Arrow Investment Advisors, LLC, et al.; Notice of Application, 72720-72729 [2013-28849]
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Federal Register / Vol. 78, No. 232 / Tuesday, December 3, 2013 / Notices
Board Agenda Room, No. 11820,
1099 14th St. NW., Washington, DC
20570
STATUS: Closed.
MATTERS TO BE CONSIDERED: Pursuant to
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552b(c)(10).
CONTACT PERSON FOR MORE INFORMATION:
Henry Breiteneicher, Associate
Executive Secretary, (202) 273–2917.
PLACE:
Dated: November 27, 2013.
William B. Cowen,
Solicitor.
[FR Doc. 2013–29025 Filed 11–29–13; 4:15 pm]
BILLING CODE 7545–01–P
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[NRC–2013–0001]
Sunshine Act Meeting Notice
Week of December 2, 2013.
Commissioners’ Conference
Room, 11555 Rockville Pike, Rockville,
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STATUS: Public and Closed.
DATE:
PLACE:
Week of December 2, 2013
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4:00 p.m. Affirmation Session (Public
Meeting) (Tentative)
a. Southern California Edison
Company (San Onofre Nuclear
Generating Station, Units 2 and 3),
Citizens Oversight Petition for
Review of LBP–12–25 (Jan. 15,
2013); Southern California Edison
Company’s Motion to Withdraw
License Amendment Request and to
Vacate LBP–12–25 and Associated
Petition for Review as Moot (Aug. 8,
2013); NRC Staff’s Motion to Vacate
Licensing Board Order LBP–12–25
(Aug. 9, 2013) (Tentative)
b. Southern California Edison Co.
(San Onofre Nuclear Generating
Station, Units 2 and 3), NRC Staff’s
Motion to Vacate the Licensing
Board’s Full Initial Decision, LBP–
13–7 (June 14, 2013) (Tentative)
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17:36 Dec 02, 2013
Dated: November 27, 2013.
Rochelle Bavol,
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[FR Doc. 2013–29018 Filed 11–29–13; 4:15 pm]
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Jkt 232001
[Investment Company Act Release No.
30813; File No. 812–14157]
Arrow Investment Advisors, LLC, et al.;
Notice of Application
November 26, 2013.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of an application for an
order under section 6(c) of the
Investment Company Act of 1940 (the
‘‘Act’’) for an exemption from sections
2(a)(32), 5(a)(1), 22(d), and 22(e) of the
Act and rule 22c–1 under the Act, under
sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and
17(a)(2) of the Act, and under section
12(d)(1)(J) for an exemption from
sections 12(d)(1)(A) and 12(d)(1)(B) of
the Act.
AGENCY:
Summary of Application:
Applicants request an order that would
permit (a) series of certain open-end
SUMMARY:
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management investment companies that
track the performance of an index
provided by an affiliated person to issue
shares (‘‘Shares’’) redeemable in large
aggregations only (‘‘Creation Units’’); (b)
secondary market transactions in Shares
to occur at negotiated market prices
rather than at net asset value (‘‘NAV’’);
(c) certain series to pay redemption
proceeds, under certain circumstances,
more than seven days after the tender of
Shares for redemption; (d) certain
affiliated persons of the series to deposit
securities into, and receive securities
from, the series in connection with the
purchase and redemption of Creation
Units; and (e) certain registered
management investment companies and
unit investment trusts outside of the
same group of investment companies as
the series to acquire Shares.
APPLICANTS: Arrow Investment
Advisors, LLC (‘‘Current Adviser’’) and
Arrow Investments Trust (‘‘Trust’’).
DATES: Filing Dates: The application
was filed on May 21, 2013 and amended
on August 23, 2013 and November 22,
2013. Applicants have agreed to file an
amendment during the notice period,
the substance of which is reflected in
this notice.
HEARING OR NOTIFICATION OF HEARING: An
order granting the requested relief will
be issued unless the Commission orders
a hearing. Interested persons may
request a hearing by writing to the
Commission’s Secretary and serving
applicants with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on December 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, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090;
Applicants, 2943 Olney Sandy Springs
Road, Olney, MD 20832.
FOR FURTHER INFORMATION CONTACT: Jaea
F. Hahn, Senior Counsel, at (202) 551–
6870, or Mary Kay Frech, Branch Chief,
at (202) 551–6821 (Division of
Investment Management, Chief
Counsel’s Office).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained via the Commission’s
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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.
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Applicants’ Representations
1. The Trust, a Delaware statutory
trust, is registered under the Act as an
open-end management investment
company with multiple series.
2. The Current Adviser is registered as
an investment adviser under the
Investment Advisers Act of 1940 (the
‘‘Advisers Act’’) and will be the
investment adviser to the Self-Indexing
Funds (defined below). Any other
Adviser (defined below) will also be
registered as an investment adviser
under the Advisers Act. The Adviser
may enter into sub-advisory agreements
with one or more investment advisers to
act as sub-advisers to particular SelfIndexing Funds (each, a ‘‘SubAdviser’’). Any Sub-Adviser will either
be registered under the Advisers Act or
will not be subject to registration
thereunder.
3. The Trust will enter into a
distribution agreement with one or more
distributors, each a broker-dealer
(‘‘Broker’’) registered under the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’), who will act as
distributor and principal underwriter of
one or more of the Self-Indexing Funds
(each, a ‘‘Distributor’’). The Distributor
of any Self-Indexing Fund may be an
affiliated person, as defined in section
2(a)(3) of the Act (‘‘Affiliated Person’’),
or an affiliated person of an Affiliated
Person (‘‘Second-Tier Affiliate’’), of that
Self-Indexing Fund’s Adviser and/or
Sub-Advisers. No Distributor will be
affiliated with any Exchange (defined
below).
4. Applicants request that the order
apply to the initial series of the Trust
described in the application (‘‘Initial
Self-Indexing Fund’’), as well as any
additional series of the Trust and other
open-end management investment
companies, or series thereof, that may
be created in the future (‘‘Future SelfIndexing Funds’’), each of which will
operate as an exchange-traded fund
(‘‘ETF’’) and will track a specified index
comprised solely of domestic or foreign
securities (each, an ‘‘Underlying
Index’’). Any Future Self-Indexing Fund
will (a) be advised by the Current
Adviser or an entity controlling,
controlled by, or under common control
with the Current Adviser (each, an
‘‘Adviser’’) and (b) comply with the
terms and conditions of the application.
The Initial Self-Indexing Fund and
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Future Self-Indexing Funds, together,
are the ‘‘Self-Indexing Funds.’’ 1
5. Each Self-Indexing Fund will hold
certain securities (‘‘Portfolio
Securities’’) selected to correspond
generally to the performance of its
Underlying Index. Each Underlying
Index will be comprised solely of
domestic and/or foreign equity and/or
fixed income securities. Each SelfIndexing Fund will track one of the
following types of Underlying Indexes:
(i) an index made up of domestic equity
securities and/or domestic fixed income
securities, (ii) an index made up of
foreign equity securities and/or foreign
fixed income securities (such Funds,
‘‘International Funds’’), or (iii) an index
made up of foreign and domestic equity
securities and/or foreign and domestic
fixed income securities (such Funds,
‘‘Global Funds’’).
6. Applicants represent that each SelfIndexing Fund will invest at least 80%
of its assets (excluding securities
lending collateral) in the component
securities of its respective Underlying
Index (‘‘Component Securities’’) and
TBA Transactions 2, and in the case of
International and Global Funds,
Component Securities and Depositary
Receipts 3 representing Component
Securities. Each Self-Indexing Fund
may also invest up to 20% of its assets
in securities and other instruments not
included in its Underlying Index but
which the Adviser and/or Sub-Adviser
believes will help the Self-Indexing
Fund track its Underlying Index,
including but not limited to certain
index futures, options, options on
1 All existing entities that intend to rely on the
requested order have been named as applicants.
Any other existing or future entity that
subsequently relies on the order will comply with
the terms and conditions of the order. A Fund of
Funds (as defined below) may rely on the order
only to invest in Self-Indexing Funds and not in
any other registered investment company.
2 A ‘‘to-be-announced transaction’’ or ‘‘TBA
Transaction’’ is a method of trading mortgagebacked securities. In a TBA Transaction, the buyer
and seller agree upon general trade parameters such
as agency, settlement date, par amount and price.
The actual pools delivered generally are determined
two days prior to settlement date.
3 Depositary receipts representing foreign
securities (‘‘Depositary Receipts’’) include
American Depositary Receipts and Global
Depositary Receipts. The Self-Indexing Funds may
invest in Depositary Receipts representing foreign
securities in which they seek to invest. Depositary
Receipts are typically issued by a financial
institution (a ‘‘depositary bank’’) and evidence
ownership interests in a security or a pool of
securities that have been deposited with the
depositary bank. A Self-Indexing Fund will not
invest in any Depositary Receipts that the Adviser
or any Sub-Adviser deems to be illiquid or for
which pricing information is not readily available.
No affiliated person of a Self-Indexing Fund, the
Adviser or any Sub-Adviser will serve as the
depositary bank for any Depositary Receipts held by
a Self-Indexing Fund.
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futures, options on index futures, swap
contracts or other derivatives, cash and
cash equivalents, and other investment
companies. A Self-Indexing Fund may
also engage in short sales in accordance
with its investment objective.
7. The Trust may offer Self-Indexing
Funds that seek to track Underlying
Indexes constructed using 130/30
investment strategies (‘‘130/30 Funds’’)
or other long/short investment strategies
(‘‘Long/Short Funds’’). Each 130/30
Fund will include strategies that: (i)
establish long positions in securities so
that total long exposure represents
approximately 130% of the SelfIndexing Fund’s net assets; and (ii)
simultaneously establish short positions
in other securities so that total short
exposure represents approximately 30%
of such Self-Indexing Fund’s net assets.
Each Long/Short Fund will obtain
exposures equal to the long and short
positions specified by the Long/Short
Index.4
8. A Self-Indexing Fund will utilize
either a replication or representative
sampling strategy to track its Underlying
Index. A Self-Indexing Fund using a
replication strategy will invest in the
Component Securities of its Underlying
Index in the same approximate
proportions as in such Underlying
Index. A Self-Indexing Fund using a
representative sampling strategy will
hold some, but not necessarily all of the
Component Securities of its Underlying
Index. Applicants state that a SelfIndexing Fund using a representative
sampling strategy will not be expected
to track the performance of its
Underlying Index with the same degree
of accuracy as would an investment
vehicle that invested in every
Component Security of the Underlying
Index with the same weighting as the
Underlying Index. Applicants expect
that each Self-Indexing Fund will have
an annual tracking error relative to the
performance of its Underlying Index of
less than 5%.
9. An Affiliated Person, or a SecondTier Affiliate, of the Trust or a SelfIndexing Fund, of the Adviser, of any
Sub-Adviser to or promoter of a SelfIndexing Fund, or of the Distributor
(each, an ‘‘Affiliated Index Provider’’) 5
4 Underlying Indexes that include both long and
short positions in securities are referred to as
‘‘Long/Short Indexes.’’
5 The applicants currently expect that the Adviser
will serve as the Affiliated Index Provider for the
Self-Indexing Funds. In the event that the Adviser
serves as the Affiliated Index Provider for a SelfIndexing Fund, the term ‘‘Affiliated Index
Provider,’’ with respect to that Self-Indexing Fund,
will refer to the employees of the Adviser that are
responsible for creating, compiling and maintaining
the relevant Underlying Index.
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will create a proprietary, rules-based
methodology to create Underlying
Indexes.6 The Affiliated Index Provider
will create, compile, sponsor or
maintain the Underlying Indexes. Each
Self-Indexing Fund will be entitled to
use its Underlying Index pursuant to a
licensing agreement with the Affiliated
Index Provider.7
10. Applicants recognize that SelfIndexing Funds could raise concerns
regarding the ability of the Affiliated
Index Provider to manipulate the
Underlying Index to the benefit or
detriment of the Self-Indexing Fund.
Applicants further recognize the
potential for conflicts that may arise
with respect to the personal trading
activity of personnel of the Affiliated
Index Provider who have knowledge of
changes to an Underlying Index prior to
the time that information is publicly
disseminated. Prior orders granted to
self-indexing ETFs (‘‘Prior Self-Indexing
Orders’’) addressed these concerns by
creating a framework that required: (i)
transparency of the Underlying Indexes;
(ii) the adoption of policies and
procedures not otherwise required by
the Act designed to mitigate such
conflicts of interest; (iii) limitations on
the ability to change the rules for index
compilation and the component
securities of the index; (iv) that the
index provider enter into an agreement
with an unaffiliated third party to act as
‘‘Calculation Agent’’; and (v) certain
limitations designed to separate
employees of the index provider,
adviser and Calculation Agent (clauses
(ii) through (v) are hereinafter referred
to as ‘‘Policies and Procedures’’).8
6 The Underlying Indexes may be made available
to registered investment companies, as well as
separately managed accounts of institutional
investors and privately offered funds that are not
deemed to be ‘‘investment companies’’ in reliance
on section 3(c)(1) or 3(c)(7) of the Act for which the
Adviser acts as adviser or sub-adviser (‘‘Affiliated
Accounts’’) as well as other such registered
investment companies, separately managed
accounts and privately offered funds for which it
does not act either as adviser or sub-adviser
(‘‘Unaffiliated Accounts’’). The Affiliated Accounts
and the Unaffiliated Accounts, like the SelfIndexing Funds, would seek to track the
performance of one or more Underlying Index(es)
by investing in the constituents of such Underlying
Indexes or a representative sample of such
constituents of the Underlying Index. Consistent
with the relief requested from section 17(a), the
Affiliated Accounts will not engage in Creation Unit
transactions with a Self-Indexing Fund.
7 The licenses for the Self-Indexing Funds will
specifically state that the Affiliated Index Provider
must provide the use of the Underlying Indexes and
related intellectual property at no cost to the Trust
and the Self-Indexing Funds.
8 See, e.g., In the Matter of WisdomTree
Investments Inc., et al., Investment Company Act
Release Nos. 27324 (May 18, 2006) (notice) and
27391 (June 12, 2006) (order); In the Matter of
IndexIQ ETF Trust, et al., Investment Company Act
Release Nos. 28638 (Feb. 27, 2009) (notice) and
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11. Instead of adopting the same or
similar Policies and Procedures,
applicants propose that each day that a
Self-Indexing Fund, the NYSE and the
national securities exchange (as defined
in section 2(a)(26) of the Act) (an
‘‘Exchange’’)) on which the SelfIndexing Fund’s Shares are primarily
listed (‘‘Listing Exchange’’) are open for
business, including any day that a SelfIndexing Fund is required to be open
under section 22(e) of the Act (a
‘‘Business Day’’), each Self-Indexing
Fund will post on its publicly available
Web site (‘‘Web site’’),9 before
commencement of trading of Shares on
the Listing Exchange, the identities and
quantities of the portfolio securities,
assets, and other positions held by the
Self-Indexing Fund (‘‘Portfolio
Holdings’’) that will form the basis for
the Self-Indexing Fund’s calculation of
its NAV at the end of the Business
Day.10 Applicants believe that requiring
Self-Indexing Funds to maintain full
portfolio transparency will provide an
effective alternative mechanism for
addressing any such potential conflicts
of interest.
12. Applicants represent that each
Self-Indexing Fund’s Portfolio Holdings
will be as transparent as the portfolio
holdings of existing actively managed
ETFs. Applicants observe that the
framework set forth in the Prior SelfIndexing Orders was established before
the Commission began issuing
exemptive relief to allow the offering of
actively-managed ETFs.11 Unlike
passively-managed ETFs, activelymanaged ETFs do not seek to replicate
the performance of a specified index but
rather seek to achieve their investment
objectives by using an ‘‘active’’
management strategy. Applicants
28653 (March 20, 2009) (order); and Van Eck
Associates Corporation, et al., et al., Investment
Company Act Release Nos. 29455 (Oct. 1, 2010)
(notice) and 29490 (Oct. 26, 2010) (order).
9 The information provided on the Web site will
be formatted to be reader-friendly.
10 Under accounting procedures followed by each
Self-Indexing Fund, trades made on the prior
Business Day (‘‘T’’) will be booked and reflected in
NAV on the current Business Day (‘‘T+1’’).
Accordingly, the Self-Indexing Funds will be able
to disclose at the beginning of each Business Day
the portfolio that will form the basis for the NAV
calculation at the end of that Business Day.
11 See, e.g., In the Matter of Huntington Asset
Advisors, Inc., et al., Investment Company Act
Release Nos. 30032 (April 10, 2012) (notice) and
30061 (May 8, 2012) (order); In the Matter of Russell
Investment Management Co., et al., Investment
Company Act Release Nos. 29655 (April 20, 2011)
(notice) and 29671 (May 16, 2011) (order); In the
Matter of Eaton Vance Management, et al.,
Investment Company Act Release Nos. 29591
(March 11, 2011) (notice) and 29620 (March 30,
2011) (order) and; In the Matter of iShares Trust, et
al., Investment Company Act Release Nos. 29543
(Dec. 27, 2010) (notice) and 29571 (Jan. 24, 2011)
(order).
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contend that the structure of actively
managed ETFs presents potential
conflicts of interest that are the same as
those presented by Self-Indexing Funds
because the portfolio managers of an
actively managed ETF by definition
have advance knowledge of pending
portfolio changes. However, rather than
requiring Policies and Procedures
similar to those required under the Prior
Self-Indexing Orders, applicants believe
that actively managed ETFs address
these potential conflicts of interest
appropriately through full portfolio
transparency, as the conditions to their
relevant exemptive relief require.
13. In addition, applicants do not
believe the potential for conflicts of
interest raised by the Adviser’s use of
the Underlying Indexes in connection
with the management of the SelfIndexing Funds and the Affiliated
Accounts will be substantially different
from the potential conflicts presented by
an adviser managing two or more
registered funds. Both the Act and the
Advisers Act contain various
protections to address conflicts of
interest where an adviser is managing
two or more registered funds and these
protections will also help address these
conflicts with respect to the SelfIndexing Funds.12
14. The Adviser and any Sub-Adviser
has adopted or will adopt, pursuant to
Rule 206(4)–7 under the Advisers Act,
written policies and procedures
designed to prevent violations of the
Advisers Act and the rules thereunder.
These include policies and procedures
designed to minimize potential conflicts
of interest among the Self-Indexing
Funds and the Affiliated Accounts, such
as cross trading policies, as well as
those designed to ensure the equitable
allocation of portfolio transactions and
brokerage commissions. In addition, the
Adviser has adopted policies and
procedures as required under section
204A of the Advisers Act, which are
reasonably designed in light of the
nature of its business to prevent the
misuse, in violation of the Advisers Act
or the Exchange Act or the rules
thereunder, of material non-public
information by the Adviser or an
associated person (‘‘Inside Information
Policy’’). Any Sub-Adviser will be
required to adopt and maintain a similar
Inside Information Policy and Code of
Ethics.13 In accordance with the Code of
12 See, e.g., rule 17j–1 under the Act and section
204A under the Advisers Act and rules 204A–1 and
206(4)–7 under the Advisers Act.
13 The Adviser has also adopted or will adopt a
code of ethics pursuant to rule 17j–1 under the Act
and rule 204A–1 under the Advisers Act, which
contains provisions reasonably necessary to prevent
Access Persons (as defined in rule 17j–1) from
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Ethics and Inside Information Policy of
the Adviser and Sub-Advisers,
personnel of those entities with
knowledge about the composition of the
Portfolio Deposit 14 will be prohibited
from disclosing such information to any
other person, except as authorized in
the course of their employment, until
such information is made public. In
addition, no Affiliated Index Provider
will provide any information relating to
changes to an Underlying Index’s
methodology for the inclusion or
exclusion of component securities, or
methodology for the calculation or the
return of component securities, in
advance of a public announcement of
such changes by such Affiliated Index
Provider. The Adviser will also include
under Item 10.C. of Part 2 of its Form
ADV a discussion of its relationship to
any Affiliated Index Provider and any
material conflicts of interest resulting
therefrom, regardless of whether the
Affiliated Index Provider is a type of
affiliate specified in Item 10.
15. To the extent the Self-Indexing
Funds transact with an Affiliated Person
of the Adviser or Sub-Adviser, such
transactions will comply with the Act,
the rules thereunder and the terms and
conditions of the requested order. In
this regard, each Self-Indexing Fund’s
board of directors or trustees (‘‘Board’’)
will periodically review the SelfIndexing Fund’s use of an Affiliated
Index Provider. Subject to the approval
of the Self-Indexing Fund’s Board, the
Adviser, Affiliated Persons of the
Adviser (‘‘Adviser Affiliates’’) and
Affiliated Persons of any Sub-Adviser
(‘‘Sub-Adviser Affiliates’’) may be
authorized to provide custody, fund
accounting and administration and
transfer agency services to the SelfIndexing Funds. Any services provided
by the Adviser, Adviser Affiliates, SubAdviser and Sub-Adviser Affiliates will
be performed in accordance with the
provisions of the Act, the rules under
the Act and any relevant guidelines
from the staff of the Commission.
16. In light of the foregoing,
applicants believe it is appropriate to
allow the Self-Indexing Funds to be
fully transparent in lieu of Policies and
Procedures from the Prior Self-Indexing
Orders discussed above.
17. The Shares of each Self-Indexing
Fund will be purchased and redeemed
in Creation Units and generally on an
in-kind basis. Except where the
purchase or redemption will include
engaging in any conduct prohibited in rule 17j–1
(‘‘Code of Ethics’’).
14 The instruments and cash that the purchaser is
required to deliver in exchange for the Creation
Units it is purchasing is referred to as the ‘‘Portfolio
Deposit.’’
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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’’).15 On any given Business
Day, the names and quantities of the
instruments that constitute the Deposit
Instruments and the names and
quantities of the instruments that
constitute the Redemption Instruments
will be identical, unless the SelfIndexing Fund is Rebalancing (as
defined below). In addition, the Deposit
Instruments and the Redemption
Instruments will each correspond pro
rata to the positions in the Self-Indexing
Fund’s portfolio (including cash
positions) 16 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; 17 (c) TBA
Transactions, short positions,
derivatives and other positions that
cannot be transferred in kind 18 will be
excluded from the Deposit Instruments
and the Redemption Instruments; 19(d)
to the extent the Self-Indexing Fund
determines, on a given Business Day, to
use a representative sampling of the
Self-Indexing Fund’s portfolio; 20 or (e)
for temporary periods, to effect changes
15 The Self-Indexing 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 Self-Indexing Funds will comply with the
conditions of rule 144A.
16 The portfolio used for this purpose will be the
same portfolio used to calculate the Self-Indexing
Fund’s NAV for the Business Day.
17 A tradeable round lot for a security will be the
standard unit of trading in that particular type of
security in its primary market.
18 This includes instruments that can be
transferred in kind only with the consent of the
original counterparty to the extent the Self-Indexing
Fund does not intend to seek such consents.
19 Because these instruments will be excluded
from the Deposit Instruments and the Redemption
Instruments, their value will be reflected in the
determination of the Cash Amount (defined below).
20 A Self-Indexing Fund may only use sampling
for this purpose if the sample: (i) is designed to
generate performance that is highly correlated to the
performance of the Self-Indexing Fund’s portfolio;
(ii) consists entirely of instruments that are already
included in the Self-Indexing Fund’s portfolio; and
(iii) is the same for all Authorized Participants
(defined below) on a given Business Day.
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72723
in the Self-Indexing Fund’s portfolio as
a result of the rebalancing of its
Underlying Index (any such change, a
‘‘Rebalancing’’). If there is a difference
between the NAV attributable to a
Creation Unit and the aggregate market
value of the Deposit Instruments or
Redemption Instruments exchanged for
the Creation Unit, the party conveying
instruments with the lower value will
also pay to the other an amount in cash
equal to that difference (the ‘‘Cash
Amount’’).
18. 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; (b) if, on a given
Business Day, the Self-Indexing 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, the Self-Indexing Fund
determines to require the purchase or
redemption, as applicable, to be made
entirely in cash; 21 (d) if, on a given
Business Day, the Self-Indexing 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
(defined below); or (ii) in the case of
International and Global Funds holding
non-U.S. investments, such instruments
are not eligible for trading due to local
trading restrictions, local restrictions on
securities transfers or other similar
circumstances; or (e) if the Self-Indexing
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
21 In determining whether a particular SelfIndexing Fund will sell or redeem Creation Units
entirely on a cash or in-kind basis (whether for a
given day or a given order), the key consideration
will be the benefit that would accrue to the SelfIndexing Fund and its investors. For instance, in
bond transactions, the Adviser may be able to
obtain better execution than Share purchasers
because of the Adviser’s size, experience and
potentially stronger relationships in the fixed
income markets. Purchases of Creation Units either
on an all cash basis or in-kind are expected to be
neutral to the Self-Indexing Funds from a tax
perspective. In contrast, cash redemptions typically
require selling portfolio holdings, which may result
in adverse tax consequences for the remaining SelfIndexing Fund shareholders that would not occur
with an in-kind redemption. As a result, tax
consideration may warrant in-kind redemptions.
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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 an International
Fund or Global Fund holding non-U.S.
investments would be subject to
unfavorable income tax treatment if the
holder receives redemption proceeds in
kind.22
19. Creation Units will consist of
specified large aggregations of Shares,
e.g., at least 25,000 Shares, and it is
expected that the initial price of a
Creation Unit will range from $1 million
to $15 million. All orders to purchase
Creation Units must be placed with the
Distributor by or through an
‘‘Authorized Participant’’ which is
either (1) a ‘‘Participating Party,’’ i.e., a
broker-dealer or other participant in the
Continuous Net Settlement System of
the NSCC, a clearing agency registered
with the Commission, or (2) a
participant in The Depository Trust
Company (‘‘DTC’’) (‘‘DTC Participant’’),
which, in either case, has signed a
participant agreement with the
Distributor. The Distributor will be
responsible for transmitting the orders
to the Self-Indexing Funds and will
furnish to those placing such orders
confirmation that the orders have been
accepted, but applicants state that the
Distributor may reject any order which
is not submitted in proper form.
20. Each Business Day, before the
open of trading on the Listing Exchange,
each Self-Indexing Fund will cause to
be published through the NSCC the
names and quantities of the instruments
comprising the Deposit Instruments and
the Redemption Instruments, as well as
the estimated Cash Amount (if any), for
that day. The list of Deposit Instruments
and Redemption Instruments will apply
until a new list is announced on the
following Business Day, and there will
be no intra-day changes to the list
except to correct errors in the published
list. Each Listing Exchange will
disseminate, every 15 seconds during
regular Exchange trading hours, through
the facilities of the Consolidated Tape
Association, an amount for each SelfIndexing Fund stated on a per
individual Share basis representing the
sum of (i) the estimated Cash Amount
and (ii) the current value of the Portfolio
Securities and other assets of the SelfIndexing Fund.
21. Transaction expenses, including
operational processing and brokerage
22 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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costs, will be incurred by a SelfIndexing Fund when investors purchase
or redeem Creation Units in-kind and
such costs have the potential to dilute
the interests of the Self-Indexing Fund’s
existing shareholders. Each SelfIndexing Fund may (but is not required
to) impose purchase or redemption
transaction fees (‘‘Transaction Fees’’) in
connection with effecting such
purchases or redemptions of Creation
Units. In all cases, such Transaction
Fees will be limited in accordance with
requirements of the Commission
applicable to management investment
companies offering redeemable
securities. Since the Transaction Fees
are intended to defray the transaction
expenses as well as to prevent possible
shareholder dilution resulting from the
purchase or redemption of Creation
Units, the Transaction Fees will be
borne only by such purchasers or
redeemers.23 The Distributor will be
responsible for delivering the SelfIndexing Fund’s prospectus to those
persons acquiring Shares in Creation
Units and for maintaining records of
both the orders placed with it and the
confirmations of acceptance furnished
by it. In addition, the Distributor will
maintain a record of the instructions
given to the applicable Fund to
implement the delivery of its Shares.
22. Shares of each Self-Indexing Fund
will be listed and traded individually on
an Exchange. It is expected that one or
more member firms of an Exchange will
be designated to act as a market maker
(each, a ‘‘Market Maker’’) and maintain
a market for Shares trading on the
Exchange. Prices of Shares trading on an
Exchange will be based on the current
bid/offer market. Transactions involving
the sale of Shares on an Exchange will
be subject to customary brokerage
commissions and charges.
23. Applicants expect that purchasers
of Creation Units will include
institutional investors and arbitrageurs.
Market Makers, acting in their roles to
provide a fair and orderly secondary
market for the Shares, may from time to
time find it appropriate to purchase or
redeem Creation Units. Applicants
expect that secondary market
purchasers of Shares will include both
institutional and retail investors.24 The
23 Where a Self-Indexing Fund permits an in-kind
purchaser (or redeeming investor) to substitute (or
receive) cash-in-lieu of depositing one or more of
the requisite Deposit Instruments (or receiving one
or more Portfolio Securities), the purchaser (or
redeeming investor) may be assessed a higher
Transaction Fee to cover the cost of purchasing
such Deposit Instruments (or selling such Portfolio
Securities).
24 Shares will be registered in book-entry form
only. DTC or its nominee will be the record or
registered owner of all outstanding Shares.
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price at which Shares trade will be
disciplined by arbitrage opportunities
created by the option continually to
purchase or redeem Shares in Creation
Units, which should help prevent
Shares from trading at a material
discount or premium in relation to their
NAV.
24. Shares will not be individually
redeemable, and owners of Shares may
acquire those Shares from the SelfIndexing Fund, or tender such Shares
for redemption to the Self-Indexing
Fund, in Creation Units only. To
redeem, an investor must accumulate
enough Shares to constitute a Creation
Unit. Redemption requests must be
placed through an Authorized
Participant. A redeeming investor may
pay a Transaction Fee, calculated in the
same manner as a Transaction Fee
payable in connection with purchases of
Creation Units.
25. Neither the Trust nor any SelfIndexing Fund will be advertised or
marketed or otherwise held out as a
traditional open-end investment
company or a ‘‘mutual fund.’’ Instead,
each such Self-Indexing Fund will be
marketed as an ‘‘ETF.’’ All marketing
materials that describe the features or
method of obtaining, buying or selling
Creation Units, or Shares traded on an
Exchange, or refer to redeemability, will
prominently disclose that Shares are not
individually redeemable and will
disclose that the owners of Shares may
acquire those Shares from the SelfIndexing Fund or tender such Shares for
redemption to the Self-Indexing Fund in
Creation Units only. The Self-Indexing
Funds will provide copies of their
annual and semi-annual shareholder
reports to DTC Participants for
distribution to beneficial owners of
Shares.
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 section 12(d)(1)(J) of the
Act for an exemption from sections
12(d)(1)(A) and (B) of the Act, and
under sections 6(c) and 17(b) of the Act
for an exemption from sections 17(a)(1)
and 17(a)(2) of the Act.
2. Section 6(c) of the Act provides that
the Commission may exempt any
person, security or transaction, or any
class of persons, securities or
transactions, from any provision of the
Act, if and to the extent that such
exemption is necessary or appropriate
in the public interest and consistent
Beneficial ownership of Shares will be shown on
the records of DTC or the DTC Participants.
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with the protection of investors and the
purposes fairly intended by the policy
and provisions of the Act. Section 17(b)
of the Act authorizes the Commission to
exempt a proposed transaction from
section 17(a) of the Act if evidence
establishes that the terms of the
transaction, including the consideration
to be paid or received, are reasonable
and fair and do not involve
overreaching on the part of any person
concerned, and the proposed
transaction is consistent with the
policies of the registered investment
company and the general provisions of
the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may
exempt any person, security, or
transaction, or any class or classes of
persons, securities or transactions, from
any provisions of section 12(d)(1) if the
exemption is consistent with the public
interest and the protection of investors.
emcdonald on DSK67QTVN1PROD with NOTICES
Sections 5(a)(1) and 2(a)(32) of the Act
3. Section 5(a)(1) of the Act defines an
‘‘open-end company’’ as a management
investment company that is offering for
sale or has outstanding any redeemable
security of which it is the issuer.
Section 2(a)(32) of the Act defines a
redeemable security as any security,
other than short-term paper, under the
terms of which the owner, upon its
presentation to the issuer, is entitled to
receive approximately a proportionate
share of the issuer’s current net assets,
or the cash equivalent. Because Shares
will not be individually redeemable,
applicants request an order that would
permit the Self-Indexing Funds to
register as open-end management
investment companies and issue Shares
that are redeemable in Creation Units
only. Applicants state that investors
may purchase Shares in Creation Units
and redeem Creation Units from each
Self-Indexing Fund. Applicants further
state that because Creation Units may
always be purchased and redeemed at
NAV, the price of Shares on the
secondary market should not vary
materially from 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 an 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
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at a current offering price described in
a Self-Indexing Fund’s prospectus, and
not at a price based on NAV. Thus,
purchases and sales of Shares in the
secondary market will not comply with
section 22(d) of the Act and rule 22c–
1 under the Act. Applicants request an
exemption under section 6(c) from these
provisions.
5. Applicants assert that the concerns
sought to be addressed by section 22(d)
of the Act and rule 22c–1 under the Act
with respect to pricing are equally
satisfied by the proposed method of
pricing Shares. Applicants maintain that
while there is little legislative history
regarding section 22(d), its provisions,
as well as those of rule 22c–1, appear to
have been designed to (a) prevent
dilution caused by certain risklesstrading schemes by principal
underwriters and contract dealers, (b)
prevent unjust discrimination or
preferential treatment among buyers,
and (c) ensure an orderly distribution of
investment company shares by
eliminating price competition from
dealers offering shares at less than the
published sales price and repurchasing
shares at more than the published
redemption price.
6. Applicants believe that none of
these purposes will be thwarted by
permitting Shares to trade in the
secondary market at negotiated prices.
Applicants state that (a) secondary
market trading in Shares does not
involve a Self-Indexing Fund as a party
and will not result in dilution of an
investment in Shares, and (b) to the
extent different prices exist during a
given trading day, or from day to day,
such variances occur as a result of thirdparty 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 price at which Shares trade will
be disciplined by arbitrage
opportunities created by the option
continually to purchase or redeem
Shares in Creation Units, which should
help prevent Shares from trading at a
material discount or premium in
relation to their NAV.
Section 22(e)
7. Section 22(e) of the Act generally
prohibits a registered investment
company from suspending the right of
redemption or postponing the date of
payment of redemption proceeds for
more than seven days after the tender of
a security for redemption. Applicants
state that settlement of redemptions for
International and Global Funds will be
contingent not only on the settlement
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72725
cycle of the United States market, but
also on current delivery cycles in local
markets for underlying foreign Portfolio
Securities held by an International Fund
or Global Fund. Applicants state that
the delivery cycles currently practicable
for transferring Redemption Instruments
to redeeming investors, coupled with
local market holiday schedules, may
require a delivery process of up to
fourteen (14) calendar days.
Accordingly, with respect to
International and Global Funds only,
applicants hereby request relief under
section 6(c) from the requirement
imposed by section 22(e) to allow
International and Global Funds to pay
redemption proceeds within fourteen
calendar days following the tender of
Creation Units for redemption.25
8. Applicants believe that Congress
adopted section 22(e) to prevent
unreasonable, undisclosed or
unforeseen delays in the actual payment
of redemption proceeds. Applicants
propose that allowing redemption
payments for Creation Units of an
International Fund or Global Fund to be
made within fourteen calendar days
would not be inconsistent with the
spirit and intent of section 22(e).
Applicants suggest that a redemption
payment occurring within fourteen
calendar days following a redemption
request would adequately afford
investor protection.
9. Applicants are not seeking relief
from section 22(e) with respect to
International and Global Funds that do
not effect creations and redemptions of
Creation Units in-kind.
Section 12(d)(1)
10. Section 12(d)(1)(A) of the Act
prohibits a registered investment
company from acquiring securities of an
investment company if such securities
represent more than 3% of the total
outstanding voting stock of the acquired
company, more than 5% of the total
assets of the acquiring company, or,
together with the securities of any other
investment companies, more than 10%
of the total assets of the acquiring
company. Section 12(d)(1)(B) of the Act
prohibits a registered open-end
investment company, its principal
underwriter and any other broker-dealer
from knowingly selling the investment
company’s shares to another investment
company if the sale will cause the
acquiring company to own more than
3% of the acquired company’s voting
25 Applicants acknowledge that no relief obtained
from the requirements of section 22(e) will affect
any obligations applicants may otherwise have
under rule 15c6–1 under the Exchange Act
requiring that most securities transactions be settled
within three business days of the trade date.
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stock, or if the sale will cause more than
10% of the acquired company’s voting
stock to be owned by investment
companies generally.
11. Applicants request an exemption
to permit registered management
investment companies and unit
investment trusts (‘‘UITs’’) that are not
advised or sponsored by the Adviser,
and not part of the same ‘‘group of
investment companies,’’ as defined in
section 12(d)(1)(G)(ii) of the Act as the
Self-Indexing Funds (such management
investment companies are referred to as
‘‘Investing Management Companies,’’
such UITs are referred to as ‘‘Investing
Trusts,’’ and Investing Management
Companies and Investing Trusts are
collectively referred to as ‘‘Funds of
Funds’’), to acquire Shares beyond the
limits of section 12(d)(1)(A) of the Act;
and the Self-Indexing Funds, and any
principal underwriter for the SelfIndexing Funds, and/or any Broker
registered under the Exchange Act, to
sell Shares to Funds of Funds beyond
the limits of section 12(d)(1)(B) of the
Act.
12. Each Investing Management
Company will be advised by an
investment adviser within the meaning
of section 2(a)(20)(A) of the Act (the
‘‘Fund of Funds Adviser’’) and may be
sub-advised by investment advisers
within the meaning of section
2(a)(20)(B) of the Act (each a ‘‘Fund of
Funds Sub-Adviser’’). Any investment
adviser to an Investing Management
Company will be registered under the
Advisers Act. Each Investing Trust will
be sponsored by a sponsor (‘‘Sponsor’’).
13. Applicants submit that the
proposed conditions to the requested
relief adequately address the concerns
underlying the limits in sections
12(d)(1)(A) and (B), which include
concerns about undue influence by a
fund of funds over underlying funds,
excessive layering of fees and overly
complex fund structures. Applicants
believe that the requested exemption is
consistent with the public interest and
the protection of investors.
14. Applicants believe that neither a
Fund of Funds nor a Fund of Funds
Affiliate would be able to exert undue
influence over a Self-Indexing Fund.26
To limit the control that a Fund of
Funds may have over a Self-Indexing
Fund, applicants propose a condition
26 A ‘‘Fund of Funds Affiliate’’ is a Fund of Funds
Adviser, Fund of Funds Sub-Adviser, Sponsor,
promoter, and principal underwriter of a Fund of
Funds, and any person controlling, controlled by,
or under common control with any of those entities.
A ‘‘Self-Indexing Fund Affiliate’’ is an investment
adviser, promoter, or principal underwriter of a
Self-Indexing Fund and any person controlling,
controlled by or under common control with any
of these entities.
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prohibiting a Fund of Funds Adviser or
Sponsor, any person controlling,
controlled by, or under common control
with a Fund of Funds Adviser or
Sponsor, and any investment company
and any issuer that would be an
investment company but for sections
3(c)(1) or 3(c)(7) of the Act that is
advised or sponsored by a Fund of
Funds Adviser or Sponsor, or any
person controlling, controlled by, or
under common control with a Fund of
Funds Adviser or Sponsor (‘‘Fund of
Funds Advisory Group’’) from
controlling (individually or in the
aggregate) a Self-Indexing Fund within
the meaning of section 2(a)(9) of the Act.
The same prohibition would apply to
any Fund of Funds Sub-Adviser, any
person controlling, controlled by or
under common control with the Fund of
Funds Sub-Adviser, and any investment
company or issuer that would be an
investment company but for sections
3(c)(1) or 3(c)(7) of the Act (or portion
of such investment company or issuer)
advised or sponsored by the Fund of
Funds Sub-Adviser or any person
controlling, controlled by or under
common control with the Fund of
Funds Sub-Adviser (‘‘Fund of Funds
Sub-Advisory Group’’).
15. Applicants propose other
conditions to limit the potential for
undue influence over the Self-Indexing
Funds, including that no Fund of Funds
or Fund of Funds Affiliate (except to the
extent it is acting in its capacity as an
investment adviser to a Self-Indexing
Fund) will cause a Self-Indexing 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, Fund of Funds Adviser,
Fund of Funds Sub-Adviser, employee
or Sponsor of the Fund of Funds, or a
person of which any such officer,
director, member of an advisory board,
Fund of Funds Adviser or Fund of
Funds Sub-Adviser, employee or
Sponsor is an affiliated person (except
that any person whose relationship to
the Self-Indexing Fund is covered by
section 10(f) of the Act is not an
Underwriting Affiliate).
16. Applicants do not believe that the
proposed arrangement will involve
excessive layering of fees. The board of
directors or trustees of any Investing
Management Company, including a
majority of the directors or trustees who
are not ‘‘interested persons’’ within the
meaning of section 2(a)(19) of the Act
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Fmt 4703
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(‘‘disinterested directors or trustees’’),
will 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 Self-Indexing Fund in which the
Investing Management Company may
invest. In addition, under condition
B.5., a Fund of Funds Adviser, or a
Fund of Funds’ trustee or Sponsor, as
applicable, will waive fees otherwise
payable to it by the Fund of Funds in
an amount at least equal to any
compensation (including fees received
pursuant to any plan adopted by a SelfIndexing Fund under rule 12b–1 under
the Act) received from a Self-Indexing
Fund by the Fund of Funds Adviser,
trustee or Sponsor or an affiliated
person of the Fund of Funds Adviser,
trustee or Sponsor, other than any
advisory fees paid to the Fund of Funds
Adviser, trustee or Sponsor or its
affiliated person by a Self-Indexing
Fund, in connection with the
investment by the Fund of Funds in the
Self-Indexing Fund. Applicants state
that any sales charges and/or service
fees charged with respect to shares of a
Fund of Funds will not exceed the
limits applicable to a fund of funds as
set forth in NASD Conduct Rule 2830.27
17. Applicants submit that the
proposed arrangement will not create an
overly complex fund structure.
Applicants note that no Self-Indexing
Fund 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 Self-Indexing Fund to purchase
shares of other investment companies
for short-term cash management
purposes. To ensure a Fund of Funds is
aware of the terms and conditions of the
requested order, the Fund of Funds will
enter into an agreement with the SelfIndexing Fund (‘‘FOF Participation
Agreement’’). The FOF Participation
Agreement will include an
acknowledgement from the Fund of
Funds that it may rely on the order only
to invest in the Self-Indexing Funds and
not in any other investment company.
18. Applicants also note that a SelfIndexing Fund may choose to reject a
direct purchase of Shares in Creation
Units by a Fund of Funds. To the extent
that a Fund of Funds purchases Shares
in the secondary market, a Self-Indexing
Fund would still retain its ability to
27 Any references to NASD Conduct Rule 2830
include any successor or replacement FINRA rule
to NASD Conduct Rule 2830.
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emcdonald on DSK67QTVN1PROD with NOTICES
reject any initial investment by a Fund
of Funds in excess of the limits of
section 12(d)(1)(A) by declining to enter
into a FOF Participation Agreement
with the Fund of Funds.
Sections 17(a)(1) and (2) of the Act
19. Sections 17(a)(1) and (2) of the Act
generally prohibit an affiliated person of
a registered investment company, or an
affiliated person of such a person, from
selling any security to or purchasing any
security from the company. Section
2(a)(3) of the Act defines ‘‘affiliated
person’’ of another person to include (a)
any person directly or indirectly
owning, controlling or holding with
power to vote 5% or more of the
outstanding voting securities of the
other person, (b) any person 5% or more
of whose outstanding voting securities
are directly or indirectly owned,
controlled or held with the power to
vote by the other person, and (c) any
person directly or indirectly controlling,
controlled by or under common control
with the other person. Section 2(a)(9) of
the Act 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 a
company’s voting securities. The SelfIndexing Funds may be deemed to be
controlled by the Adviser or an entity
controlling, controlled by or under
common control with the Adviser and
hence affiliated persons of each other. In
addition, the Self-Indexing Funds may
be deemed to be under common control
with any other registered investment
company (or series thereof) advised by
an Adviser or an entity controlling,
controlled by or under common control
with an Adviser (an ‘‘Affiliated Fund’’).
Any investor, including Market Makers,
owning 5% or holding in excess of 25%
of the Trust or such Self-Indexing
Funds, may be deemed affiliated
persons of the Trust or such SelfIndexing Funds. In addition, an investor
could own 5% or more, or in excess of
25% of the outstanding shares of one or
more Affiliated Funds making that
investor a Second-Tier Affiliate of the
Self-Indexing Funds.
20. Applicants request an exemption
from sections 17(a)(1) and 17(a)(2) of the
Act pursuant to sections 6(c) and 17(b)
of the Act to permit persons that are
Affiliated Persons of the Self-Indexing
Funds, or Second-Tier Affiliates of the
Self-Indexing 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 SelfIndexing Funds; (b) an affiliation with a
person with an ownership interest
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17:36 Dec 02, 2013
Jkt 232001
described in (a); or (c) holding 5% or
more, or more than 25%, of the shares
of one or more Affiliated Funds, to
effectuate purchases and redemptions
‘‘in-kind.’’
21. 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 Self-Indexing
Fund in Creation Units. Both the
deposit procedures for ‘‘in-kind’’
purchases of Creation Units and the
redemption procedures for ‘‘in-kind’’
redemptions of Creation Units will be
effected in exactly the same manner for
all purchases and redemptions,
regardless of size or number. There will
be no discrimination between
purchasers or redeemers. Deposit
Instruments and Redemption
Instruments for each Self-Indexing Fund
will be valued in the identical manner
as those Portfolio Securities currently
held by such Self-Indexing Fund and
the valuation of the Deposit Instruments
and Redemption Instruments will be
made in an identical manner 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, but rather
assert that such procedures will be
implemented consistently with each
Self-Indexing Fund’s objectives and
with the general purposes of the Act.
Applicants believe that ‘‘in-kind’’
purchases and redemptions will be
made on terms reasonable to applicants
and any Affiliated Persons because they
will be valued pursuant to verifiable
objective standards. The method of
valuing Portfolio Securities held by a
Self-Indexing Fund is identical to that
used for calculating ‘‘in-kind’’ purchase
or redemption values and therefore
creates no opportunity for Affiliated
Persons or Second-Tier Affiliates of
applicants to effect a transaction
detrimental to the other holders of
Shares of that Self-Indexing Fund.
Similarly, applicants submit that, by
using the same standards for valuing
Portfolio Securities held by a SelfIndexing Fund as are used for
calculating ‘‘in-kind’’ redemptions or
purchases, the Self-Indexing Fund will
ensure that its NAV will not be
adversely affected by such securities
transactions. Applicants also note that
the ability to take deposits and make
redemptions ‘‘in-kind’’ will help each
Self-Indexing Fund to track closely its
Underlying Index and therefore aid in
achieving the Self-Indexing Fund’s
objectives.
22. Applicants also seek relief under
sections 6(c) and 17(b) from section
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Sfmt 4703
72727
17(a) to permit a Self-Indexing Fund
that is an Affiliated Person, or a SecondTier Affiliate, of a Fund of Funds to sell
its Shares to and redeem its Shares from
a Fund of Funds, and to engage in any
accompanying in-kind transactions with
the Fund of Funds.28 Applicants state
that the terms of the transactions are fair
and reasonable and do not involve
overreaching. Applicants note that any
consideration paid by a Fund of Funds
for the purchase or redemption of
Shares directly from a Self-Indexing
Fund will be based on the NAV of the
Self-Indexing Fund.29 Applicants
believe that any proposed transactions
directly between the Self-Indexing
Funds and Funds of Funds will be
consistent with the policies of each
Fund of Funds. The purchase of
Creation Units by a Fund of Funds
directly from a Self-Indexing Fund will
be accomplished in accordance with the
investment restrictions of any such
Fund of Funds and will be consistent
with the investment policies set forth in
the Fund of Funds’ registration
statement. Applicants also state that the
proposed transactions are consistent
with the general purposes of the Act and
are 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. The requested relief to permit ETF
operations will expire on the effective
28 Although applicants believe that most Funds of
Funds will purchase Shares in the secondary
market and will not purchase Creation Units
directly from a Self-Indexing Fund, a Fund of
Funds might seek to transact in Creation Units
directly with a Self-Indexing Fund that is an
affiliated person of a Fund of Funds. To the extent
that purchases and sales of Shares occur in the
secondary market and not through principal
transactions directly between a Fund of Funds and
a Self-Indexing 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 Self-Indexing Fund to a Fund
of Funds and redemptions of those Shares.
Applicants are not seeking relief from section 17(a)
for, and the requested relief will not apply to,
transactions where a Self-Indexing Fund could be
deemed an affiliated person, or an affiliated person
of an affiliated person of a Fund of Funds because
an Adviser or an entity controlling, controlled by
or under common control with an Adviser provides
investment advisory services to that Fund of Funds.
29 Applicants acknowledge that the receipt of
compensation by (a) an affiliated person of a Fund
of Funds, or an affiliated person of such person, for
the purchase by the Fund of Funds of Shares of a
Self-Indexing Fund or (b) an affiliated person of a
Self-Indexing Fund, or an affiliated person of such
person, for the sale by the Self-Indexing Fund of its
Shares to a Fund of Funds, may be prohibited by
section 17(e)(1) of the Act. The FOF Participation
Agreement also will include this acknowledgment.
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emcdonald on DSK67QTVN1PROD with NOTICES
date of any Commission rule under the
Act that provides relief permitting the
operation of index-based ETFs.
2. As long as a Self-Indexing Fund
operates in reliance on the requested
order, the Shares of such Self-Indexing
Fund will be listed on an Exchange.
3. Neither a Trust nor any SelfIndexing 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 Shares are not individually
redeemable and that owners of Shares
may acquire those Shares from the SelfIndexing Fund and tender those Shares
for redemption to a Self-Indexing Fund
in Creation Units only.
4. The Web site, which is and will be
publicly accessible at no charge, will
contain, on a per Share basis for each
Self-Indexing Fund, the prior Business
Day’s NAV and the market closing price
or the midpoint 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.
5. Each Self-Indexing Fund will post
on the Web site on each Business Day,
before commencement of trading of
Shares on the Exchange, the identities
and quantities of the Self-Indexing
Fund’s Portfolio Holdings.
6. No Adviser or any Sub-Adviser,
directly or indirectly, will cause any
Authorized Participant (or any investor
on whose behalf an Authorized
Participant may transact with the SelfIndexing Fund) to acquire any Deposit
Instrument for a Self-Indexing Fund
through a transaction in which the SelfIndexing Fund could not engage
directly.
B. Section 12(d)(1) Relief
1. The members of a Fund of Funds’
Advisory Group will not control
(individually or in the aggregate) a SelfIndexing Fund within the meaning of
section 2(a)(9) of the Act. The members
of a Fund of Funds’ Sub-Advisory
Group will not control (individually or
in the aggregate) a Self-Indexing 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
Self-Indexing Fund, the Fund of Funds’
Advisory Group or the Fund of Funds’
Sub-Advisory Group, each in the
aggregate, becomes a holder of more
than 25 percent of the outstanding
voting securities of a Self-Indexing
Fund, it will vote its Shares of the SelfIndexing Fund in the same proportion
as the vote of all other holders of the
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17:36 Dec 02, 2013
Jkt 232001
Self-Indexing Fund’s Shares. This
condition does not apply to the Fund of
Funds’ Sub-Advisory Group with
respect to a Self-Indexing Fund for
which the Fund of Funds’ Sub-Adviser
or a person controlling, controlled by or
under common control with the Fund of
Funds’ Sub-Adviser acts as the
investment adviser within the meaning
of section 2(a)(20)(A) of the Act.
2. No Fund of Funds or Fund of
Funds Affiliate will cause any existing
or potential investment by the Fund of
Funds in a Self-Indexing Fund to
influence the terms of any services or
transactions between the Fund of Funds
or Fund of Funds Affiliate and the SelfIndexing Fund or a Self-Indexing Fund
Affiliate.
3. The board of directors or trustees of
an Investing Management Company,
including a majority of the disinterested
directors or trustees, will adopt
procedures reasonably designed to
ensure that the Fund of Funds Adviser
and Fund of Funds Sub-Adviser are
conducting the investment program of
the Investing Management Company
without taking into account any
consideration received by the Investing
Management Company or a Fund of
Funds Affiliate from a Self-Indexing
Fund or Self-Indexing Fund Affiliate in
connection with any services or
transactions.
4. Once an investment by a Fund of
Funds in the securities of a SelfIndexing Fund exceeds the limits in
section 12(d)(1)(A)(i) of the Act, the
Board of the Self-Indexing Fund,
including a majority of the directors or
trustees who are not ‘‘interested
persons’’ within the meaning of section
2(a)(19) of the Act (‘‘non-interested
Board members’’), will determine that
any consideration paid by the SelfIndexing Fund to the Fund of Funds or
a Fund of Funds 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 Self-Indexing
Fund; (ii) is within the range of
consideration that the Self-Indexing
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 Self-Indexing Fund and its
investment adviser(s), or any person
controlling, controlled by or under
common control with such investment
adviser(s).
5. The Fund of Funds Adviser, or
trustee or Sponsor of an Investing Trust,
as applicable, will waive fees otherwise
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Fmt 4703
Sfmt 4703
payable to it by the Fund of Funds in
an amount at least equal to any
compensation (including fees received
pursuant to any plan adopted by a SelfIndexing Fund under rule 12b-l under
the Act) received from a Self-Indexing
Fund by the Fund of Funds Adviser, or
trustee or Sponsor of the Investing
Trust, or an affiliated person of the
Fund of Funds Adviser, or trustee or
Sponsor of the Investing Trust, other
than any advisory fees paid to the Fund
of Funds Adviser, trustee or Sponsor of
an Investing Trust, or its affiliated
person by the Self-Indexing Fund, in
connection with the investment by the
Fund of Funds in the Self-Indexing
Fund. Any Fund of Funds Sub-Adviser
will waive fees otherwise payable to the
Fund of Funds Sub-Adviser, directly or
indirectly, by the Investing Management
Company in an amount at least equal to
any compensation received from a SelfIndexing Fund by the Fund of Funds
Sub-Adviser, or an affiliated person of
the Fund of Funds Sub-Adviser, other
than any advisory fees paid to the Fund
of Funds Sub-Adviser or its affiliated
person by the Self-Indexing Fund, in
connection with the investment by the
Investing Management Company in the
Self-Indexing Fund made at the
direction of the Fund of Funds SubAdviser. In the event that the Fund of
Funds Sub-Adviser waives fees, the
benefit of the waiver will be passed
through to the Investing Management
Company.
6. No Fund of Funds or Fund of
Funds Affiliate (except to the extent it
is acting in its capacity as an investment
adviser to a Self-Indexing Fund) will
cause a Self-Indexing Fund to purchase
a security in any Affiliated
Underwriting.
7. The Board of a Self-Indexing Fund,
including a majority of the noninterested Board members, will adopt
procedures reasonably designed to
monitor any purchases of securities by
the Self-Indexing Fund in an Affiliated
Underwriting, once an investment by a
Fund of Funds in the securities of the
Self-Indexing 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 Fund of Funds in the
Self-Indexing Fund. The Board will
consider, among other things: (i)
whether the purchases were consistent
with the investment objectives and
policies of the Self-Indexing 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 Self-Indexing Fund in
Affiliated Underwritings and the
amount purchased directly from an
Underwriting Affiliate have changed
significantly from prior years. The
Board will take any appropriate actions
based on its review, including, if
appropriate, the institution of
procedures designed to ensure that
purchases of securities in Affiliated
Underwritings are in the best interest of
shareholders of the Self-Indexing Fund.
8. Each Self-Indexing 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 a Fund of Funds
in the securities of the Self-Indexing
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 Self-Indexing
Fund in excess of the limit in section
12(d)(1)(A), a Fund of Funds and the
applicable Trust will execute a FOF
Participation Agreement stating without
limitation 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 Self-Indexing
Fund in excess of the limit in section
12(d)(1)(A)(i), a Fund of Funds will
notify the Self-Indexing Fund of the
investment. At such time, the Fund of
Funds will also transmit to the SelfIndexing Fund a list of the names of
each Fund of Funds Affiliate and
Underwriting Affiliate. The Fund of
Funds will notify the Self-Indexing
Fund of any changes to the list of the
names as soon as reasonably practicable
after a change occurs. The Self-Indexing
Fund and the Fund of Funds will
maintain and preserve a copy of the
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17:36 Dec 02, 2013
Jkt 232001
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 disinterested
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
Self-Indexing Fund in which the
Investing Management Company may
invest. These findings and their basis
will be fully recorded in the minute
books of the appropriate Investing
Management Company.
11. Any sales charges and/or service
fees charged with respect to shares of a
Fund of Funds will not exceed the
limits applicable to a fund of funds as
set forth in NASD Conduct Rule 2830.
12. No Self-Indexing Fund will
acquire securities of an 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 the Self-Indexing Fund acquires
securities of another investment
company pursuant to exemptive relief
from the Commission permitting the
Self-Indexing Fund to acquire securities
of one or more 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. 2013–28849 Filed 12–2–13; 8:45 am]
BILLING CODE 8011–01–P
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70947; File No. SR–OCC–
2013–21]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing and Immediate Effectiveness
of a Proposed Rule Change To Make
Technical Changes to OCC’s By-Laws
and Rules in Connection with the
Modification of the Individual
Registration Categories of the
Investment Industry Regulatory
Organization of Canada
November 26, 2013.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that, on
November 20, 2013, The Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change described in Items
I and II below, which Items have been
prepared primarily by OCC. OCC has
designated the proposed rule change as
constituting a ‘‘non-controversial’’ rule
change under paragraph (f)(6) of Rule
19b–4 under the Act,3 which renders
the proposal was effective upon filing
with the Commission. The Commission
is publishing this notice to solicit
comments on the rule change from
interested parties.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
This proposed rule change by The
Options Clearing Corporation (‘‘OCC’’)
would make technical changes to OCC’s
By-Laws and Rules in connection with
the modification of the individual
registration categories of the Investment
Industry Regulatory Organization of
Canada (‘‘IIROC’’) under which every
Canadian clearing member or applicant
seeking to become a Canadian clearing
member would be required to employ at
least one associated person registered as
a Chief Financial Officer (‘‘CFO’’) with
IIROC.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission,
OCC included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 17 CFR 240.19b–4(f)(4)(ii).
2 17
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]]>Agencies
[Federal Register Volume 78, Number 232 (Tuesday, December 3, 2013)]
[Notices]
[Pages 72720-72729]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28849]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30813; File No. 812-14157]
Arrow Investment Advisors, LLC, et al.; Notice of Application
November 26, 2013.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (the ``Act'') for an exemption from
sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of the Act and rule 22c-1
under the Act, under sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and 17(a)(2) of the Act, and under
section 12(d)(1)(J) for an exemption from sections 12(d)(1)(A) and
12(d)(1)(B) of the Act.
-----------------------------------------------------------------------
SUMMARY: Summary of Application: Applicants request an order that
would permit (a) series of certain open-end management investment
companies that track the performance of an index provided by an
affiliated person to issue shares (``Shares'') redeemable in large
aggregations only (``Creation Units''); (b) secondary market
transactions in Shares to occur at negotiated market prices rather than
at net asset value (``NAV''); (c) certain series to pay redemption
proceeds, under certain circumstances, more than seven days after the
tender of Shares for redemption; (d) certain affiliated persons of the
series to deposit securities into, and receive securities from, the
series in connection with the purchase and redemption of Creation
Units; and (e) certain registered management investment companies and
unit investment trusts outside of the same group of investment
companies as the series to acquire Shares.
Applicants: Arrow Investment Advisors, LLC (``Current Adviser'') and
Arrow Investments Trust (``Trust'').
DATES: Filing Dates: The application was filed on May 21, 2013 and
amended on August 23, 2013 and November 22, 2013. Applicants have
agreed to file an amendment during the notice period, the substance of
which is reflected in this notice.
Hearing or Notification of Hearing: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on December 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, Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090; Applicants,
2943 Olney Sandy Springs Road, Olney, MD 20832.
FOR FURTHER INFORMATION CONTACT: Jaea F. Hahn, Senior Counsel, at (202)
551-6870, or Mary Kay Frech, Branch Chief, at (202) 551-6821 (Division
of Investment Management, Chief Counsel's Office).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's
[[Page 72721]]
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, a Delaware statutory trust, is registered under the
Act as an open-end management investment company with multiple series.
2. The Current Adviser is registered as an investment adviser under
the Investment Advisers Act of 1940 (the ``Advisers Act'') and will be
the investment adviser to the Self-Indexing Funds (defined below). Any
other Adviser (defined below) will also be registered as an investment
adviser under the Advisers Act. The Adviser may enter into sub-advisory
agreements with one or more investment advisers to act as sub-advisers
to particular Self-Indexing Funds (each, a ``Sub-Adviser''). Any Sub-
Adviser will either be registered under the Advisers Act or will not be
subject to registration thereunder.
3. The Trust will enter into a distribution agreement with one or
more distributors, each a broker-dealer (``Broker'') registered under
the Securities Exchange Act of 1934 (the ``Exchange Act''), who will
act as distributor and principal underwriter of one or more of the
Self-Indexing Funds (each, a ``Distributor''). The Distributor of any
Self-Indexing Fund may be an affiliated person, as defined in section
2(a)(3) of the Act (``Affiliated Person''), or an affiliated person of
an Affiliated Person (``Second-Tier Affiliate''), of that Self-Indexing
Fund's Adviser and/or Sub-Advisers. No Distributor will be affiliated
with any Exchange (defined below).
4. Applicants request that the order apply to the initial series of
the Trust described in the application (``Initial Self-Indexing
Fund''), as well as any additional series of the Trust and other open-
end management investment companies, or series thereof, that may be
created in the future (``Future Self-Indexing Funds''), each of which
will operate as an exchange-traded fund (``ETF'') and will track a
specified index comprised solely of domestic or foreign securities
(each, an ``Underlying Index''). Any Future Self-Indexing Fund will (a)
be advised by the Current Adviser or an entity controlling, controlled
by, or under common control with the Current Adviser (each, an
``Adviser'') and (b) comply with the terms and conditions of the
application. The Initial Self-Indexing Fund and Future Self-Indexing
Funds, together, are the ``Self-Indexing Funds.'' \1\
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\1\ All existing entities that intend to rely on the requested
order have been named as applicants. Any other existing or future
entity that subsequently relies on the order will comply with the
terms and conditions of the order. A Fund of Funds (as defined
below) may rely on the order only to invest in Self-Indexing Funds
and not in any other registered investment company.
---------------------------------------------------------------------------
5. Each Self-Indexing Fund will hold certain securities
(``Portfolio Securities'') selected to correspond generally to the
performance of its Underlying Index. Each Underlying Index will be
comprised solely of domestic and/or foreign equity and/or fixed income
securities. Each Self-Indexing Fund will track one of the following
types of Underlying Indexes: (i) an index made up of domestic equity
securities and/or domestic fixed income securities, (ii) an index made
up of foreign equity securities and/or foreign fixed income securities
(such Funds, ``International Funds''), or (iii) an index made up of
foreign and domestic equity securities and/or foreign and domestic
fixed income securities (such Funds, ``Global Funds'').
6. Applicants represent that each Self-Indexing Fund will invest at
least 80% of its assets (excluding securities lending collateral) in
the component securities of its respective Underlying Index
(``Component Securities'') and TBA Transactions \2\, and in the case of
International and Global Funds, Component Securities and Depositary
Receipts \3\ representing Component Securities. Each Self-Indexing Fund
may also invest up to 20% of its assets in securities and other
instruments not included in its Underlying Index but which the Adviser
and/or Sub-Adviser believes will help the Self-Indexing Fund track its
Underlying Index, including but not limited to certain index futures,
options, options on futures, options on index futures, swap contracts
or other derivatives, cash and cash equivalents, and other investment
companies. A Self-Indexing Fund may also engage in short sales in
accordance with its investment objective.
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\2\ A ``to-be-announced transaction'' or ``TBA Transaction'' is
a method of trading mortgage-backed securities. In a TBA
Transaction, the buyer and seller agree upon general trade
parameters such as agency, settlement date, par amount and price.
The actual pools delivered generally are determined two days prior
to settlement date.
\3\ Depositary receipts representing foreign securities
(``Depositary Receipts'') include American Depositary Receipts and
Global Depositary Receipts. The Self-Indexing Funds may invest in
Depositary Receipts representing foreign securities in which they
seek to invest. Depositary Receipts are typically issued by a
financial institution (a ``depositary bank'') and evidence ownership
interests in a security or a pool of securities that have been
deposited with the depositary bank. A Self-Indexing Fund will not
invest in any Depositary Receipts that the Adviser or any Sub-
Adviser deems to be illiquid or for which pricing information is not
readily available. No affiliated person of a Self-Indexing Fund, the
Adviser or any Sub-Adviser will serve as the depositary bank for any
Depositary Receipts held by a Self-Indexing Fund.
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7. The Trust may offer Self-Indexing Funds that seek to track
Underlying Indexes constructed using 130/30 investment strategies
(``130/30 Funds'') or other long/short investment strategies (``Long/
Short Funds''). Each 130/30 Fund will include strategies that: (i)
establish long positions in securities so that total long exposure
represents approximately 130% of the Self-Indexing Fund's net assets;
and (ii) simultaneously establish short positions in other securities
so that total short exposure represents approximately 30% of such Self-
Indexing Fund's net assets. Each Long/Short Fund will obtain exposures
equal to the long and short positions specified by the Long/Short
Index.\4\
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\4\ Underlying Indexes that include both long and short
positions in securities are referred to as ``Long/Short Indexes.''
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8. A Self-Indexing Fund will utilize either a replication or
representative sampling strategy to track its Underlying Index. A Self-
Indexing Fund using a replication strategy will invest in the Component
Securities of its Underlying Index in the same approximate proportions
as in such Underlying Index. A Self-Indexing Fund using a
representative sampling strategy will hold some, but not necessarily
all of the Component Securities of its Underlying Index. Applicants
state that a Self-Indexing Fund using a representative sampling
strategy will not be expected to track the performance of its
Underlying Index with the same degree of accuracy as would an
investment vehicle that invested in every Component Security of the
Underlying Index with the same weighting as the Underlying Index.
Applicants expect that each Self-Indexing Fund will have an annual
tracking error relative to the performance of its Underlying Index of
less than 5%.
9. An Affiliated Person, or a Second-Tier Affiliate, of the Trust
or a Self-Indexing Fund, of the Adviser, of any Sub-Adviser to or
promoter of a Self-Indexing Fund, or of the Distributor (each, an
``Affiliated Index Provider'') \5\
[[Page 72722]]
will create a proprietary, rules-based methodology to create Underlying
Indexes.\6\ The Affiliated Index Provider will create, compile, sponsor
or maintain the Underlying Indexes. Each Self-Indexing Fund will be
entitled to use its Underlying Index pursuant to a licensing agreement
with the Affiliated Index Provider.\7\
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\5\ The applicants currently expect that the Adviser will serve
as the Affiliated Index Provider for the Self-Indexing Funds. In the
event that the Adviser serves as the Affiliated Index Provider for a
Self-Indexing Fund, the term ``Affiliated Index Provider,'' with
respect to that Self-Indexing Fund, will refer to the employees of
the Adviser that are responsible for creating, compiling and
maintaining the relevant Underlying Index.
\6\ The Underlying Indexes may be made available to registered
investment companies, as well as separately managed accounts of
institutional investors and privately offered funds that are not
deemed to be ``investment companies'' in reliance on section 3(c)(1)
or 3(c)(7) of the Act for which the Adviser acts as adviser or sub-
adviser (``Affiliated Accounts'') as well as other such registered
investment companies, separately managed accounts and privately
offered funds for which it does not act either as adviser or sub-
adviser (``Unaffiliated Accounts''). The Affiliated Accounts and the
Unaffiliated Accounts, like the Self-Indexing Funds, would seek to
track the performance of one or more Underlying Index(es) by
investing in the constituents of such Underlying Indexes or a
representative sample of such constituents of the Underlying Index.
Consistent with the relief requested from section 17(a), the
Affiliated Accounts will not engage in Creation Unit transactions
with a Self-Indexing Fund.
\7\ The licenses for the Self-Indexing Funds will specifically
state that the Affiliated Index Provider must provide the use of the
Underlying Indexes and related intellectual property at no cost to
the Trust and the Self-Indexing Funds.
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10. Applicants recognize that Self-Indexing Funds could raise
concerns regarding the ability of the Affiliated Index Provider to
manipulate the Underlying Index to the benefit or detriment of the
Self-Indexing Fund. Applicants further recognize the potential for
conflicts that may arise with respect to the personal trading activity
of personnel of the Affiliated Index Provider who have knowledge of
changes to an Underlying Index prior to the time that information is
publicly disseminated. Prior orders granted to self-indexing ETFs
(``Prior Self-Indexing Orders'') addressed these concerns by creating a
framework that required: (i) transparency of the Underlying Indexes;
(ii) the adoption of policies and procedures not otherwise required by
the Act designed to mitigate such conflicts of interest; (iii)
limitations on the ability to change the rules for index compilation
and the component securities of the index; (iv) that the index provider
enter into an agreement with an unaffiliated third party to act as
``Calculation Agent''; and (v) certain limitations designed to separate
employees of the index provider, adviser and Calculation Agent (clauses
(ii) through (v) are hereinafter referred to as ``Policies and
Procedures'').\8\
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\8\ See, e.g., In the Matter of WisdomTree Investments Inc., et
al., Investment Company Act Release Nos. 27324 (May 18, 2006)
(notice) and 27391 (June 12, 2006) (order); In the Matter of IndexIQ
ETF Trust, et al., Investment Company Act Release Nos. 28638 (Feb.
27, 2009) (notice) and 28653 (March 20, 2009) (order); and Van Eck
Associates Corporation, et al., et al., Investment Company Act
Release Nos. 29455 (Oct. 1, 2010) (notice) and 29490 (Oct. 26, 2010)
(order).
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11. Instead of adopting the same or similar Policies and
Procedures, applicants propose that each day that a Self-Indexing Fund,
the NYSE and the national securities exchange (as defined in section
2(a)(26) of the Act) (an ``Exchange'')) on which the Self-Indexing
Fund's Shares are primarily listed (``Listing Exchange'') are open for
business, including any day that a Self-Indexing Fund is required to be
open under section 22(e) of the Act (a ``Business Day''), each Self-
Indexing Fund will post on its publicly available Web site (``Web
site''),\9\ before commencement of trading of Shares on the Listing
Exchange, the identities and quantities of the portfolio securities,
assets, and other positions held by the Self-Indexing Fund (``Portfolio
Holdings'') that will form the basis for the Self-Indexing Fund's
calculation of its NAV at the end of the Business Day.\10\ Applicants
believe that requiring Self-Indexing Funds to maintain full portfolio
transparency will provide an effective alternative mechanism for
addressing any such potential conflicts of interest.
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\9\ The information provided on the Web site will be formatted
to be reader-friendly.
\10\ Under accounting procedures followed by each Self-Indexing
Fund, trades made on the prior Business Day (``T'') will be booked
and reflected in NAV on the current Business Day (``T+1'').
Accordingly, the Self-Indexing Funds will be able to disclose at the
beginning of each Business Day the portfolio that will form the
basis for the NAV calculation at the end of that Business Day.
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12. Applicants represent that each Self-Indexing Fund's Portfolio
Holdings will be as transparent as the portfolio holdings of existing
actively managed ETFs. Applicants observe that the framework set forth
in the Prior Self-Indexing Orders was established before the Commission
began issuing exemptive relief to allow the offering of actively-
managed ETFs.\11\ Unlike passively-managed ETFs, actively-managed ETFs
do not seek to replicate the performance of a specified index but
rather seek to achieve their investment objectives by using an
``active'' management strategy. Applicants contend that the structure
of actively managed ETFs presents potential conflicts of interest that
are the same as those presented by Self-Indexing Funds because the
portfolio managers of an actively managed ETF by definition have
advance knowledge of pending portfolio changes. However, rather than
requiring Policies and Procedures similar to those required under the
Prior Self-Indexing Orders, applicants believe that actively managed
ETFs address these potential conflicts of interest appropriately
through full portfolio transparency, as the conditions to their
relevant exemptive relief require.
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\11\ See, e.g., In the Matter of Huntington Asset Advisors,
Inc., et al., Investment Company Act Release Nos. 30032 (April 10,
2012) (notice) and 30061 (May 8, 2012) (order); In the Matter of
Russell Investment Management Co., et al., Investment Company Act
Release Nos. 29655 (April 20, 2011) (notice) and 29671 (May 16,
2011) (order); In the Matter of Eaton Vance Management, et al.,
Investment Company Act Release Nos. 29591 (March 11, 2011) (notice)
and 29620 (March 30, 2011) (order) and; In the Matter of iShares
Trust, et al., Investment Company Act Release Nos. 29543 (Dec. 27,
2010) (notice) and 29571 (Jan. 24, 2011) (order).
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13. In addition, applicants do not believe the potential for
conflicts of interest raised by the Adviser's use of the Underlying
Indexes in connection with the management of the Self-Indexing Funds
and the Affiliated Accounts will be substantially different from the
potential conflicts presented by an adviser managing two or more
registered funds. Both the Act and the Advisers Act contain various
protections to address conflicts of interest where an adviser is
managing two or more registered funds and these protections will also
help address these conflicts with respect to the Self-Indexing
Funds.\12\
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\12\ See, e.g., rule 17j-1 under the Act and section 204A under
the Advisers Act and rules 204A-1 and 206(4)-7 under the Advisers
Act.
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14. The Adviser and any Sub-Adviser has adopted or will adopt,
pursuant to Rule 206(4)-7 under the Advisers Act, written policies and
procedures designed to prevent violations of the Advisers Act and the
rules thereunder. These include policies and procedures designed to
minimize potential conflicts of interest among the Self-Indexing Funds
and the Affiliated Accounts, such as cross trading policies, as well as
those designed to ensure the equitable allocation of portfolio
transactions and brokerage commissions. In addition, the Adviser has
adopted policies and procedures as required under section 204A of the
Advisers Act, which are reasonably designed in light of the nature of
its business to prevent the misuse, in violation of the Advisers Act or
the Exchange Act or the rules thereunder, of material non-public
information by the Adviser or an associated person (``Inside
Information Policy''). Any Sub-Adviser will be required to adopt and
maintain a similar Inside Information Policy and Code of Ethics.\13\ In
accordance with the Code of
[[Page 72723]]
Ethics and Inside Information Policy of the Adviser and Sub-Advisers,
personnel of those entities with knowledge about the composition of the
Portfolio Deposit \14\ will be prohibited from disclosing such
information to any other person, except as authorized in the course of
their employment, until such information is made public. In addition,
no Affiliated Index Provider will provide any information relating to
changes to an Underlying Index's methodology for the inclusion or
exclusion of component securities, or methodology for the calculation
or the return of component securities, in advance of a public
announcement of such changes by such Affiliated Index Provider. The
Adviser will also include under Item 10.C. of Part 2 of its Form ADV a
discussion of its relationship to any Affiliated Index Provider and any
material conflicts of interest resulting therefrom, regardless of
whether the Affiliated Index Provider is a type of affiliate specified
in Item 10.
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\13\ The Adviser has also adopted or will adopt a code of ethics
pursuant to rule 17j-1 under the Act and rule 204A-1 under the
Advisers Act, which contains provisions reasonably necessary to
prevent Access Persons (as defined in rule 17j-1) from engaging in
any conduct prohibited in rule 17j-1 (``Code of Ethics'').
\14\ The instruments and cash that the purchaser is required to
deliver in exchange for the Creation Units it is purchasing is
referred to as the ``Portfolio Deposit.''
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15. To the extent the Self-Indexing Funds transact with an
Affiliated Person of the Adviser or Sub-Adviser, such transactions will
comply with the Act, the rules thereunder and the terms and conditions
of the requested order. In this regard, each Self-Indexing Fund's board
of directors or trustees (``Board'') will periodically review the Self-
Indexing Fund's use of an Affiliated Index Provider. Subject to the
approval of the Self-Indexing Fund's Board, the Adviser, Affiliated
Persons of the Adviser (``Adviser Affiliates'') and Affiliated Persons
of any Sub-Adviser (``Sub-Adviser Affiliates'') may be authorized to
provide custody, fund accounting and administration and transfer agency
services to the Self-Indexing Funds. Any services provided by the
Adviser, Adviser Affiliates, Sub-Adviser and Sub-Adviser Affiliates
will be performed in accordance with the provisions of the Act, the
rules under the Act and any relevant guidelines from the staff of the
Commission.
16. In light of the foregoing, applicants believe it is appropriate
to allow the Self-Indexing Funds to be fully transparent in lieu of
Policies and Procedures from the Prior Self-Indexing Orders discussed
above.
17. The Shares of each Self-Indexing Fund 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'').\15\ On any given Business Day, the names and quantities
of the instruments that constitute the Deposit Instruments and the
names and quantities of the instruments that constitute the Redemption
Instruments will be identical, unless the Self-Indexing Fund is
Rebalancing (as defined below). In addition, the Deposit Instruments
and the Redemption Instruments will each correspond pro rata to the
positions in the Self-Indexing Fund's portfolio (including cash
positions) \16\ 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; \17\ (c) TBA Transactions, short positions,
derivatives and other positions that cannot be transferred in kind \18\
will be excluded from the Deposit Instruments and the Redemption
Instruments; \19\(d) to the extent the Self-Indexing Fund determines,
on a given Business Day, to use a representative sampling of the Self-
Indexing Fund's portfolio; \20\ or (e) for temporary periods, to effect
changes in the Self-Indexing Fund's portfolio as a result of the
rebalancing of its Underlying Index (any such change, a
``Rebalancing''). If there is a difference between the NAV attributable
to a Creation Unit and the aggregate market value of the Deposit
Instruments or Redemption Instruments exchanged for the Creation Unit,
the party conveying instruments with the lower value will also pay to
the other an amount in cash equal to that difference (the ``Cash
Amount'').
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\15\ The Self-Indexing 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 Self-Indexing Funds will comply with
the conditions of rule 144A.
\16\ The portfolio used for this purpose will be the same
portfolio used to calculate the Self-Indexing Fund's NAV for the
Business Day.
\17\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
\18\ This includes instruments that can be transferred in kind
only with the consent of the original counterparty to the extent the
Self-Indexing Fund does not intend to seek such consents.
\19\ Because these instruments will be excluded from the Deposit
Instruments and the Redemption Instruments, their value will be
reflected in the determination of the Cash Amount (defined below).
\20\ A Self-Indexing Fund may only use sampling for this purpose
if the sample: (i) is designed to generate performance that is
highly correlated to the performance of the Self-Indexing Fund's
portfolio; (ii) consists entirely of instruments that are already
included in the Self-Indexing Fund's portfolio; and (iii) is the
same for all Authorized Participants (defined below) on a given
Business Day.
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18. 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; (b)
if, on a given Business Day, the Self-Indexing 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, the Self-Indexing Fund determines to require
the purchase or redemption, as applicable, to be made entirely in cash;
\21\ (d) if, on a given Business Day, the Self-Indexing 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 (defined below); or (ii) in the case of
International and Global Funds holding non-U.S. investments, such
instruments are not eligible for trading due to local trading
restrictions, local restrictions on securities transfers or other
similar circumstances; or (e) if the Self-Indexing 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
[[Page 72724]]
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 an International Fund or
Global Fund holding non-U.S. investments would be subject to
unfavorable income tax treatment if the holder receives redemption
proceeds in kind.\22\
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\21\ In determining whether a particular Self-Indexing Fund will
sell or redeem Creation Units entirely on a cash or in-kind basis
(whether for a given day or a given order), the key consideration
will be the benefit that would accrue to the Self-Indexing Fund and
its investors. For instance, in bond transactions, the Adviser may
be able to obtain better execution than Share purchasers because of
the Adviser's size, experience and potentially stronger
relationships in the fixed income markets. Purchases of Creation
Units either on an all cash basis or in-kind are expected to be
neutral to the Self-Indexing Funds from a tax perspective. In
contrast, cash redemptions typically require selling portfolio
holdings, which may result in adverse tax consequences for the
remaining Self-Indexing Fund shareholders that would not occur with
an in-kind redemption. As a result, tax consideration may warrant
in-kind redemptions.
\22\ 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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19. Creation Units will consist of specified large aggregations of
Shares, e.g., at least 25,000 Shares, and it is expected that the
initial price of a Creation Unit will range from $1 million to $15
million. All orders to purchase Creation Units must be placed with the
Distributor by or through an ``Authorized Participant'' which is either
(1) a ``Participating Party,'' i.e., a broker-dealer or other
participant in the Continuous Net Settlement System of the NSCC, a
clearing agency registered with the Commission, or (2) a participant in
The Depository Trust Company (``DTC'') (``DTC Participant''), which, in
either case, has signed a participant agreement with the Distributor.
The Distributor will be responsible for transmitting the orders to the
Self-Indexing Funds and will furnish to those placing such orders
confirmation that the orders have been accepted, but applicants state
that the Distributor may reject any order which is not submitted in
proper form.
20. Each Business Day, before the open of trading on the Listing
Exchange, each Self-Indexing Fund will cause to be published through
the NSCC the names and quantities of the instruments comprising the
Deposit Instruments and the Redemption Instruments, as well as the
estimated Cash Amount (if any), for that day. The list of Deposit
Instruments and Redemption Instruments will apply until a new list is
announced on the following Business Day, and there will be no intra-day
changes to the list except to correct errors in the published list.
Each Listing Exchange will disseminate, every 15 seconds during regular
Exchange trading hours, through the facilities of the Consolidated Tape
Association, an amount for each Self-Indexing Fund stated on a per
individual Share basis representing the sum of (i) the estimated Cash
Amount and (ii) the current value of the Portfolio Securities and other
assets of the Self-Indexing Fund.
21. Transaction expenses, including operational processing and
brokerage costs, will be incurred by a Self-Indexing Fund when
investors purchase or redeem Creation Units in-kind and such costs have
the potential to dilute the interests of the Self-Indexing Fund's
existing shareholders. Each Self-Indexing Fund may (but is not required
to) impose purchase or redemption transaction fees (``Transaction
Fees'') in connection with effecting such purchases or redemptions of
Creation Units. In all cases, such Transaction Fees will be limited in
accordance with requirements of the Commission applicable to management
investment companies offering redeemable securities. Since the
Transaction Fees are intended to defray the transaction expenses as
well as to prevent possible shareholder dilution resulting from the
purchase or redemption of Creation Units, the Transaction Fees will be
borne only by such purchasers or redeemers.\23\ The Distributor will be
responsible for delivering the Self-Indexing Fund's prospectus to those
persons acquiring Shares in Creation Units and for maintaining records
of both the orders placed with it and the confirmations of acceptance
furnished by it. In addition, the Distributor will maintain a record of
the instructions given to the applicable Fund to implement the delivery
of its Shares.
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\23\ Where a Self-Indexing Fund permits an in-kind purchaser (or
redeeming investor) to substitute (or receive) cash-in-lieu of
depositing one or more of the requisite Deposit Instruments (or
receiving one or more Portfolio Securities), the purchaser (or
redeeming investor) may be assessed a higher Transaction Fee to
cover the cost of purchasing such Deposit Instruments (or selling
such Portfolio Securities).
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22. Shares of each Self-Indexing Fund will be listed and traded
individually on an Exchange. It is expected that one or more member
firms of an Exchange will be designated to act as a market maker (each,
a ``Market Maker'') and maintain a market for Shares trading on the
Exchange. Prices of Shares trading on an Exchange will be based on the
current bid/offer market. Transactions involving the sale of Shares on
an Exchange will be subject to customary brokerage commissions and
charges.
23. Applicants expect that purchasers of Creation Units will
include institutional investors and arbitrageurs. Market Makers, acting
in their roles to provide a fair and orderly secondary market for the
Shares, may from time to time find it appropriate to purchase or redeem
Creation Units. Applicants expect that secondary market purchasers of
Shares will include both institutional and retail investors.\24\ The
price at which Shares trade will be disciplined by arbitrage
opportunities created by the option continually to purchase or redeem
Shares in Creation Units, which should help prevent Shares from trading
at a material discount or premium in relation to their NAV.
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\24\ 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 the DTC Participants.
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24. Shares will not be individually redeemable, and owners of
Shares may acquire those Shares from the Self-Indexing Fund, or tender
such Shares for redemption to the Self-Indexing Fund, in Creation Units
only. To redeem, an investor must accumulate enough Shares to
constitute a Creation Unit. Redemption requests must be placed through
an Authorized Participant. A redeeming investor may pay a Transaction
Fee, calculated in the same manner as a Transaction Fee payable in
connection with purchases of Creation Units.
25. Neither the Trust nor any Self-Indexing Fund will be advertised
or marketed or otherwise held out as a traditional open-end investment
company or a ``mutual fund.'' Instead, each such Self-Indexing Fund
will be marketed as an ``ETF.'' All marketing materials that describe
the features or method of obtaining, buying or selling Creation Units,
or Shares traded on an Exchange, or refer to redeemability, will
prominently disclose that Shares are not individually redeemable and
will disclose that the owners of Shares may acquire those Shares from
the Self-Indexing Fund or tender such Shares for redemption to the
Self-Indexing Fund in Creation Units only. The Self-Indexing Funds will
provide copies of their annual and semi-annual shareholder reports to
DTC Participants for distribution to beneficial owners of Shares.
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 section 12(d)(1)(J) of the Act for
an exemption from sections 12(d)(1)(A) and (B) of the Act, and under
sections 6(c) and 17(b) of the Act for an exemption from sections
17(a)(1) and 17(a)(2) of the Act.
2. Section 6(c) of the Act provides that the Commission may exempt
any person, security or transaction, or any class of persons,
securities or transactions, from any provision of the Act, if and to
the extent that such exemption is necessary or appropriate in the
public interest and consistent
[[Page 72725]]
with the protection of investors and the purposes fairly intended by
the policy and provisions of the Act. Section 17(b) of the Act
authorizes the Commission to exempt a proposed transaction from section
17(a) of the Act if evidence establishes that the terms of the
transaction, including the consideration to be paid or received, are
reasonable and fair and do not involve overreaching on the part of any
person concerned, and the proposed transaction is consistent with the
policies of the registered investment company and the general
provisions of the Act. Section 12(d)(1)(J) of the Act provides that the
Commission may exempt any person, security, or transaction, or any
class or classes of persons, securities or transactions, from any
provisions of section 12(d)(1) if the exemption is consistent with the
public interest and the protection of investors.
Sections 5(a)(1) and 2(a)(32) of the Act
3. Section 5(a)(1) of the Act defines an ``open-end company'' as a
management investment company that is offering for sale or has
outstanding any redeemable security of which it is the issuer. Section
2(a)(32) of the Act defines a redeemable security as any security,
other than short-term paper, under the terms of which the owner, upon
its presentation to the issuer, is entitled to receive approximately a
proportionate share of the issuer's current net assets, or the cash
equivalent. Because Shares will not be individually redeemable,
applicants request an order that would permit the Self-Indexing Funds
to register as open-end management investment companies and issue
Shares that are redeemable in Creation Units only. Applicants state
that investors may purchase Shares in Creation Units and redeem
Creation Units from each Self-Indexing Fund. Applicants further state
that because Creation Units may always be purchased and redeemed at
NAV, the price of Shares on the secondary market should not vary
materially from 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 an underwriter, except at a current public
offering price described in the prospectus. Rule 22c-1 under the Act
generally requires that a dealer selling, redeeming or repurchasing a
redeemable security do so only at a price based on its NAV. Applicants
state that secondary market trading in Shares will take place at
negotiated prices, not at a current offering price described in a Self-
Indexing Fund's prospectus, and not at a price based on NAV. Thus,
purchases and sales of Shares in the secondary market will not comply
with section 22(d) of the Act and rule 22c-1 under the Act. Applicants
request an exemption under section 6(c) from these provisions.
5. Applicants assert that the concerns sought to be addressed by
section 22(d) of the Act and rule 22c-1 under the Act with respect to
pricing are equally satisfied by the proposed method of pricing Shares.
Applicants maintain that while there is little legislative history
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to (a) prevent dilution caused by
certain riskless-trading schemes by principal underwriters and contract
dealers, (b) prevent unjust discrimination or preferential treatment
among buyers, and (c) ensure an orderly distribution of investment
company shares by eliminating price competition from dealers offering
shares at less than the published sales price and repurchasing shares
at more than the published redemption price.
6. Applicants believe that none of these purposes will be thwarted
by permitting Shares to trade in the secondary market at negotiated
prices. Applicants state that (a) secondary market trading in Shares
does not involve a Self-Indexing Fund as a party and will not result in
dilution of an investment in Shares, and (b) to the extent different
prices exist during a given trading day, or from day to day, such
variances occur as a result of third-party market forces, such as
supply and demand. Therefore, applicants assert that secondary market
transactions in Shares will not lead to discrimination or preferential
treatment among purchasers. Finally, applicants contend that the price
at which Shares trade will be disciplined by arbitrage opportunities
created by the option continually to purchase or redeem Shares in
Creation Units, which should help prevent Shares from trading at a
material discount or premium in relation to their NAV.
Section 22(e)
7. Section 22(e) of the Act generally prohibits a registered
investment company from suspending the right of redemption or
postponing the date of payment of redemption proceeds for more than
seven days after the tender of a security for redemption. Applicants
state that settlement of redemptions for International and Global Funds
will be contingent not only on the settlement cycle of the United
States market, but also on current delivery cycles in local markets for
underlying foreign Portfolio Securities held by an International Fund
or Global Fund. Applicants state that the delivery cycles currently
practicable for transferring Redemption Instruments to redeeming
investors, coupled with local market holiday schedules, may require a
delivery process of up to fourteen (14) calendar days. Accordingly,
with respect to International and Global Funds only, applicants hereby
request relief under section 6(c) from the requirement imposed by
section 22(e) to allow International and Global Funds to pay redemption
proceeds within fourteen calendar days following the tender of Creation
Units for redemption.\25\
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\25\ Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations applicants
may otherwise have under rule 15c6-1 under the Exchange Act
requiring that most securities transactions be settled within three
business days of the trade date.
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8. Applicants believe that Congress adopted section 22(e) to
prevent unreasonable, undisclosed or unforeseen delays in the actual
payment of redemption proceeds. Applicants propose that allowing
redemption payments for Creation Units of an International Fund or
Global Fund to be made within fourteen calendar days would not be
inconsistent with the spirit and intent of section 22(e). Applicants
suggest that a redemption payment occurring within fourteen calendar
days following a redemption request would adequately afford investor
protection.
9. Applicants are not seeking relief from section 22(e) with
respect to International and Global Funds that do not effect creations
and redemptions of Creation Units in-kind.
Section 12(d)(1)
10. Section 12(d)(1)(A) of the Act prohibits a registered
investment company from acquiring securities of an investment company
if such securities represent more than 3% of the total outstanding
voting stock of the acquired company, more than 5% of the total assets
of the acquiring company, or, together with the securities of any other
investment companies, more than 10% of the total assets of the
acquiring company. Section 12(d)(1)(B) of the Act prohibits a
registered open-end investment company, its principal underwriter and
any other broker-dealer from knowingly selling the investment company's
shares to another investment company if the sale will cause the
acquiring company to own more than 3% of the acquired company's voting
[[Page 72726]]
stock, or if the sale will cause more than 10% of the acquired
company's voting stock to be owned by investment companies generally.
11. Applicants request an exemption to permit registered management
investment companies and unit investment trusts (``UITs'') that are not
advised or sponsored by the Adviser, and not part of the same ``group
of investment companies,'' as defined in section 12(d)(1)(G)(ii) of the
Act as the Self-Indexing Funds (such management investment companies
are referred to as ``Investing Management Companies,'' such UITs are
referred to as ``Investing Trusts,'' and Investing Management Companies
and Investing Trusts are collectively referred to as ``Funds of
Funds''), to acquire Shares beyond the limits of section 12(d)(1)(A) of
the Act; and the Self-Indexing Funds, and any principal underwriter for
the Self-Indexing Funds, and/or any Broker registered under the
Exchange Act, to sell Shares to Funds of Funds beyond the limits of
section 12(d)(1)(B) of the Act.
12. Each Investing Management Company will be advised by an
investment adviser within the meaning of section 2(a)(20)(A) of the Act
(the ``Fund of Funds Adviser'') and may be sub-advised by investment
advisers within the meaning of section 2(a)(20)(B) of the Act (each a
``Fund of Funds Sub-Adviser''). Any investment adviser to an Investing
Management Company will be registered under the Advisers Act. Each
Investing Trust will be sponsored by a sponsor (``Sponsor'').
13. Applicants submit that the proposed conditions to the requested
relief adequately address the concerns underlying the limits in
sections 12(d)(1)(A) and (B), which include concerns about undue
influence by a fund of funds over underlying funds, excessive layering
of fees and overly complex fund structures. Applicants believe that the
requested exemption is consistent with the public interest and the
protection of investors.
14. Applicants believe that neither a Fund of Funds nor a Fund of
Funds Affiliate would be able to exert undue influence over a Self-
Indexing Fund.\26\ To limit the control that a Fund of Funds may have
over a Self-Indexing Fund, applicants propose a condition prohibiting a
Fund of Funds Adviser or Sponsor, any person controlling, controlled
by, or under common control with a Fund of Funds Adviser or Sponsor,
and any investment company and any issuer that would be an investment
company but for sections 3(c)(1) or 3(c)(7) of the Act that is advised
or sponsored by a Fund of Funds Adviser or Sponsor, or any person
controlling, controlled by, or under common control with a Fund of
Funds Adviser or Sponsor (``Fund of Funds Advisory Group'') from
controlling (individually or in the aggregate) a Self-Indexing Fund
within the meaning of section 2(a)(9) of the Act. The same prohibition
would apply to any Fund of Funds Sub-Adviser, any person controlling,
controlled by or under common control with the Fund of Funds Sub-
Adviser, and any investment company or issuer that would be an
investment company but for sections 3(c)(1) or 3(c)(7) of the Act (or
portion of such investment company or issuer) advised or sponsored by
the Fund of Funds Sub-Adviser or any person controlling, controlled by
or under common control with the Fund of Funds Sub-Adviser (``Fund of
Funds Sub-Advisory Group'').
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\26\ A ``Fund of Funds Affiliate'' is a Fund of Funds Adviser,
Fund of Funds Sub-Adviser, Sponsor, promoter, and principal
underwriter of a Fund of Funds, and any person controlling,
controlled by, or under common control with any of those entities. A
``Self-Indexing Fund Affiliate'' is an investment adviser, promoter,
or principal underwriter of a Self-Indexing Fund and any person
controlling, controlled by or under common control with any of these
entities.
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15. Applicants propose other conditions to limit the potential for
undue influence over the Self-Indexing Funds, including that no Fund of
Funds or Fund of Funds Affiliate (except to the extent it is acting in
its capacity as an investment adviser to a Self-Indexing Fund) will
cause a Self-Indexing 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, Fund of Funds
Adviser, Fund of Funds Sub-Adviser, employee or Sponsor of the Fund of
Funds, or a person of which any such officer, director, member of an
advisory board, Fund of Funds Adviser or Fund of Funds Sub-Adviser,
employee or Sponsor is an affiliated person (except that any person
whose relationship to the Self-Indexing Fund is covered by section
10(f) of the Act is not an Underwriting Affiliate).
16. Applicants do not believe that the proposed arrangement will
involve excessive layering of fees. The board of directors or trustees
of any Investing Management Company, including a majority of the
directors or trustees who are not ``interested persons'' within the
meaning of section 2(a)(19) of the Act (``disinterested directors or
trustees''), will 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 Self-Indexing Fund in which the Investing Management
Company may invest. In addition, under condition B.5., a Fund of Funds
Adviser, or a Fund of Funds' trustee or Sponsor, as applicable, will
waive fees otherwise payable to it by the Fund of Funds in an amount at
least equal to any compensation (including fees received pursuant to
any plan adopted by a Self-Indexing Fund under rule 12b-1 under the
Act) received from a Self-Indexing Fund by the Fund of Funds Adviser,
trustee or Sponsor or an affiliated person of the Fund of Funds
Adviser, trustee or Sponsor, other than any advisory fees paid to the
Fund of Funds Adviser, trustee or Sponsor or its affiliated person by a
Self-Indexing Fund, in connection with the investment by the Fund of
Funds in the Self-Indexing Fund. Applicants state that any sales
charges and/or service fees charged with respect to shares of a Fund of
Funds will not exceed the limits applicable to a fund of funds as set
forth in NASD Conduct Rule 2830.\27\
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\27\ Any references to NASD Conduct Rule 2830 include any
successor or replacement FINRA rule to NASD Conduct Rule 2830.
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17. Applicants submit that the proposed arrangement will not create
an overly complex fund structure. Applicants note that no Self-Indexing
Fund 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
Self-Indexing Fund to purchase shares of other investment companies for
short-term cash management purposes. To ensure a Fund of Funds is aware
of the terms and conditions of the requested order, the Fund of Funds
will enter into an agreement with the Self-Indexing Fund (``FOF
Participation Agreement''). The FOF Participation Agreement will
include an acknowledgement from the Fund of Funds that it may rely on
the order only to invest in the Self-Indexing Funds and not in any
other investment company.
18. Applicants also note that a Self-Indexing Fund may choose to
reject a direct purchase of Shares in Creation Units by a Fund of
Funds. To the extent that a Fund of Funds purchases Shares in the
secondary market, a Self-Indexing Fund would still retain its ability
to
[[Page 72727]]
reject any initial investment by a Fund of Funds in excess of the
limits of section 12(d)(1)(A) by declining to enter into a FOF
Participation Agreement with the Fund of Funds.
Sections 17(a)(1) and (2) of the Act
19. Sections 17(a)(1) and (2) of the Act generally prohibit an
affiliated person of a registered investment company, or an affiliated
person of such a person, from selling any security to or purchasing any
security from the company. Section 2(a)(3) of the Act defines
``affiliated person'' of another person to include (a) any person
directly or indirectly owning, controlling or holding with power to
vote 5% or more of the outstanding voting securities of the other
person, (b) any person 5% or more of whose outstanding voting
securities are directly or indirectly owned, controlled or held with
the power to vote by the other person, and (c) any person directly or
indirectly controlling, controlled by or under common control with the
other person. Section 2(a)(9) of the Act 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 a company's voting
securities. The Self-Indexing Funds may be deemed to be controlled by
the Adviser or an entity controlling, controlled by or under common
control with the Adviser and hence affiliated persons of each other. In
addition, the Self-Indexing Funds may be deemed to be under common
control with any other registered investment company (or series
thereof) advised by an Adviser or an entity controlling, controlled by
or under common control with an Adviser (an ``Affiliated Fund''). Any
investor, including Market Makers, owning 5% or holding in excess of
25% of the Trust or such Self-Indexing Funds, may be deemed affiliated
persons of the Trust or such Self-Indexing Funds. In addition, an
investor could own 5% or more, or in excess of 25% of the outstanding
shares of one or more Affiliated Funds making that investor a Second-
Tier Affiliate of the Self-Indexing Funds.
20. Applicants request an exemption from sections 17(a)(1) and
17(a)(2) of the Act pursuant to sections 6(c) and 17(b) of the Act to
permit persons that are Affiliated Persons of the Self-Indexing Funds,
or Second-Tier Affiliates of the Self-Indexing 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 Self-Indexing Funds;
(b) 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, to effectuate purchases and redemptions
``in-kind.''
21. 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 Self-Indexing Fund in
Creation Units. Both the deposit procedures for ``in-kind'' purchases
of Creation Units and the redemption procedures for ``in-kind''
redemptions of Creation Units will be effected in exactly the same
manner for all purchases and redemptions, regardless of size or number.
There will be no discrimination between purchasers or redeemers.
Deposit Instruments and Redemption Instruments for each Self-Indexing
Fund will be valued in the identical manner as those Portfolio
Securities currently held by such Self-Indexing Fund and the valuation
of the Deposit Instruments and Redemption Instruments will be made in
an identical manner 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, but
rather assert that such procedures will be implemented consistently
with each Self-Indexing Fund's objectives and with the general purposes
of the Act. Applicants believe that ``in-kind'' purchases and
redemptions will be made on terms reasonable to applicants and any
Affiliated Persons because they will be valued pursuant to verifiable
objective standards. The method of valuing Portfolio Securities held by
a Self-Indexing Fund is identical to that used for calculating ``in-
kind'' purchase or redemption values and therefore creates no
opportunity for Affiliated Persons or Second-Tier Affiliates of
applicants to effect a transaction detrimental to the other holders of
Shares of that Self-Indexing Fund. Similarly, applicants submit that,
by using the same standards for valuing Portfolio Securities held by a
Self-Indexing Fund as are used for calculating ``in-kind'' redemptions
or purchases, the Self-Indexing Fund will ensure that its NAV will not
be adversely affected by such securities transactions. Applicants also
note that the ability to take deposits and make redemptions ``in-kind''
will help each Self-Indexing Fund to track closely its Underlying Index
and therefore aid in achieving the Self-Indexing Fund's objectives.
22. Applicants also seek relief under sections 6(c) and 17(b) from
section 17(a) to permit a Self-Indexing Fund that is an Affiliated
Person, or a Second-Tier Affiliate, of a Fund of Funds to sell its
Shares to and redeem its Shares from a Fund of Funds, and to engage in
any accompanying in-kind transactions with the Fund of Funds.\28\
Applicants state that the terms of the transactions are fair and
reasonable and do not involve overreaching. Applicants note that any
consideration paid by a Fund of Funds for the purchase or redemption of
Shares directly from a Self-Indexing Fund will be based on the NAV of
the Self-Indexing Fund.\29\ Applicants believe that any proposed
transactions directly between the Self-Indexing Funds and Funds of
Funds will be consistent with the policies of each Fund of Funds. The
purchase of Creation Units by a Fund of Funds directly from a Self-
Indexing Fund will be accomplished in accordance with the investment
restrictions of any such Fund of Funds and will be consistent with the
investment policies set forth in the Fund of Funds' registration
statement. Applicants also state that the proposed transactions are
consistent with the general purposes of the Act and are appropriate in
the public interest.
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\28\ Although applicants believe that most Funds of Funds will
purchase Shares in the secondary market and will not purchase
Creation Units directly from a Self-Indexing Fund, a Fund of Funds
might seek to transact in Creation Units directly with a Self-
Indexing Fund that is an affiliated person of a Fund of Funds. To
the extent that purchases and sales of Shares occur in the secondary
market and not through principal transactions directly between a
Fund of Funds and a Self-Indexing 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 Self-Indexing Fund to
a Fund of Funds and redemptions of those Shares. Applicants are not
seeking relief from section 17(a) for, and the requested relief will
not apply to, transactions where a Self-Indexing Fund could be
deemed an affiliated person, or an affiliated person of an
affiliated person of a Fund of Funds because an Adviser or an entity
controlling, controlled by or under common control with an Adviser
provides investment advisory services to that Fund of Funds.
\29\ Applicants acknowledge that the receipt of compensation by
(a) an affiliated person of a Fund of Funds, or an affiliated person
of such person, for the purchase by the Fund of Funds of Shares of a
Self-Indexing Fund or (b) an affiliated person of a Self-Indexing
Fund, or an affiliated person of such person, for the sale by the
Self-Indexing Fund of its Shares to a Fund of Funds, 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. The requested relief to permit ETF operations will expire on the
effective
[[Page 72728]]
date of any Commission rule under the Act that provides relief
permitting the operation of index-based ETFs.
2. As long as a Self-Indexing Fund operates in reliance on the
requested order, the Shares of such Self-Indexing Fund will be listed
on an Exchange.
3. Neither a Trust nor any Self-Indexing 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 Shares
are not individually redeemable and that owners of Shares may acquire
those Shares from the Self-Indexing Fund and tender those Shares for
redemption to a Self-Indexing Fund in Creation Units only.
4. The Web site, which is and will be publicly accessible at no
charge, will contain, on a per Share basis for each Self-Indexing Fund,
the prior Business Day's NAV and the market closing price or the
midpoint 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.
5. Each Self-Indexing Fund will post on the Web site on each
Business Day, before commencement of trading of Shares on the Exchange,
the identities and quantities of the Self-Indexing Fund's Portfolio
Holdings.
6. No Adviser or any Sub-Adviser, directly or indirectly, will
cause any Authorized Participant (or any investor on whose behalf an
Authorized Participant may transact with the Self-Indexing Fund) to
acquire any Deposit Instrument for a Self-Indexing Fund through a
transaction in which the Self-Indexing Fund could not engage directly.
B. Section 12(d)(1) Relief
1. The members of a Fund of Funds' Advisory Group will not control
(individually or in the aggregate) a Self-Indexing Fund within the
meaning of section 2(a)(9) of the Act. The members of a Fund of Funds'
Sub-Advisory Group will not control (individually or in the aggregate)
a Self-Indexing 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
Self-Indexing Fund, the Fund of Funds' Advisory Group or the Fund of
Funds' Sub-Advisory Group, each in the aggregate, becomes a holder of
more than 25 percent of the outstanding voting securities of a Self-
Indexing Fund, it will vote its Shares of the Self-Indexing Fund in the
same proportion as the vote of all other holders of the Self-Indexing
Fund's Shares. This condition does not apply to the Fund of Funds' Sub-
Advisory Group with respect to a Self-Indexing Fund for which the Fund
of Funds' Sub-Adviser or a person controlling, controlled by or under
common control with the Fund of Funds' Sub-Adviser acts as the
investment adviser within the meaning of section 2(a)(20)(A) of the
Act.
2. No Fund of Funds or Fund of Funds Affiliate will cause any
existing or potential investment by the Fund of Funds in a Self-
Indexing Fund to influence the terms of any services or transactions
between the Fund of Funds or Fund of Funds Affiliate and the Self-
Indexing Fund or a Self-Indexing Fund Affiliate.
3. The board of directors or trustees of an Investing Management
Company, including a majority of the disinterested directors or
trustees, will adopt procedures reasonably designed to ensure that the
Fund of Funds Adviser and Fund of Funds Sub-Adviser are conducting the
investment program of the Investing Management Company without taking
into account any consideration received by the Investing Management
Company or a Fund of Funds Affiliate from a Self-Indexing Fund or Self-
Indexing Fund Affiliate in connection with any services or
transactions.
4. Once an investment by a Fund of Funds in the securities of a
Self-Indexing Fund exceeds the limits in section 12(d)(1)(A)(i) of the
Act, the Board of the Self-Indexing Fund, including a majority of the
directors or trustees who are not ``interested persons'' within the
meaning of section 2(a)(19) of the Act (``non-interested Board
members''), will determine that any consideration paid by the Self-
Indexing Fund to the Fund of Funds or a Fund of Funds 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 Self-Indexing Fund; (ii) is within the range
of consideration that the Self-Indexing 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 Self-Indexing Fund and its
investment adviser(s), or any person controlling, controlled by or
under common control with such investment adviser(s).
5. The Fund of Funds Adviser, or trustee or Sponsor of an Investing
Trust, as applicable, will waive fees otherwise payable to it by the
Fund of Funds in an amount at least equal to any compensation
(including fees received pursuant to any plan adopted by a Self-
Indexing Fund under rule 12b-l under the Act) received from a Self-
Indexing Fund by the Fund of Funds Adviser, or trustee or Sponsor of
the Investing Trust, or an affiliated person of the Fund of Funds
Adviser, or trustee or Sponsor of the Investing Trust, other than any
advisory fees paid to the Fund of Funds Adviser, trustee or Sponsor of
an Investing Trust, or its affiliated person by the Self-Indexing Fund,
in connection with the investment by the Fund of Funds in the Self-
Indexing Fund. Any Fund of Funds Sub-Adviser will waive fees otherwise
payable to the Fund of Funds Sub-Adviser, directly or indirectly, by
the Investing Management Company in an amount at least equal to any
compensation received from a Self-Indexing Fund by the Fund of Funds
Sub-Adviser, or an affiliated person of the Fund of Funds Sub-Adviser,
other than any advisory fees paid to the Fund of Funds Sub-Adviser or
its affiliated person by the Self-Indexing Fund, in connection with the
investment by the Investing Management Company in the Self-Indexing
Fund made at the direction of the Fund of Funds Sub-Adviser. In the
event that the Fund of Funds Sub-Adviser waives fees, the benefit of
the waiver will be passed through to the Investing Management Company.
6. No Fund of Funds or Fund of Funds Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Self-
Indexing Fund) will cause a Self-Indexing Fund to purchase a security
in any Affiliated Underwriting.
7. The Board of a Self-Indexing Fund, including a majority of the
non-interested Board members, will adopt procedures reasonably designed
to monitor any purchases of securities by the Self-Indexing Fund in an
Affiliated Underwriting, once an investment by a Fund of Funds in the
securities of the Self-Indexing 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 Fund of
Funds in the Self-Indexing Fund. The Board will consider, among other
things: (i) whether the purchases were consistent with the investment
objectives and policies of the Self-Indexing Fund; (ii) how the
performance of securities purchased in an Affiliated Underwriting
[[Page 72729]]
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 Self-Indexing
Fund in Affiliated Underwritings and the amount purchased directly from
an Underwriting Affiliate have changed significantly from prior years.
The Board will take any appropriate actions based on its review,
including, if appropriate, the institution of procedures designed to
ensure that purchases of securities in Affiliated Underwritings are in
the best interest of shareholders of the Self-Indexing Fund.
8. Each Self-Indexing 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 a Fund of Funds in the
securities of the Self-Indexing 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 Self-Indexing Fund in excess of the limit
in section 12(d)(1)(A), a Fund of Funds and the applicable Trust will
execute a FOF Participation Agreement stating without limitation 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 Self-Indexing Fund in excess of the limit in section
12(d)(1)(A)(i), a Fund of Funds will notify the Self-Indexing Fund of
the investment. At such time, the Fund of Funds will also transmit to
the Self-Indexing Fund a list of the names of each Fund of Funds
Affiliate and Underwriting Affiliate. The Fund of Funds will notify the
Self-Indexing Fund of any changes to the list of the names as soon as
reasonably practicable after a change occurs. The Self-Indexing Fund
and the Fund of Funds 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 disinterested 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 Self-Indexing Fund in which the Investing Management Company may
invest. These findings and their basis will be fully recorded in the
minute books of the appropriate Investing Management Company.
11. Any sales charges and/or service fees charged with respect to
shares of a Fund of Funds will not exceed the limits applicable to a
fund of funds as set forth in NASD Conduct Rule 2830.
12. No Self-Indexing Fund will acquire securities of an 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 the Self-Indexing Fund acquires securities of
another investment company pursuant to exemptive relief from the
Commission permitting the Self-Indexing Fund to acquire securities of
one or more 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. 2013-28849 Filed 12-2-13; 8:45 am]
BILLING CODE 8011-01-P
