Horizons ETFs Management (USA) LLC and Horizons ETF Trust; Notice of Application, 54298-54304 [2013-21348]
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Federal Register / Vol. 78, No. 170 / Tuesday, September 3, 2013 / Notices
or termination of any sub-advisor during
the applicable quarter.
9. Whenever a sub-advisor is hired or
terminated, the Manager will provide
the Board with information showing the
expected impact on the profitability of
the Manager.
10. Whenever a sub-advisor change is
proposed for a Subadvised Series with
an Affiliated Sub-Advisor or a WhollyOwned Sub-Advisor, the Board,
including a majority of the Independent
Board Members, will make a separate
finding, reflected in the Board minutes,
that such change is in the best interests
of the Subadvised Series and its
shareholders, and does not involve a
conflict of interest from which the
Manager or the Affiliated Sub-Advisor
or Wholly-Owned Sub-Advisor derives
an inappropriate advantage.
11. No Board member or officer of a
Subadvised Series, or director or officer
of the Manager, will own directly or
indirectly (other than through a pooled
investment vehicle that is not controlled
by such person), any interest in a SubAdvisor, except for (a) ownership of
interests in the Manager or any entity,
other than a Wholly-Owned SubAdvisor, that controls, is controlled by,
or is under common control with the
Manager, or (b) ownership of less than
1% of the outstanding securities of any
class of equity or debt of a publicly
traded company that is either a SubAdvisor or an entity that controls, is
controlled by, or is under common
control with a Sub-Advisor.
12. Each Subadvised Series will
disclose the Aggregate Fee Disclosure in
its registration statement.
13. In the event the Commission
adopts a rule under the Act providing
substantially similar relief to that
requested in the application, the
requested order will expire on the
effective date of that rule.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–21347 Filed 8–30–13; 8:45 am]
BILLING CODE 8011–01–P
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SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
30680; 812–14178]
Horizons ETFs Management (USA) LLC
and Horizons ETF Trust; Notice of
Application
August 27, 2013.
Securities and Exchange
Commission (‘‘Commission’’).
AGENCY:
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Notice of an application for an
order under section 6(c) of the
Investment Company Act of 1940
(‘‘Act’’) for an exemption from sections
2(a)(32), 5(a)(1), 22(d) and 22(e) of the
Act and rule 22c–1 under the Act, under
sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and
(a)(2) of the Act, and under section
12(d)(1)(J) of the Act for an exemption
from sections 12(d)(1)(A) and (B) of the
Act.
ACTION:
Horizons ETFs Management
(USA) LLC (‘‘Horizons’’) and Horizons
ETF Trust (the ‘‘Trust’’).
SUMMARY OF APPLICATION: Applicants
request an order that permits: (a)
Actively-managed series of certain
open-end management investment
companies 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 from 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.
FILING DATES: The application was filed
on July 17, 2013 and amended on
August 27, 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 September 23, 2013,
and should be accompanied by proof of
service on applicants, in the form of an
affidavit or, for lawyers, a certificate of
service. Hearing requests should state
the nature of the writer’s interest, the
reason for the request, and the issues
contested. Persons who wish to be
notified of a hearing may request
notification by writing to the
Commission’s Secretary.
ADDRESSES: Elizabeth M. Murphy,
Secretary, U.S. Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
Applicants: Horizons and the Trust:
Horizons ETFs Management (USA) LLC,
APPLICANTS:
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One Bryant Park, 39th Floor, New York,
New York 10036.
FOR FURTHER INFORMATION CONTACT:
Deepak T. Pai, Senior Counsel, at (202)
551–6876 or Mary Kay Frech, Branch
Chief, at (202) 551–6814 (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 for an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
Applicants’ Representations
1. The Trust is a statutory trust
organized under the laws of Delaware
and will register with the Commission
as an open-end management investment
company. Applicants currently intend
that the initial series of the Trust will be
the Horizons Active Global Dividend
ETF (the ‘‘Initial Fund’’), which will
seek long-term returns consisting of
regular dividend income and modest
long-term capital growth. The Initial
Fund will invest primarily in equity
securities listed on North American
exchanges, including American
Depositary Receipts (‘‘ADRs’’), and may
also from time to time invest in
preferred and fixed-income securities
such as government bonds, corporate
bonds, or treasury bills.
2. Horizons, a Delaware limited
liability company registered with the
Commission as an investment adviser
under the Investment Adviser Act of
1940 (‘‘Advisers Act’’), will be the
investment adviser to the Initial Fund.
The Advisor (as defined below) may
enter into sub-advisory agreements with
investment advisers to act as subadvisors with respect to the Funds (as
defined below) (each a ‘‘Sub-Advisor’’).
Applicants state that any Sub-Advisor
will be registered, or not subject to
registration, under the Advisers Act. A
registered broker-dealer (‘‘Broker’’)
under the Securities Exchange Act of
1934 (the ‘‘Exchange Act’’), will be
selected and approved by the Board (as
defined below) to act as the distributor
and principal underwriter of the Funds
(the ‘‘Distributor’’).
3. Applicants request that the order
apply to the Initial Fund and any future
series of the Trust or of any other openend management companies that may
utilize active management investment
strategies (collectively, ‘‘Future
Funds’’). Any Future Fund will (a) be
advised by Horizons or an entity
controlling, controlled by, or under
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common control with Horizons
(Horizons and each such other entity
and any successor thereto included in
the term ‘‘Advisor’’),1 and (b) comply
with the terms and conditions of the
application.2 The Initial Fund and
Future Funds together are the ‘‘Funds’’.3
Each Fund will consist of a portfolio of
securities (including fixed income
securities and/or equity securities) and/
or currencies traded in the U.S. and/or
non-U.S. markets, and derivatives, other
assets, and other investment positions
(‘‘Portfolio Instruments’’).4 Funds may
invest in ‘‘Depositary Receipts’’.5 Each
Fund will operate as an actively
managed exchange-traded fund (‘‘ETF’’).
4. Applicants 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 that is
currently or subsequently part of the
same ‘‘group of investment companies’’
as the Initial Fund within the meaning
of section 12(d)(1)(G)(ii) of the Act; (ii)
any principal underwriter for the Fund;
(iii) any Brokers selling Shares of a
Fund to an Investing Fund (as defined
below); and (iv) each management
investment company or unit investment
trust registered under the Act that is not
part of the same ‘‘group of investment
companies’’ as the Funds, and that
enters into a FOF Participation
Agreement (as defined below) with a
Fund (such management investment
companies, ‘‘Investing Management
Companies,’’ such unit investment
1 For the purposes of the requested order, a
‘‘successor’’ is limited to an entity or entities that
result from a reorganization into another
jurisdiction or a change in the type of business
organization.
2 Any Advisor to a Future Fund will be registered
as an investment adviser under the Advisers Act.
All entities that currently intend to rely on the
order are named as applicants. Any other entity that
relies on the order in the future will comply with
the terms and conditions of the application.
3 Applicants further request that the order apply
to any future Distributor of the Funds, which would
be a Broker and would comply with the terms and
conditions of the application. The Distributor of any
Fund may be an affiliated person of the Advisor
and/or Sub-Advisors.
4 If a Fund invests in derivatives, then (a) the
board of trustees (‘‘Board’’) of the Fund will
periodically review and approve the Fund’s use of
derivatives and how the Advisor 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.
5 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
Advisor or Sub-Advisor deems to be illiquid or for
which pricing information is not readily available.
No affiliated persons of applicants, any Future
Fund, any Advisor or any Sub-Advisor will serve
as the depositary bank for any Depositary Receipts
held by a Fund.
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trusts, ‘‘Investing Trusts,’’ and Investing
Management Companies and Investing
Trusts together, ‘‘Investing Funds’’).
Investing Funds do not include the
Funds.6
5. Applicants anticipate that a
Creation Unit will consist of at least
25,000 Shares. Applicants anticipate
that the trading price of a Share will
range from $10 to $100. All orders to
purchase Creation Units must be placed
with the Distributor by or through a
party that has entered into a participant
agreement with the Distributor and the
transfer agent of the Fund (‘‘Authorized
Participant’’) with respect to the
creation and redemption of Creation
Units. An Authorized Participant is
either: (a) A Broker or other participant,
in the Continuous Net Settlement
System of the National Securities
Clearing Corporation (‘‘NSCC’’), a
clearing agency registered with the
Commission and affiliated with the
Depository Trust Company (‘‘DTC’’), or
(b) a participant in the DTC (‘‘DTC
Participant’’).
6. In order to keep costs low and
permit each Fund to be as fully invested
as possible, 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’’).7 On any given Business
Day,8 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 redemption, as the
‘‘Creation Basket.’’ In addition, the
Creation Basket will correspond pro rata
6 An
Investing Fund may rely on the order only
to invest in Funds and not in any other registered
investment company.
7 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.
8 Each Fund will sell and redeem Creation Units
on any day the Fund is open, including as required
by section 22(e) of the Act (each, a ‘‘Business Day’’).
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54299
to the positions in a Fund’s portfolio
(including cash positions),9 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; 10 or (c) TBA
Transactions,11 short positions and
other positions that cannot be
transferred in kind 12 will be excluded
from the Creation Basket.13 If there is a
difference between 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
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 or DTC; or (ii)
in the case of Funds holding non-U.S.
investment (‘‘Global Funds’’), such
instruments are not eligible for trading
due to local trading restrictions, local
restrictions on securities transfers or
9 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.
10 A tradeable round lot for a security will be the
standard unit of trading in that particular type of
security in its primary market.
11 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.
12 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.
13 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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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
would be subject to unfavorable income
tax treatment if the holder receives
redemption proceeds in kind.14
8. Each Business Day, before the open
of trading on a national securities
exchange, as defined in section 2(a)(26)
of the Act (‘‘Stock Exchange’’), on which
Shares are listed, 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 intraday changes to the Creation Basket
except to correct errors in the published
Creation Basket. The Stock Exchange
will disseminate every 15 seconds
throughout the trading day an amount
representing, on a per Share basis, the
sum of the current value of the Portfolio
Instruments that were publicly
disclosed prior to the commencement of
trading in Shares on the Stock
Exchange.
9. A Fund may recoup the settlement
costs charged by NSCC and DTC by
imposing a transaction fee on investors
purchasing or redeeming Creation Units
(the ‘‘Transaction Fee’’). The
Transaction Fee will be borne only by
purchasers and redeemers of Creation
Units and will be limited to amounts
that have been determined appropriate
by the Advisor to defray the transaction
expenses that will be incurred by a
Fund when an investor purchases or
redeems Creation Units.15 All orders to
purchase Creation Units will be placed
with the Distributor by or through an
Authorized Participant and the
14 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).
15 Where a Fund permits an in-kind purchaser to
deposit cash in lieu of depositing one or more
Deposit Instruments, the purchaser may be assessed
a higher Transaction Fee to offset the cost to the
Fund of buying those particular Deposit
Instruments. In all cases, the Transaction Fee will
be limited in accordance with the requirements of
the Commission applicable to open-end
management investment companies offering
redeemable securities.
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Distributor will transmit all purchase
orders to the relevant Fund. The
Distributor will be responsible for
delivering a prospectus (‘‘Prospectus’’)
to those persons purchasing Creation
Units and for maintaining records of
both the orders placed with it and the
confirmations of acceptance furnished
by it.
10. Shares will be listed and traded at
negotiated prices on a Stock Exchange
and traded in the secondary market.
Applicants expect that Stock Exchange
specialists or market makers (‘‘Market
Makers’’) will be assigned to Shares.
The price of Shares trading on the Stock
Exchange will be based on a current
bid/offer in the secondary market.
Transactions involving the purchases
and sales of Shares on the Stock
Exchange will be subject to customary
brokerage commissions and charges.
11. Applicants expect that purchasers
of Creation Units will include
institutional investors and arbitrageurs.
Specialists or Market Makers, acting in
their unique role to provide a fair and
orderly secondary market for Shares,
also may purchase Creation Units for
use in their own market making
activities.16 Applicants expect that
secondary market purchasers of Shares
will include both institutional and retail
investors.17 Applicants expect that
arbitrage opportunities created by the
ability to continually purchase or
redeem Creation Units at their NAV per
Share should ensure that the Shares will
not trade at a material discount or
premium in relation to their 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
16 If Shares are listed on The NASDAQ Stock
Market LLC (‘‘Nasdaq’’) or a similar electronic Stock
Exchange (including NYSE Arca), one or more
member firms of that Stock Exchange will act as
Market Maker and maintain a market for Shares
trading on that Stock Exchange. On Nasdaq, no
particular Market Maker would be contractually
obligated to make a market in Shares. However, the
listing requirements on Nasdaq, for example,
stipulate that at least two Market Makers must be
registered in Shares to maintain a listing. In
addition, on Nasdaq and NYSE Arca, 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 as discussed below.
17 Shares will be registered in book-entry form
only. DTC or its nominee will be the record or
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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placed by or through an Authorized
Participant.
13. Neither the Trust nor any Fund
will be marketed or otherwise held out
as a ‘‘mutual fund.’’ Instead, each Fund
will be marketed as an ‘‘actively
managed exchange-traded fund’’. In any
advertising material where features of
obtaining, buying or selling Shares
traded on the Stock Exchange are
described, there will be an appropriate
statement to the effect that Shares are
not individually redeemable.
14. The Funds’ Web site, which will
be publicly available prior to the public
offering of Shares, will include a
Prospectus and additional quantitative
information updated on a daily basis,
including, 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 the
calculation of such NAV (‘‘Bid/Ask
Price’’), and a calculation of the
premium or discount of the market
closing price or Bid/Ask Price against
such NAV. On each Business Day,
before commencement of trading in
Shares on the Stock Exchange, the Fund
will disclose on its Web site the
identities and quantities of the Portfolio
Instruments held by the Fund
(including any short positions held in
securities (‘‘Short Positions’’)) that will
form the basis for the Fund’s calculation
of NAV at the end of the Business Day.18
Applicants’ Legal Analysis
1. Applicants request an order under
section 6(c) of the Act for an exemption
from sections 2(a)(32), 5(a)(1), 22(d) and
22(e) of the Act and rule 22c-1 under the
Act, under sections 6(c) and 17(b) of the
Act for an exemption from sections
17(a)(1) and 17(a)(2) of the Act, and
under section 12(d)(1)(J) of the Act for
an exemption from sections 12(d)(1)(A)
and (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 provisions 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
18 Applicants note that under accounting
procedures followed by the Funds, trades made on
the prior Business Day will be booked and reflected
in NAV on the current Business Day. Accordingly,
each Fund will be able to disclose at the beginning
of the Business Day the portfolio that will form the
basis for its NAV calculation at the end of such
Business Day.
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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.
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Sections 2(a)(32) and 5(a)(1) 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 each Fund to redeem Shares in
Creation Units only. Applicants state
that investors may purchase Shares in
Creation Units from each Fund and
redeem Creation Units from each Fund.
Applicants further state that because the
market price of Creation Units will be
disciplined by arbitrage opportunities,
investors should be able to 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 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.
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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 risklesstrading 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
system 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 should 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) 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 settlement of redemptions
of Creation Units of 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 in which those Funds
invest. Applicants have been advised
that, under certain circumstances, the
delivery cycles for transferring Portfolio
Instruments to redeeming investors,
coupled with local market holiday
schedules, will require a delivery
process of up to 14 calendar days.
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54301
Applicants therefore request relief from
section 22(e) in order to provide
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 Instruments of each Global
Fund customarily clear and settle, but in
all cases no later than 14 calendar days
following the tender of a Creation
Unit.19
8. Applicants state that section 22(e)
was designed to prevent unreasonable,
undisclosed and 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 allowing redemption payments for
Creation Units of a Fund to be made
within a maximum of 14 calendar days
would not be inconsistent with the
spirit and intent of section 22(e).
Applicants state each Global Fund’s
statement of additional information
(‘‘SAI’’) will disclose those local
holidays (over the period of at least one
year following the date of the SAI), if
any, that are expected to prevent the
delivery of redemption proceeds in
seven calendar days and the maximum
number of days needed to deliver the
proceeds for each affected Global Fund.
Applicants are not seeking relief from
section 22(e) with respect to Global
Funds that do not affect redemptions inkind.
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
19 Applicants acknowledge that no relief obtained
from the requirements of section 22(e) will affect
any obligations that it may otherwise 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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owned by investment companies
generally.
10. Applicants request relief to permit
Investing 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 Investing
Funds in excess of the limits in section
12(d)(1)(B) of the Act. 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.
11. Applicants submit that their
proposed conditions address any
concerns regarding the potential for
undue influence. To limit the control
that an Investing Fund may have over a
Fund, applicants propose a condition
prohibiting the adviser of an Investing
Management Company (‘‘Investing Fund
Advisor’’), sponsor of an Investing Trust
(‘‘Sponsor’’), any person controlling,
controlled by, or under common control
with the Investing Fund Advisor 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 Investing Fund
Advisor, the Sponsor, or any person
controlling, controlled by, or under
common control with the Investing
Fund Advisor or Sponsor (‘‘Investing
Fund’s Advisory Group’’) from
controlling (individually or in the
aggregate) a Fund within the meaning of
section 2(a)(9) of the Act. The same
prohibition would apply to any subadviser to an Investing Management
Company (‘‘Investing Fund SubAdvisor’’), any person controlling,
controlled by or under common control
with the Investing Fund Sub-Advisor,
and any investment company or issuer
that would be an investment company
but for sections 3(c)(1) or 3(c)(7) of the
Act (or portion of such investment
company or issuer) advised or
sponsored by the Investing Fund SubAdvisor or any person controlling,
controlled by or under common control
with the Investing Fund Sub-Advisor
(‘‘Investing Fund’s Sub-Advisory
Group’’).
12. Applicants propose a condition to
ensure that no Investing Fund or
Investing Fund Affiliate 20 (except to the
20 An ‘‘Investing Fund Affiliate’’ is any Investing
Fund Advisor, Investing Fund Sub-Advisor,
Sponsor, promoter and principal underwriter of an
Investing Fund, and any person controlling,
controlled by or under common control with any
of these entities. ‘‘Fund Affiliate’’ is an investment
adviser, promoter, or principal underwriter of a
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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,
Investing Fund Advisor, Investing Fund
Sub-Advisor, employee or Sponsor of
the Investing Fund, or a person of which
any such officer, director, member of an
advisory board, Investing Fund Advisor,
Investing Fund Sub-Advisor, employee
or Sponsor is an affiliated person
(except any person whose relationship
to the Fund is covered by section 10(f)
of the Act is not an Underwriting
Affiliate).
13. Applicants propose several
conditions to address the potential for
layering of fees. Applicants note that the
board of directors or trustees of any
Investing Management Company,
including a majority of the directors or
trustees who are not ‘‘interested
persons’’ within the meaning of section
2(a)(19) of the Act (‘‘independent
directors or trustees’’), will 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 Investing
Management Company may invest.
Applicants also state that 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 2830.21
14. 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.
15. To ensure that an Investing Fund
is aware of the terms and conditions of
the requested order, the Investing Funds
Fund or any person controlling, controlled by or
under common control with any of these entities.
21 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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must enter into an agreement with the
respective Funds (‘‘FOF Participation
Agreement’’). The FOF Participation
Agreement will include an
acknowledgement from the Investing
Fund that it may rely on the order only
to invest in a Fund and not in any other
investment company.
Sections 17(a)(1) and (2) of the Act
16. Section 17(a) of the Act generally
prohibits an affiliated person of a
registered investment company, or an
affiliated person of such a person
(‘‘second tier affiliate’’), from selling any
security to or purchasing any security
from the company. Section 2(a)(3) of the
Act defines ‘‘affiliated person’’ to
include 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
defines ‘‘control’’ as the power to
exercise a controlling influence over the
management or policies of a company
and provides that a control relationship
will be presumed where one person
owns more than 25% of another
person’s voting securities. Each Fund
may be deemed to be controlled by an
Advisor 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
an Advisor (an ‘‘Affiliated Fund’’).
17. 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 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 in
excess of 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.22 Applicants also
request an exemption in order to permit
a Fund to sell its Shares to and redeem
its Shares from, and engage in the inkind transactions that would
accompany such sales and redemptions
with, certain Investing Funds of which
22 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 Investing Fund because an
investment adviser to the Funds is also an
investment adviser to an Investing Fund.
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the Funds are affiliated persons or
second-tier affiliates.23
18. Applicants assert that no useful
purpose would be served by prohibiting
such affiliated persons from making inkind purchases or in-kind redemptions
of Shares of a Fund in Creation Units.
Absent the unusual circumstances
discussed in the application, the
Deposit Instruments and Redemption
Instruments available for a Fund will be
the same for all purchasers and
redeemers, respectively, and will
correspond pro rata to the Fund’s
Portfolio Instruments. 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
Redemption Instruments will be valued
in the same manner as those Portfolio
Instruments currently held by the
relevant Funds, and the valuation of the
Deposit Instruments and Redemption
Instruments will be made in the same
manner and on the same terms for all,
regardless of the identity of the
purchaser or redeemer. Applicants do
not believe that in-kind purchases and
redemptions will result in abusive selfdealing or overreaching of the Fund.
19. Applicants also submit that the
sale of Shares to and redemption of
Shares from an Investing Fund meets
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 Shares
directly from a Fund will be based on
the NAV of the Fund in accordance with
policies and procedures set forth in the
Fund’s registration statement.24 The
FOF Participation Agreement will
require any Investing Fund that
purchases Creation Units directly from
a Fund to represent that the purchase of
Creation Units from a Fund by an
Investing Fund will be accomplished in
23 Applicants expect most Investing Funds will
purchase Shares in the secondary market and will
not purchase 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 Investing
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 Investing Fund and
redemptions of those Shares. The requested relief
is intended to also cover the in-kind transactions
that may accompany such sales and redemptions.
24 Applicants acknowledge that the receipt of
compensation by (a) an affiliated person of an
Investing Fund, or an affiliated person of such
person, for the purchase by the Investing Fund of
Shares of the 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 Investing Fund,
may be prohibited by section 17(e)(1) of the Act.
The FOF Participation Agreement also will include
this acknowledgment.
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compliance with the investment
restrictions of the Investing Fund and
will be consistent with the investment
policies set forth in the Investing Fund’s
registration statement. Applicants also
state that the proposed transactions are
consistent with the general purposes of
the Act and appropriate in the public
interest.
Applicants’ Conditions
Applicants agree that any order of the
Commission granting the requested
relief will be subject to the following
conditions:
A. ETF Relief
1. As long as a Fund operates in
reliance on the requested order, the
Shares of the Fund will be listed on a
Stock Exchange.
2. Neither the Trust nor any Fund will
be advertised or marketed as an openend investment company or a 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.
3. 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 Bid/Ask Price, and a calculation of
the premium or discount of the market
closing price or Bid/Ask Price against
such NAV.
4. On each Business Day, before
commencement of trading in Shares on
the Stock Exchange, the Fund will
disclose on its Web site the identities
and quantities of the Portfolio
Instruments 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 Advisor or any Sub-Advisor,
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
the 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
1. The members of the Investing
Fund’s Advisory Group will not control
(individually or in the aggregate) a Fund
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54303
within the meaning of section 2(a)(9) of
the Act. The members of the Investing
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 Investing
Fund’s Advisory Group or the Investing
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 the Fund’s Shares. This
condition does not apply to the
Investing Fund’s Sub-Advisory Group
with respect to a Fund for which the
Investing Fund Sub-Advisor or a person
controlling, controlled by or under
common control with the Investing
Fund Sub-Advisor acts as the
investment adviser within the meaning
of section 2(a)(20)(A) of the Act.
2. No Investing Fund or Investing
Fund Affiliate will cause any existing or
potential investment by the Investing
Fund in a Fund to influence the terms
of any services or transactions between
the Investing Fund or an Investing Fund
Affiliate and the Fund or a Fund
Affiliate.
3. The board of directors or trustees of
an Investing Management Company,
including a majority of the independent
directors or trustees, will adopt
procedures reasonably designed to
ensure that the Investing Fund Advisor
and any Investing Fund Sub-Advisor are
conducting the investment program of
the Investing Management Company
without taking into account any
consideration received by the Investing
Management Company or an Investing
Fund Affiliate from a Fund or a Fund
Affiliate in connection with any services
or transactions.
4. Once an investment by an Investing
Fund in the Shares of a Fund exceeds
the limit in section 12(d)(1)(A)(i) of the
Act, the Board of a Fund, including a
majority of the independent directors or
trustees, will determine that any
consideration paid by the Fund to the
Investing Fund or an Investing Fund
Affiliate in connection with any services
or transactions: (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
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and its investment adviser(s), or any
person controlling, controlled by or
under common control with such
investment adviser(s).
5. The Investing Fund Advisor, or
Trustee or Sponsor, as applicable, will
waive fees otherwise payable to it by the
Investing Fund in an amount at least
equal to any compensation (including
fees received pursuant to any plan
adopted by a Fund under rule 12b–1
under the Act) received from a Fund by
the Investing Fund Advisor, or Trustee
or Sponsor, or an affiliated person of the
Investing Fund Advisor, or Trustee or
Sponsor, other than any advisory fees
paid to the Investing Fund Advisor, or
Trustee, or Sponsor, or its affiliated
person by the Fund, in connection with
the investment by the Investing Fund in
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 Sub-Advisor, or an
affiliated person of the Investing Fund
Sub-Advisor, other than any advisory
fees paid to the Investing Fund SubAdvisor or its affiliated person by the
Fund, in connection with the
investment by the Investing
Management Company in the Fund
made at the direction of the Investing
Fund Sub-Advisor. In the event that the
Investing Fund Sub-Advisor waives
fees, the benefit of the waiver will be
passed through to the Investing
Management Company.
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
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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 assure that
purchases of securities in Affiliated
Underwritings are in the best interest of
shareholders of the Fund.
8. 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
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 a Fund in
excess of the limits in section
12(d)(1)(A), an Investing Fund will
execute a FOF Participation Agreement
with the Fund stating that their
respective 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 of a
Fund 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
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Fmt 4703
Sfmt 9990
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.
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 section
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. 2013–21348 Filed 8–30–13; 8:45 am]
BILLING CODE 8011–01–P
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[Federal Register Volume 78, Number 170 (Tuesday, September 3, 2013)]
[Notices]
[Pages 54298-54304]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-21348]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30680; 812-14178]
Horizons ETFs Management (USA) LLC and Horizons ETF Trust; Notice
of Application
August 27, 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 (``Act'') for an exemption from sections
2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act and rule 22c-1 under the
Act, under sections 6(c) and 17(b) of the Act for an exemption from
sections 17(a)(1) and (a)(2) of the Act, and under section 12(d)(1)(J)
of the Act for an exemption from sections 12(d)(1)(A) and (B) of the
Act.
-----------------------------------------------------------------------
Applicants: Horizons ETFs Management (USA) LLC (``Horizons'') and
Horizons ETF Trust (the ``Trust'').
Summary of Application: Applicants request an order that permits: (a)
Actively-managed series of certain open-end management investment
companies 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
from 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.
Filing Dates: The application was filed on July 17, 2013 and amended on
August 27, 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 September 23, 2013, and should be accompanied by proof of
service on applicants, in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090. Applicants:
Horizons and the Trust: Horizons ETFs Management (USA) LLC, One Bryant
Park, 39th Floor, New York, New York 10036.
FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at
(202) 551-6876 or Mary Kay Frech, Branch Chief, at (202) 551-6814
(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 for an
applicant using the Company name box, at https://www.sec.gov/search/search.htm or by calling (202) 551-8090.
Applicants' Representations
1. The Trust is a statutory trust organized under the laws of
Delaware and will register with the Commission as an open-end
management investment company. Applicants currently intend that the
initial series of the Trust will be the Horizons Active Global Dividend
ETF (the ``Initial Fund''), which will seek long-term returns
consisting of regular dividend income and modest long-term capital
growth. The Initial Fund will invest primarily in equity securities
listed on North American exchanges, including American Depositary
Receipts (``ADRs''), and may also from time to time invest in preferred
and fixed-income securities such as government bonds, corporate bonds,
or treasury bills.
2. Horizons, a Delaware limited liability company registered with
the Commission as an investment adviser under the Investment Adviser
Act of 1940 (``Advisers Act''), will be the investment adviser to the
Initial Fund. The Advisor (as defined below) may enter into sub-
advisory agreements with investment advisers to act as sub-advisors
with respect to the Funds (as defined below) (each a ``Sub-Advisor'').
Applicants state that any Sub-Advisor will be registered, or not
subject to registration, under the Advisers Act. A registered broker-
dealer (``Broker'') under the Securities Exchange Act of 1934 (the
``Exchange Act''), will be selected and approved by the Board (as
defined below) to act as the distributor and principal underwriter of
the Funds (the ``Distributor'').
3. Applicants request that the order apply to the Initial Fund and
any future series of the Trust or of any other open-end management
companies that may utilize active management investment strategies
(collectively, ``Future Funds''). Any Future Fund will (a) be advised
by Horizons or an entity controlling, controlled by, or under
[[Page 54299]]
common control with Horizons (Horizons and each such other entity and
any successor thereto included in the term ``Advisor''),\1\ and (b)
comply with the terms and conditions of the application.\2\ The Initial
Fund and Future Funds together are the ``Funds''.\3\ Each Fund will
consist of a portfolio of securities (including fixed income securities
and/or equity securities) and/or currencies traded in the U.S. and/or
non-U.S. markets, and derivatives, other assets, and other investment
positions (``Portfolio Instruments'').\4\ Funds may invest in
``Depositary Receipts''.\5\ Each Fund will operate as an actively
managed exchange-traded fund (``ETF'').
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\1\ For the purposes of the requested order, a ``successor'' is
limited to an entity or entities that result from a reorganization
into another jurisdiction or a change in the type of business
organization.
\2\ Any Advisor to a Future Fund will be registered as an
investment adviser under the Advisers Act. All entities that
currently intend to rely on the order are named as applicants. Any
other entity that relies on the order in the future will comply with
the terms and conditions of the application.
\3\ Applicants further request that the order apply to any
future Distributor of the Funds, which would be a Broker and would
comply with the terms and conditions of the application. The
Distributor of any Fund may be an affiliated person of the Advisor
and/or Sub-Advisors.
\4\ If a Fund invests in derivatives, then (a) the board of
trustees (``Board'') of the Fund will periodically review and
approve the Fund's use of derivatives and how the Advisor 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.
\5\ 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 Advisor
or Sub-Advisor deems to be illiquid or for which pricing information
is not readily available. No affiliated persons of applicants, any
Future Fund, any Advisor or any Sub-Advisor will serve as the
depositary bank for any Depositary Receipts held by a Fund.
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4. Applicants 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
that is currently or subsequently part of the same ``group of
investment companies'' as the Initial Fund within the meaning of
section 12(d)(1)(G)(ii) of the Act; (ii) any principal underwriter for
the Fund; (iii) any Brokers selling Shares of a Fund to an Investing
Fund (as defined below); and (iv) each management investment company or
unit investment trust registered under the Act that is not part of the
same ``group of investment companies'' as the Funds, and that enters
into a FOF Participation Agreement (as defined below) with a Fund (such
management investment companies, ``Investing Management Companies,''
such unit investment trusts, ``Investing Trusts,'' and Investing
Management Companies and Investing Trusts together, ``Investing
Funds''). Investing Funds do not include the Funds.\6\
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\6\ An Investing Fund may rely on the order only to invest in
Funds and not in any other registered investment company.
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5. Applicants anticipate that a Creation Unit will consist of at
least 25,000 Shares. Applicants anticipate that the trading price of a
Share will range from $10 to $100. All orders to purchase Creation
Units must be placed with the Distributor by or through a party that
has entered into a participant agreement with the Distributor and the
transfer agent of the Fund (``Authorized Participant'') with respect to
the creation and redemption of Creation Units. An Authorized
Participant is either: (a) A Broker or other participant, in the
Continuous Net Settlement System of the National Securities Clearing
Corporation (``NSCC''), a clearing agency registered with the
Commission and affiliated with the Depository Trust Company (``DTC''),
or (b) a participant in the DTC (``DTC Participant'').
6. In order to keep costs low and permit each Fund to be as fully
invested as possible, 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'').\7\ On
any given Business Day,\8\ 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 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),\9\ 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; \10\ or
(c) TBA Transactions,\11\ short positions and other positions that
cannot be transferred in kind \12\ will be excluded from the Creation
Basket.\13\ If there is a difference between 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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\7\ 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.
\8\ Each Fund will sell and redeem Creation Units on any day the
Fund is open, including as required by section 22(e) of the Act
(each, a ``Business Day'').
\9\ 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.
\10\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
\11\ 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.
\12\ 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.
\13\ 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 or
DTC; or (ii) in the case of Funds holding non-U.S. investment (``Global
Funds''), such instruments are not eligible for trading due to local
trading restrictions, local restrictions on securities transfers or
[[Page 54300]]
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 would be
subject to unfavorable income tax treatment if the holder receives
redemption proceeds in kind.\14\
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\14\ 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 (``Stock
Exchange''), on which Shares are listed, 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. The Stock Exchange
will disseminate every 15 seconds throughout the trading day an amount
representing, on a per Share basis, the sum of the current value of the
Portfolio Instruments that were publicly disclosed prior to the
commencement of trading in Shares on the Stock Exchange.
9. A Fund may recoup the settlement costs charged by NSCC and DTC
by imposing a transaction fee on investors purchasing or redeeming
Creation Units (the ``Transaction Fee''). The Transaction Fee will be
borne only by purchasers and redeemers of Creation Units and will be
limited to amounts that have been determined appropriate by the Advisor
to defray the transaction expenses that will be incurred by a Fund when
an investor purchases or redeems Creation Units.\15\ All orders to
purchase Creation Units will be placed with the Distributor by or
through an Authorized Participant and the Distributor will transmit all
purchase orders to the relevant Fund. The Distributor will be
responsible for delivering a prospectus (``Prospectus'') to those
persons purchasing Creation Units and for maintaining records of both
the orders placed with it and the confirmations of acceptance furnished
by it.
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\15\ Where a Fund permits an in-kind purchaser to deposit cash
in lieu of depositing one or more Deposit Instruments, the purchaser
may be assessed a higher Transaction Fee to offset the cost to the
Fund of buying those particular Deposit Instruments. In all cases,
the Transaction Fee will be limited in accordance with the
requirements of the Commission applicable to open-end management
investment companies offering redeemable securities.
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10. Shares will be listed and traded at negotiated prices on a
Stock Exchange and traded in the secondary market. Applicants expect
that Stock Exchange specialists or market makers (``Market Makers'')
will be assigned to Shares. The price of Shares trading on the Stock
Exchange will be based on a current bid/offer in the secondary market.
Transactions involving the purchases and sales of Shares on the Stock
Exchange will be subject to customary brokerage commissions and
charges.
11. Applicants expect that purchasers of Creation Units will
include institutional investors and arbitrageurs. Specialists or Market
Makers, acting in their unique role to provide a fair and orderly
secondary market for Shares, also may purchase Creation Units for use
in their own market making activities.\16\ Applicants expect that
secondary market purchasers of Shares will include both institutional
and retail investors.\17\ Applicants expect that arbitrage
opportunities created by the ability to continually purchase or redeem
Creation Units at their NAV per Share should ensure that the Shares
will not trade at a material discount or premium in relation to their
NAV.
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\16\ If Shares are listed on The NASDAQ Stock Market LLC
(``Nasdaq'') or a similar electronic Stock Exchange (including NYSE
Arca), one or more member firms of that Stock Exchange will act as
Market Maker and maintain a market for Shares trading on that Stock
Exchange. On Nasdaq, no particular Market Maker would be
contractually obligated to make a market in Shares. However, the
listing requirements on Nasdaq, for example, stipulate that at least
two Market Makers must be registered in Shares to maintain a
listing. In addition, on Nasdaq and NYSE Arca, 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 as discussed below.
\17\ Shares will be registered in book-entry form only. DTC or
its nominee will be the record or 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.
13. Neither the Trust nor any Fund will be marketed or otherwise
held out as a ``mutual fund.'' Instead, each Fund will be marketed as
an ``actively managed exchange-traded fund''. In any advertising
material where features of obtaining, buying or selling Shares traded
on the Stock Exchange are described, there will be an appropriate
statement to the effect that Shares are not individually redeemable.
14. The Funds' Web site, which will be publicly available prior to
the public offering of Shares, will include a Prospectus and additional
quantitative information updated on a daily basis, including, 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 the
calculation of such NAV (``Bid/Ask Price''), and a calculation of the
premium or discount of the market closing price or Bid/Ask Price
against such NAV. On each Business Day, before commencement of trading
in Shares on the Stock Exchange, the Fund will disclose on its Web site
the identities and quantities of the Portfolio Instruments held by the
Fund (including any short positions held in securities (``Short
Positions'')) that will form the basis for the Fund's calculation of
NAV at the end of the Business Day.\18\
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\18\ Applicants note that under accounting procedures followed
by the Funds, trades made on the prior Business Day will be booked
and reflected in NAV on the current Business Day. Accordingly, each
Fund will be able to disclose at the beginning of the Business Day
the portfolio that will form the basis for its NAV calculation at
the end of such Business Day.
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Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the Act for an
exemption from sections 2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act
and rule 22c-1 under the Act, under sections 6(c) and 17(b) of the Act
for an exemption from sections 17(a)(1) and 17(a)(2) of the Act, and
under section 12(d)(1)(J) of the Act for an exemption from sections
12(d)(1)(A) and (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 provisions 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
[[Page 54301]]
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 2(a)(32) and 5(a)(1) 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 each Fund to redeem
Shares in Creation Units only. Applicants state that investors may
purchase Shares in Creation Units from each Fund and redeem Creation
Units from each Fund. Applicants further state that because the market
price of Creation Units will be disciplined by arbitrage opportunities,
investors should be able to 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 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 system 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 should 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) 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 settlement of redemptions of Creation Units of 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 in which those Funds invest. Applicants have been advised that,
under certain circumstances, the delivery cycles for transferring
Portfolio Instruments to redeeming investors, coupled with local market
holiday schedules, will require a delivery process of up to 14 calendar
days. Applicants therefore request relief from section 22(e) in order
to provide 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
Instruments of each Global Fund customarily clear and settle, but in
all cases no later than 14 calendar days following the tender of a
Creation Unit.\19\
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\19\ Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations that it
may otherwise 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 state that section 22(e) was designed to prevent
unreasonable, undisclosed and 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 allowing redemption payments for
Creation Units of a Fund to be made within a maximum of 14 calendar
days would not be inconsistent with the spirit and intent of section
22(e). Applicants state each Global Fund's statement of additional
information (``SAI'') will disclose those local holidays (over the
period of at least one year following the date of the SAI), if any,
that are expected to prevent the delivery of redemption proceeds in
seven calendar days and the maximum number of days needed to deliver
the proceeds for each affected Global Fund. Applicants are not seeking
relief from section 22(e) with respect to Global Funds that do not
affect redemptions 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
[[Page 54302]]
owned by investment companies generally.
10. Applicants request relief to permit Investing 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 Investing Funds in excess of the limits in section
12(d)(1)(B) of the Act. 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.
11. Applicants submit that their proposed conditions address any
concerns regarding the potential for undue influence. To limit the
control that an Investing Fund may have over a Fund, applicants propose
a condition prohibiting the adviser of an Investing Management Company
(``Investing Fund Advisor''), sponsor of an Investing Trust
(``Sponsor''), any person controlling, controlled by, or under common
control with the Investing Fund Advisor 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
Investing Fund Advisor, the Sponsor, or any person controlling,
controlled by, or under common control with the Investing Fund Advisor
or Sponsor (``Investing Fund's Advisory Group'') from controlling
(individually or in the aggregate) a Fund within the meaning of section
2(a)(9) of the Act. The same prohibition would apply to any sub-adviser
to an Investing Management Company (``Investing Fund Sub-Advisor''),
any person controlling, controlled by or under common control with the
Investing Fund Sub-Advisor, and any investment company or issuer that
would be an investment company but for sections 3(c)(1) or 3(c)(7) of
the Act (or portion of such investment company or issuer) advised or
sponsored by the Investing Fund Sub-Advisor or any person controlling,
controlled by or under common control with the Investing Fund Sub-
Advisor (``Investing Fund's Sub-Advisory Group'').
12. Applicants propose a condition to ensure that no Investing Fund
or Investing Fund Affiliate \20\ (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, Investing Fund Advisor, Investing Fund Sub-
Advisor, employee or Sponsor of the Investing Fund, or a person of
which any such officer, director, member of an advisory board,
Investing Fund Advisor, Investing Fund Sub-Advisor, employee or Sponsor
is an affiliated person (except 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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\20\ An ``Investing Fund Affiliate'' is any Investing Fund
Advisor, Investing Fund Sub-Advisor, Sponsor, promoter and principal
underwriter of an Investing Fund, and any person controlling,
controlled by or under common control with any of these entities.
``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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13. Applicants propose several conditions to address the potential
for layering of fees. Applicants note that the board of directors or
trustees of any Investing Management Company, including a majority of
the directors or trustees who are not ``interested persons'' within the
meaning of section 2(a)(19) of the Act (``independent directors or
trustees''), will 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 Investing Management Company
may invest. Applicants also state that 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.\21\
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\21\ 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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14. 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.
15. To ensure that an Investing Fund is aware of the terms and
conditions of the requested order, the Investing Funds must enter into
an agreement with the respective Funds (``FOF Participation
Agreement''). The FOF Participation Agreement will include an
acknowledgement from the Investing Fund that it may rely on the order
only to invest in a Fund and not in any other investment company.
Sections 17(a)(1) and (2) of the Act
16. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such a person (``second tier affiliate''), from selling any security to
or purchasing any security from the company. Section 2(a)(3) of the Act
defines ``affiliated person'' to include 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
defines ``control'' as the power to exercise a controlling influence
over the management or policies of a company and provides that a
control relationship will be presumed where one person owns more than
25% of another person's voting securities. Each Fund may be deemed to
be controlled by an Advisor 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
an Advisor (an ``Affiliated Fund'').
17. 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 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 in
excess of 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.\22\ Applicants also request an
exemption in order to permit a Fund to sell its Shares to and redeem
its Shares from, and engage in the in-kind transactions that would
accompany such sales and redemptions with, certain Investing Funds of
which
[[Page 54303]]
the Funds are affiliated persons or second-tier affiliates.\23\
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\22\ 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 Investing Fund because an investment
adviser to the Funds is also an investment adviser to an Investing
Fund.
\23\ Applicants expect most Investing Funds will purchase Shares
in the secondary market and will not purchase 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 Investing 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 Investing Fund and redemptions of those Shares. The
requested relief is intended to also cover the in-kind transactions
that may accompany such sales and redemptions.
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18. Applicants assert that no useful purpose would be served by
prohibiting such affiliated persons from making in-kind purchases or
in-kind redemptions of Shares of a Fund in Creation Units. Absent the
unusual circumstances discussed in the application, the Deposit
Instruments and Redemption Instruments available for a Fund will be the
same for all purchasers and redeemers, respectively, and will
correspond pro rata to the Fund's Portfolio Instruments. 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 Redemption Instruments will be
valued in the same manner as those Portfolio Instruments currently held
by the relevant Funds, and the valuation of the Deposit Instruments and
Redemption Instruments will be made in the same manner and on the same
terms for all, regardless of the identity of the purchaser or redeemer.
Applicants do not believe that in-kind purchases and redemptions will
result in abusive self-dealing or overreaching of the Fund.
19. Applicants also submit that the sale of Shares to and
redemption of Shares from an Investing Fund meets 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 Shares
directly from a Fund will be based on the NAV of the Fund in accordance
with policies and procedures set forth in the Fund's registration
statement.\24\ The FOF Participation Agreement will require any
Investing Fund that purchases Creation Units directly from a Fund to
represent that the purchase of Creation Units from a Fund by an
Investing Fund will be accomplished in compliance with the investment
restrictions of the Investing Fund and will be consistent with the
investment policies set forth in the Investing Fund's registration
statement. 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 Investing Fund, or an affiliated
person of such person, for the purchase by the Investing Fund of
Shares of the 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 Investing Fund, may be prohibited by section 17(e)(1)
of the Act. The FOF Participation 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. ETF Relief
1. As long as a Fund operates in reliance on the requested order,
the Shares of the Fund will be listed on a Stock Exchange.
2. Neither the Trust nor any Fund will be advertised or marketed as
an open-end investment company or a 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.
3. 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 Bid/
Ask Price, and a calculation of the premium or discount of the market
closing price or Bid/Ask Price against such NAV.
4. On each Business Day, before commencement of trading in Shares
on the Stock Exchange, the Fund will disclose on its Web site the
identities and quantities of the Portfolio Instruments 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 Advisor or any Sub-Advisor, 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 the 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
1. The members of the Investing 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 the Investing 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
Investing Fund's Advisory Group or the Investing 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
the Fund's Shares. This condition does not apply to the Investing
Fund's Sub-Advisory Group with respect to a Fund for which the
Investing Fund Sub-Advisor or a person controlling, controlled by or
under common control with the Investing Fund Sub-Advisor acts as the
investment adviser within the meaning of section 2(a)(20)(A) of the
Act.
2. No Investing Fund or Investing Fund Affiliate will cause any
existing or potential investment by the Investing Fund in a Fund to
influence the terms of any services or transactions between the
Investing Fund or an Investing Fund Affiliate and the Fund or a Fund
Affiliate.
3. The board of directors or trustees of an Investing Management
Company, including a majority of the independent directors or trustees,
will adopt procedures reasonably designed to ensure that the Investing
Fund Advisor and any Investing Fund Sub-Advisor are conducting the
investment program of the Investing Management Company without taking
into account any consideration received by the Investing Management
Company or an Investing Fund Affiliate from a Fund or a Fund Affiliate
in connection with any services or transactions.
4. Once an investment by an Investing Fund in the Shares of a Fund
exceeds the limit in section 12(d)(1)(A)(i) of the Act, the Board of a
Fund, including a majority of the independent directors or trustees,
will determine that any consideration paid by the Fund to the Investing
Fund or an Investing Fund Affiliate in connection with any services or
transactions: (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
[[Page 54304]]
and its investment adviser(s), or any person controlling, controlled by
or under common control with such investment adviser(s).
5. The Investing Fund Advisor, or Trustee or Sponsor, as
applicable, will waive fees otherwise payable to it by the Investing
Fund in an amount at least equal to any compensation (including fees
received pursuant to any plan adopted by a Fund under rule 12b-1 under
the Act) received from a Fund by the Investing Fund Advisor, or Trustee
or Sponsor, or an affiliated person of the Investing Fund Advisor, or
Trustee or Sponsor, other than any advisory fees paid to the Investing
Fund Advisor, or Trustee, or Sponsor, or its affiliated person by the
Fund, in connection with the investment by the Investing Fund in the
Fund. Any Investing Fund Sub-Advisor will waive fees otherwise payable
to the Investing Fund Sub-Advisor, directly or indirectly, by the
Investing Management Company in an amount at least equal to any
compensation received from a Fund by the Investing Fund Sub-Advisor, or
an affiliated person of the Investing Fund Sub-Advisor, other than any
advisory fees paid to the Investing Fund Sub-Advisor or its affiliated
person by the Fund, in connection with the investment by the Investing
Management Company in the Fund made at the direction of the Investing
Fund Sub-Advisor. In the event that the Investing Fund Sub-Advisor
waives fees, the benefit of the waiver will be passed through to the
Investing Management Company.
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
assure that purchases of securities in Affiliated Underwritings are in
the best interest of shareholders of the Fund.
8. 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 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 a Fund in excess of the limits in section
12(d)(1)(A), an Investing Fund will execute a FOF Participation
Agreement with the Fund stating that their respective 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 of a Fund 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.
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 section 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. 2013-21348 Filed 8-30-13; 8:45 am]
BILLING CODE 8011-01-P
