22c–1 under
the Act, and under sections 6(c) and
17(b) of the Act for an exemption from
sections 17(a)(1) and 17(a)(2) of the Act.
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.
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 owner, upon its
presentation to the issuer, is entitled to
receive approximately his 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 Funds to register as open-end
management investment companies and
issue Shares that are redeemable in
Creation Units only. Applicants state
that investors may purchase Shares in
Creation Units and redeem Creation
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39803
Units from each Fund. Applicants
further state that because the market
price of Shares will be disciplined by
arbitrage opportunities, investors should
be able to buy and sell Shares in the
secondary market at prices that do not
vary materially 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 a Fund’s
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,
and (c) ensure an orderly distribution
system of investment company shares
by eliminating price competition from
non-contract dealers offering shares at
less than the published sales price and
repurchasing shares at more than the
published redemption price.
6. Applicants believe that none of
these purposes will be thwarted by
permitting Shares to trade in the
secondary market at negotiated prices.
Applicants state that (a) secondary
market trading in Shares does not
involve Trust assets and will not 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
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discrimination or preferential treatment
among purchasers. Finally, applicants
contend that the proposed distribution
system will be orderly because
competitive forces will ensure that the
difference between the market price of
Shares and their NAV remains narrow.
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Section 22(e)
7. Section 22(e) of the Act generally
prohibits a registered investment
company from suspending the right of
redemption or postponing the date of
payment of redemption proceeds for
more than seven days after the tender of
a security for redemption. Applicants
observe that the settlement of
redemptions for the Foreign Funds will
be contingent not only on the settlement
cycle of the U.S. securities markets, but
also on the delivery cycles in local
markets for the underlying foreign
securities held by the Foreign Funds.
Applicants believe 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 15 calendar
days.18 Applicants therefore request
relief from section 22(e) in order to
provide for payment or satisfaction of
redemptions within the maximum
number of calendar days required for
such payment or satisfaction in the
principal local markets where
transactions in the Portfolio Securities
of each Foreign Fund customarily clear
and settle, but in all cases no later than
15 calendar days following the tender of
a Creation Unit.19 With respect to
Future Funds that are Foreign Funds,
applicants seek the same relief from
section 22(e) only to the extent that
circumstances exist similar to those
described in the application.
8. Applicants submit that section
22(e) was designed to prevent
unreasonable, undisclosed and
unforeseen delays in the actual payment
of redemption proceeds. Applicants
state that allowing redemption
payments for Creation Units of a Foreign
Fund to be made within a maximum of
15 calendar days would not be
inconsistent with the spirit and intent of
section 22(e). Applicants state the SAI
will identify those instances in a given
year where, due to local holidays, more
than seven days will be needed to
deliver redemption proceeds and will
18 In the past, settlement in certain countries,
including Russia, has extended to 15 calendar days.
19 Applicants acknowledge that relief obtained
from the requirements of section 22(e) will not
affect any obligations applicants may have under
rule 15c6–1 under the Exchange Act. Rule 15c6–1
requires that most securities transactions be settled
within three business days of the trade date.
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list such holidays and the maximum
number of days, but in no case more
than 15 calendar days. Applicants are
only seeking relief from section 22(e) to
the extent that the Foreign Funds effect
redemptions of Creation Units in-kind.
Sections 17(a)(1) and (2) of the Act
9. Section 17(a) of the Act generally
prohibits an affiliated person of a
registered investment company, or an
affiliated person of such a person
(‘‘second-tier affiliate’’), from selling any
security or other property to or
acquiring any security or other property
from the company. Section 2(a)(3) of the
Act defines ‘‘affiliated person’’ of
another person to include (a) any person
directly or indirectly owning,
controlling or holding with power to
vote 5% or more of the outstanding
voting securities of the other person,
and (c) any person directly or indirectly
controlling, controlled by or under
common control with the other person.
Section 2(a)(9) of the Act defines control
as the power to exercise a controlling
influence over the management of
policies of a company. It also provides
that a control relationship will be
presumed where one person owns more
than 25% of a company’s voting
securities. The Funds may be deemed to
be controlled by 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
(an ‘‘Affiliated Fund’’).
10. Applicants request an exemption
from section 17(a) of the Act pursuant
to sections 17(b) and 6(c) of the Act to
permit persons to effectuate in-kind
purchases and redemptions with a Fund
when they are affiliated persons or
second-tier affiliates of the Fund solely
by virtue of one or more of the
following: (a) Holding 5% or more, or
more than 25%, of the outstanding
Shares of one or more Funds; (b) having
an affiliation with a person with an
ownership interest described in (a); or
(c) holding 5% or more, or more than
25%, of the shares of one or more
Affiliated Funds.
11. Applicants assert that no useful
purpose would be served by prohibiting
these types of affiliated persons from
acquiring or redeeming Creation Units
through in-kind transactions. Except as
described in Section II.K.2 of the
application, the Deposit Instruments
and Redemption Instruments will be the
same for each purchaser or redeemer
regardless of the their identity. The
deposit procedures for both in-kind
purchases and in-kind redemptions of
Creation Units will be the same for all
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Fmt 4703
Sfmt 9990
purchases and redemptions, regardless
of size or number. Deposit Instruments
and Redemption Instruments will be
valued in the same manner as Portfolio
Securities are valued for purposes of
calculating NAV. Applicants submit
that, by using the same standards for
valuing Portfolio Securities as are used
for calculating in-kind redemptions or
purchases, the Fund will ensure that its
NAV will not be adversely affected by
such transactions. Applicants also
believe that in-kind purchases and
redemptions will not result in selfdealing or overreaching of the Fund.
Applicants’ Conditions
Applicants agree that any order of the
Commission granting the requested
relief will be subject to the following
conditions:
1. The requested relief will expire on
the effective date of any Commission
rule under the Act that provides relief
permitting the operation of index-based
ETFs.
2. As long as a Fund operates in
reliance on the order, the Shares of such
Fund will be listed on an Exchange.
3. No 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 Shares are not individually
redeemable and that owners of Shares
may acquire those Shares from the Fund
and tender those Shares for redemption
to a Fund in Creation Units only.
4. 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.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–15846 Filed 7–1–13; 8:45 am]
BILLING CODE 8011–01–P
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]]>Agencies
[Federal Register Volume 78, Number 127 (Tuesday, July 2, 2013)]
[Notices]
[Pages 39799-39804]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-15846]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30582; File No. 812-14088]
First Trust Exchange-Traded Fund, et al.; Notice of Application
June 26, 2013.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (the ``Act'') for an exemption from
sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of the Act and rule 22c-1
under the Act, and under sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and (a)(2) of the Act.
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Summary of Application: Applicants request an order that would permit
(a) certain open-end management investment companies or series thereof
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 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 (d) certain series to pay redemption proceeds, under certain
circumstances, more than seven days after the tender of Shares for
redemption.
Applicants: First Trust Exchange-Traded Fund, First Trust Exchange-
Traded Fund II, First Trust Exchange-Traded Fund III, First Trust
Exchange-
[[Page 39800]]
Traded Fund IV, First Trust Exchange-Traded Fund V, First Trust
Exchange-Traded Fund VI, First Trust Exchange-Traded Fund VII, First
Trust Exchange-Traded AlphaDEX[supreg] Fund, First Trust Exchange-
Traded AlphaDEX[supreg] Fund II (the ``Existing Trusts''), First Trust
Advisors L.P. (``First Trust Advisors''), and First Trust Portfolios,
L.P. (the ``Distributor'').
DATES: Filing Dates: The application was filed on October 25, 2012, and
amended on April 23, 2013. Applicants have agreed to file an amendment
during the notice period, the substance of which is reflected in this
notice.
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 July 22, 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, Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090; Applicants,
120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel at
(202) 551-6817, or Daniele Marchesani, Branch Chief, at (202) 551-6821
(Division of Investment Management, Exemptive Applications Office).
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 Existing Trust is registered under the Act as an open-end
management investment company. An Existing Trust initially will offer
one Fund (defined below) identified in the application (``Initial
Fund''), whose performance will correspond to the price and yield
performance, before fees and expenses, of a specified securities index
(``Underlying Index'').
2. Applicants request that the order apply to the Existing Trusts
and the Initial Fund and any other open-end management investment
company existing or created in the future (together with the Existing
Trusts, the ``Trusts'' and each, a ``Trust'') and any existing or
future series of the Trusts, advised by First Trust Advisors or an
entity controlling, controlled by or under common control with First
Trust Advisors (each, an ``Adviser'') that tracks an Underlying Index
(``Future Funds'').\1\ Any Future Fund will be (a) advised by an
Adviser and (b) comply with the terms and conditions of the
application. The Initial Fund and any Future Funds together are the
``Funds.''
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\1\ All entities that currently intend to rely on the order have
been named as applicants. Any other existing or future entity that
subsequently relies on the order will comply with the terms and
conditions of the application. Any existing series of a Trust or any
other registered open-end management investment company that seeks
to rely on the requested relief in the future will be an exchange-
traded fund, not a mutual fund.
---------------------------------------------------------------------------
3. Certain of the Funds will be based on Underlying Indexes which
will be comprised of securities traded in the U.S. markets (``Domestic
Indexes''). Other Funds will be based on Underlying Indexes which will
be comprised of foreign and domestic securities or solely of securities
not traded in the U.S. markets (``Foreign Indexes''). Funds which track
Domestic Indexes are referred to as ``Domestic Funds'' and Funds which
track Foreign Indexes are referred to as ``Foreign Funds.'' Underlying
Indexes that include both long and short positions in securities are
referred to as ``Long/Short Indexes.'' Funds based on Long/Short
Indexes are ``Long/Short Funds.'' Underlying Indexes that use a 130/30
investment strategy are referred to as ``130/30 Indexes.'' Funds based
on 130/30 Indexes are ``130/30 Funds.''
4. An Adviser registered as an investment adviser under the
Investment Advisers Act of 1940 (the ``Advisers Act'') will serve as
investment adviser to the Funds. The Adviser may enter into sub-
advisory agreements with one or more investment advisers to act as a
sub-adviser to a Fund (each, a ``Sub-Adviser''). Each Sub-Adviser will
be registered or not subject to registration under the Advisers Act.
The Distributor is a broker-dealer registered under the Securities
Exchange Act of 1934 (the ``Exchange Act'') and will act as the
principal underwriter and distributor for the Funds.\2\
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\2\ Applicants request that the order also apply to future
distributors that comply with the terms and conditions of the
application.
---------------------------------------------------------------------------
5. Each Fund will hold certain securities and other assets and
positions (``Portfolio Positions'') selected to correspond to the
performance of its Underlying Index.\3\ Except with respect to
Affiliated Index Funds (defined below), no entity that creates,
compiles, sponsors or maintains an Underlying Index (``Index
Provider'') will be an affiliated person, as defined in section 2(a)(3)
of the Act, or an affiliated person of an affiliated person, of the
Trust, a Fund, the Adviser, any Sub-adviser, or promoter of a Fund, or
of the Distributor.
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\3\ Applicants represent that each Fund will invest at least 80%
of its total assets in the component securities that comprise its
Underlying Index (``Component Securities'') or, as applicable,
depositary receipts or TBA Transactions (as defined below)
representing Component Securities. Each Fund also may invest up to
20% of its total assets (the ``20% Asset Basket'') in a broad
variety of other instruments, including securities and other
instruments not included in its Underlying Index, which the Adviser
believes will help the Fund track its Underlying Index.
---------------------------------------------------------------------------
6. A Fund will utilize either a replication or representative
sampling strategy to track its Underlying Index. A Fund using a
replication strategy will invest in substantially all of the Component
Securities in its Underlying Index in the same approximate proportions
as in the Underlying Index. A Fund using a representative sampling
strategy will hold some, but may not hold all, of the Component
Securities of its Underlying Index. Applicants state that use of the
representative sampling strategy may prevent a Fund from tracking the
performance of its Underlying Index with the same degree of accuracy as
would a Fund that invests in every Component Security of the Underlying
Index. Applicants expect that each Fund will have an annual tracking
error relative to the performance of its Underlying Index of less than
5 percent.
7. Each Fund will issue, on a continuous basis, Creation Units,
(e.g., at least 25,000 Shares) with an initial price per Share of $25
to $100. All orders to purchase Creation Units must be placed with the
Distributor by or through a party that has entered into an agreement
with the Distributor (``Authorized Participant''). The Distributor will
be responsible for delivering the Fund's prospectus to those persons
acquiring Creation Units and for maintaining records of both the orders
placed with it and the confirmations of acceptance furnished
[[Page 39801]]
by it. In addition, the Distributor will maintain a record of the
instructions given to the applicable Fund to implement the delivery of
its Shares. An Authorized Participant must be either (a) a
``Participating Party,'' (i.e., a broker-dealer or other participant in
the Continuous Net Settlement System of the National Securities
Clearing Corporation (``NSCC''), a clearing house registered with the
Commission, or (b) a participant in the Depository Trust Company
(``DTC,'' and such participant, ``DTC Participant''), which, in either
case, has signed a ``Participant Agreement'' with the Distributor.
8. The 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'').\4\ On any given
Business Day 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, unless the Fund is Rebalancing (as defined below). In
addition, the Deposit Instruments and the Redemption Instruments will
each correspond pro rata to the positions in a Fund's portfolio
(including cash positions),\5\ 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; \6\ (c) ``to be announced''
transactions (``TBA Transactions''),\7\ short positions, derivatives
and other positions that cannot be transferred in kind \8\ will be
excluded from the Deposit Instruments and the Redemption Instruments;
\9\ (d) to the extent the Fund determines, on a given Business Day, to
use a representative sampling of the Fund's portfolio; \10\ or (e) for
temporary periods, to effect changes in the Fund's portfolio as a
result of the rebalancing of its Underlying Index (any such change, a
``Rebalancing''). If there is a difference between the net asset value
(``NAV'') attributable to a Creation Unit and the aggregate market
value of the Deposit Instruments or Redemption Instruments 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 ``Balancing Amount'').
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\4\ 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.
\5\ The portfolio used for this purpose will be the same
portfolio used to calculate the Fund's NAV for that Business Day.
\6\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
\7\ 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. The actual pools delivered generally are determined two
days prior to the settlement date.
\8\ 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.
\9\ Because these instruments will be excluded from the Deposit
Instruments and the Redemption Instruments, their value will be
reflected in the determination of the Balancing Amount (defined
below).
\10\ A Fund may only use sampling for this purpose if the
sample: (a) Is designed to generate performance that is highly
correlated to the performance of the Fund's portfolio; (b) consists
entirely of instruments that are already included in the Fund's
portfolio; and (c) is the same for all Authorized Participants on a
given Business Day.
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9. 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 Balancing 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; \11\ (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 or
DTC; or (ii) in the case of 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 Foreign Fund would be subject to unfavorable income tax
treatment if the holder receives redemption proceeds in kind.\12\
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\11\ In determining whether a particular Fund will sell or
redeem Creation Units entirely on a cash or in-kind basis (whether
for a given day or a given order), the key consideration will be the
benefit that would accrue to the Fund and its investors. For
instance, in bond transactions, the Adviser may be able to obtain
better execution than Share purchasers because of the Adviser's
size, experience and potentially stronger relationships in the fixed
income markets. Purchases of Creation Units either on an all cash
basis or in-kind are expected to be neutral to the Funds from a tax
perspective. In contrast, cash redemptions typically require selling
portfolio holdings, which may result in adverse tax consequences for
the remaining Fund shareholders that would not occur with an in-kind
redemption. As a result, tax considerations may warrant in-kind
redemptions.
\12\ 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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10. Each Business Day, before the open of trading on a national
securities exchange, as defined in section 2(a)(26) of the Act
(``Exchange'') on which Shares are listed (``Listing Exchange''), each
Fund will cause to be published through the NSCC the names and
quantities of the instruments comprising the Deposit Instruments and
the Redemption Instruments, as well as the estimated Balancing Amount
(if any), for that day. The list of Deposit Instruments and the list of
Redemption Instruments will apply until new lists are announced on the
following Business Day, and there will be no intra-day changes to the
lists except to correct errors in the published lists.
11. For the Long/Short Funds and 130/30 Funds, the Adviser will
provide full portfolio holdings disclosure on a daily basis on the
Funds' publicly available Web site (``Web site'') and will develop an
``IIV File,'' which it will use to disclose the Funds' full portfolio
holdings, including short positions. Before the opening of business on
each Business Day, the Trust, Adviser or other third party, will make
the IIV File available by email upon request. Applicants state that
given either the IIV
[[Page 39802]]
File or the Web site disclosure,\13\ anyone will be able to know in
real time the intraday value of the Long/Short Funds and 130/30
Funds.\14\ With respect to the Long/Short Funds and 130/30 Funds, the
investment characteristics of any financial instruments and short
positions used to achieve short and long exposures will be described in
sufficient detail for market participants to understand the principal
investment strategies of the Funds and to permit informed trading of
their Shares.
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\13\ The information on the Web site will be the same as that
disclosed to Authorized Participants in the IIV File, except that
(a) the information provided on the Web site will be formatted to be
reader-friendly and (b) the portfolio holdings data on the Web site
will be calculated and displayed on a per Fund basis, while the
information in the IIV File will be calculated and displayed on a
per Creation Unit basis.
\14\ Each Listing Exchange or other major market data provider
will disseminate, every 15 seconds during regular Exchange trading
hours, through the facilities of the Consolidated Tape Association,
an amount for each Fund representing the sum of (a) the estimated
Balancing Amount and (b) the current value of the Deposit
Instruments and any short positions, on a per individual Share
basis.
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12. Shares of each Fund will be listed and traded individually on
an Exchange. It is expected that one or more member firms of an
Exchange will be designated to act as a market maker (``Market Maker'')
and maintain a market in Shares trading on the Exchange. Prices of
Shares trading on an Exchange will be based on the current bid/offer
market. Shares sold in the secondary market will be subject to
customary brokerage commissions and charges.
13. Applicants expect that purchasers of Creation Units will
include institutional investors and arbitrageurs. Market Makers also
may purchase Creation Units for use in market-making activities.
Applicants expect that secondary market purchasers of Shares will
include both institutional investors and retail investors.\15\
Applicants expect that the price at which Shares trade will be
disciplined by arbitrage opportunities created by the option to
continually purchase or redeem Creation Units at their NAV, which
should ensure that Shares will not trade at a material discount or
premium in relation to their NAV.
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\15\ Shares will be registered in book-entry form only. DTC or
its nominee will be the registered owner of all outstanding Shares.
DTC or DTC Participants will maintain records reflecting beneficial
owners of Shares.
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14. Shares will not be individually redeemable. To redeem, an
investor must accumulate enough Shares to constitute a Creation Unit.
Redemption orders must be placed by or through an Authorized
Participant.
15. An investor purchasing or redeeming a Creation Unit from a Fund
may be charged a fee (``Transaction Fee'') to protect existing
shareholders of the Funds from the dilutive costs associated with the
purchase and redemption of Creation Units.\16\
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\16\ Where a Fund permits an in-kind purchaser to substitute
cash in lieu of depositing one or more Deposit Instruments, the
Transaction Fee imposed on a purchaser or redeemer may be higher.
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16. None of the Funds will be advertised, marketed or otherwise
held out as a traditional open-end investment company or a mutual fund.
Instead, each Fund will be marketed as an ``exchange traded fund
(``ETF''). All marketing materials that describe the features or method
of obtaining, buying or selling Creation Units, or Shares traded on an
Exchange, or refer to redeemability, will prominently disclose that
Shares are not individually redeemable and that the owners of Shares
may purchase or redeem Shares from the Fund in Creation Units. The same
approach will be followed in the shareholder reports issued or
circulated in connection with the Shares. The Funds will provide copies
of their annual and semi-annual shareholder reports to DTC Participants
for distribution to shareholders.
17. Applicants also request that the order allow them to offer
Funds for which the Adviser or an affiliated person, as defined in
section 2(a)(3) of the Act, or an affiliated person of an affiliated
person, of a Trust or a Fund, the Adviser, any Sub-Adviser, the
Distributor or a promoter of the Fund (each, other than the Adviser, an
``Affiliated Person'') will serve as the Index Provider (``Affiliated
Index Fund''). The Index Provider to an Affiliated Index Fund (the
``Affiliated Index Provider''), will create a proprietary, rules based
methodology (``Rules-Based Process'') to create Underlying Indexes for
use by the Affiliated Index Funds and other investors (an ``Affiliated
Index'').\17\ The Adviser, if it is the Affiliated Index Provider, will
be the owner of the Affiliated Indexes and all related intellectual
property thereto, or the Adviser will enter into a license agreement
with any Affiliated Person that is an Affiliated Index Provider for the
use of the Underlying Indexes and related intellectual property at no
cost to a Trust and Affiliated Index Funds.
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\17\ The Affiliated Indexes may be made available to registered
investment companies, as well as separately managed accounts of
institutional investors and privately offered funds that are not
deemed to be ``investment companies'' in reliance on section 3(c)(1)
or 3(c)(7) of the Act and other pooled investment vehicles for which
the Adviser acts as adviser or sub-adviser (``Affiliated Accounts'')
as well as other such registered investment companies, separately
managed accounts, privately offered funds and other pooled
investment vehicles for which it does not act either as adviser or
sub-adviser (``Unaffiliated Accounts''). The Affiliated Accounts and
the Unaffiliated Accounts (collectively, ``Accounts''), like the
Funds, would seek to track the performance of one or more Underlying
Index(es) by investing in the constituents of such Underlying
Index(es) or a representative sample of such constituents of the
index. Consistent with the relief requested from section 17(a), the
Affiliated Accounts will not engage in Creation Unit transactions
with a Fund.
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18. Applicants contend that the potential conflicts of interest
arising from the fact that the Affiliated Index Provider will be the
Adviser or an Affiliated Person are not actual concerns, and will not
have any impact on the operation of the Affiliated Index Funds, because
the Affiliated Indexes will maintain transparency. Applicants further
state that the Affiliated Index Funds' portfolios will be transparent,
and the Adviser, any Affiliated Person who is an Affiliated Index
Provider, any Sub-Adviser and the Affiliated Index Funds each will
adopt policies and procedures to address any potential conflicts of
interest (``Policies and Procedures''). The Affiliated Index Provider
will publish in the public domain, including on its Web site and/or the
Affiliated Index Funds' Web site, the rules that governing the
construction and maintenance of each of its Affiliated Indexes.
Applicants believe that this public disclosure will prevent the Adviser
from possessing any advantage over other market participants by virtue
of being the Affiliated Index Provider or being affiliated with the
Affiliated Index Provider. Applicants note that the identity and
weightings of the securities of any Affiliated Index will be readily
ascertainable by any third party because the Rules-Based Process will
be freely available.
19. Like other index providers, the Affiliated Index Provider may
modify the Rules-Based Process in the future. The Rules-Based Process
could be modified, for example, to reflect changes in the underlying
market tracked by an Affiliated Index, the way in which the Rules-Based
Process takes into account market events or to change the way a
corporate action, such as a stock split, is handled. Such changes would
not take effect until the Affiliated Index Provider has given (a) the
Calculation Agent (defined below) reasonable prior written notice of
such rule changes, and (b) the investing public at least sixty (60)
days published notice that such changes will be implemented. Affiliated
Indexes may have reconstitution dates and rebalance dates that occur on
a periodic basis
[[Page 39803]]
more frequently than once yearly, but no more frequently than monthly.
20. As owner of the Affiliated Indexes, the Affiliated Index
Provider will hire a calculation agent (``Calculation Agent''). The
Calculation Agent will not be an affiliated person, as such term is
defined in the Act, or an affiliated person of an affiliated person, of
the Affiliated Index Funds, the Adviser, any Sub-Adviser, any promoter
of a Fund or the Distributor. The Affiliated Index Provider will
initially apply the Rules Based Process to the universe of equity and/
or fixed income securities and will determine the number, type, and
weight of securities that will comprise each Affiliated Index, and will
perform all calculations necessary to determine the proper make-up of
the Affiliated Index. Thereafter, the Calculation Agent will be solely
responsible for the calculation and maintenance of each Affiliated
Index, as well as the dissemination of the values of each Affiliated
Index. The Affiliated Index Provider will be responsible solely for
performing the reconstitution updates and rebalance updates for each
Affiliated Index.
21. The Adviser, any Affiliated Person who is an Affiliated Index
Provider, any Sub-Adviser and the Affiliated Index Funds will adopt and
implement Policies and Procedures to address any potential conflicts of
interest. Among other things, the Policies and Procedures will be
designed to limit or prohibit communication with respect to issues/
information related to management, calculation and reconstitution of
the Affiliated Indexes between the personnel of the Index Provider who
have responsibility for the Affiliated Indexes and the Rules Based
Process (``Index Personnel'') and the personnel who have responsibility
for the maintenance of the Affiliated Index Funds or any Affiliated
Accounts. The Index Personnel (a) will not have any responsibility for
the management of the Affiliated Index Funds, or the Affiliated
Accounts, (b) will be expressly prohibited from sharing this
information with those employees of the Adviser or those of any Sub-
Adviser, that have responsibility for the management of the Affiliated
Index Funds, or any Affiliated Account until such information is
publicly announced, and (c) will be expressly prohibited from sharing
or using this non-public information in any way except in connection
with the performance of their respective duties. In addition, the
Adviser and any Sub-Adviser will adopt and implement, pursuant to rule
206(4)-7 under the Advisers Act, written policies and procedures
designed to prevent violations of the Advisers Act and the rules
thereunder. Also, the Adviser has adopted a code of ethics pursuant to
rule 17j-1 under the Act and rule 204A-1 under the Advisers Act (``Code
of Ethics''). Any Sub-Adviser will be required to adopt a Code of
Ethics and provide the Trust with the certification required by rule
17j-1 under the Act. In conclusion, Applicants submit that the
Affiliated Index Funds will operate in a manner very similar to the
other index-based ETFs which are currently traded.
Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the Act for an
exemption from sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of the Act
and rule 22c-1 under the Act, and under sections 6(c) and 17(b) of the
Act for an exemption from sections 17(a)(1) and 17(a)(2) of the Act.
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.
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 owner, upon
its presentation to the issuer, is entitled to receive approximately
his 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 Funds to register as
open-end management investment companies and issue Shares that are
redeemable in Creation Units only. Applicants state that investors may
purchase Shares in Creation Units and redeem Creation Units from each
Fund. Applicants further state that because the market price of Shares
will be disciplined by arbitrage opportunities, investors should be
able to buy and sell Shares in the secondary market at prices that do
not vary materially 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 a Fund's 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, and (c) ensure an orderly distribution system of
investment company shares by eliminating price competition from non-
contract dealers offering shares at less than the published sales price
and repurchasing shares at more than the published redemption price.
6. Applicants believe that none of these purposes will be thwarted
by permitting Shares to trade in the secondary market at negotiated
prices. Applicants state that (a) secondary market trading in Shares
does not involve Trust assets and will not 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
[[Page 39804]]
discrimination or preferential treatment among purchasers. Finally,
applicants contend that the proposed distribution system will be
orderly because competitive forces will ensure that the difference
between the market price of Shares and their NAV remains narrow.
Section 22(e)
7. Section 22(e) of the Act generally prohibits a registered
investment company from suspending the right of redemption or
postponing the date of payment of redemption proceeds for more than
seven days after the tender of a security for redemption. Applicants
observe that the settlement of redemptions for the Foreign Funds will
be contingent not only on the settlement cycle of the U.S. securities
markets, but also on the delivery cycles in local markets for the
underlying foreign securities held by the Foreign Funds. Applicants
believe 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 15 calendar days.\18\ Applicants therefore request relief from
section 22(e) in order to provide for payment or satisfaction of
redemptions within the maximum number of calendar days required for
such payment or satisfaction in the principal local markets where
transactions in the Portfolio Securities of each Foreign Fund
customarily clear and settle, but in all cases no later than 15
calendar days following the tender of a Creation Unit.\19\ With respect
to Future Funds that are Foreign Funds, applicants seek the same relief
from section 22(e) only to the extent that circumstances exist similar
to those described in the application.
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\18\ In the past, settlement in certain countries, including
Russia, has extended to 15 calendar days.
\19\ Applicants acknowledge that relief obtained from the
requirements of section 22(e) will not affect any obligations
applicants may have under rule 15c6-1 under the Exchange Act. Rule
15c6-1 requires that most securities transactions be settled within
three business days of the trade date.
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8. Applicants submit that section 22(e) was designed to prevent
unreasonable, undisclosed and unforeseen delays in the actual payment
of redemption proceeds. Applicants state that allowing redemption
payments for Creation Units of a Foreign Fund to be made within a
maximum of 15 calendar days would not be inconsistent with the spirit
and intent of section 22(e). Applicants state the SAI will identify
those instances in a given year where, due to local holidays, more than
seven days will be needed to deliver redemption proceeds and will list
such holidays and the maximum number of days, but in no case more than
15 calendar days. Applicants are only seeking relief from section 22(e)
to the extent that the Foreign Funds effect redemptions of Creation
Units in-kind.
Sections 17(a)(1) and (2) of the Act
9. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such a person (``second-tier affiliate''), from selling any security or
other property to or acquiring any security or other property from the
company. Section 2(a)(3) of the Act defines ``affiliated person'' of
another person to include (a) any person directly or indirectly owning,
controlling or holding with power to vote 5% or more of the outstanding
voting securities of the other person, and (c) any person directly or
indirectly controlling, controlled by or under common control with the
other person. Section 2(a)(9) of the Act defines control as the power
to exercise a controlling influence over the management of policies of
a company. It also provides that a control relationship will be
presumed where one person owns more than 25% of a company's voting
securities. The Funds may be deemed to be controlled by 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 (an ``Affiliated
Fund'').
10. Applicants request an exemption from section 17(a) of the Act
pursuant to sections 17(b) and 6(c) of the Act to permit persons to
effectuate in-kind purchases and redemptions with a Fund when they are
affiliated persons or second-tier affiliates of the Fund solely by
virtue of one or more of the following: (a) Holding 5% or more, or more
than 25%, of the outstanding Shares of one or more Funds; (b) having an
affiliation with a person with an ownership interest described in (a);
or (c) holding 5% or more, or more than 25%, of the shares of one or
more Affiliated Funds.
11. Applicants assert that no useful purpose would be served by
prohibiting these types of affiliated persons from acquiring or
redeeming Creation Units through in-kind transactions. Except as
described in Section II.K.2 of the application, the Deposit Instruments
and Redemption Instruments will be the same for each purchaser or
redeemer regardless of the their identity. The deposit procedures for
both in-kind purchases and in-kind redemptions of Creation Units will
be the same for all purchases and redemptions, regardless of size or
number. Deposit Instruments and Redemption Instruments will be valued
in the same manner as Portfolio Securities are valued for purposes of
calculating NAV. Applicants submit that, by using the same standards
for valuing Portfolio Securities as are used for calculating in-kind
redemptions or purchases, the Fund will ensure that its NAV will not be
adversely affected by such transactions. Applicants also believe that
in-kind purchases and redemptions will not result in self-dealing or
overreaching of the Fund.
Applicants' Conditions
Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
1. The requested relief will expire on the effective date of any
Commission rule under the Act that provides relief permitting the
operation of index-based ETFs.
2. As long as a Fund operates in reliance on the order, the Shares
of such Fund will be listed on an Exchange.
3. No 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 Shares are not individually redeemable and
that owners of Shares may acquire those Shares from the Fund and tender
those Shares for redemption to a Fund in Creation Units only.
4. 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.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15846 Filed 7-1-13; 8:45 am]
BILLING CODE 8011-01-P
