ETF Securities Advisors LLC, et al.; Notice of Application, 71469-71477 [2014-28313]
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Federal Register / Vol. 79, No. 231 / Tuesday, December 2, 2014 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
31346; 812–14292]
ETF Securities Advisors LLC, et al.;
Notice of Application
November 24, 2014.
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.
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AGENCY:
Summary of Application: Applicants
request an order that would permit (a)
series of certain open-end management
investment companies to issue shares
(‘‘Shares’’) redeemable in large
aggregations only (‘‘Creation Units’’); (b)
secondary market transactions in Shares
to occur at negotiated market prices
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: ETF Securities Advisors
LLC (‘‘ETF Securities’’), ETFS Trust
(‘‘Trust’’) and ALPS Distributors, Inc.
(‘‘ALPS’’).
Filing Dates: The application was
filed on March 18, 2014, and amended
on July 30, 2014 and November 4, 2014.
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 19, 2014, and
should be accompanied by proof of
service on applicants, in the form of an
affidavit, or for lawyers, a certificate of
service. Pursuant to rule 0–5 under the
Act, hearing requests should state the
nature of the writer’s interest, any facts
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bearing upon the desirability of a
hearing on the matter, 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: Secretary, Securities and
Exchange Commission, 100 F Street NE.,
Washington, DC 20549–1090;
Applicants: ETF Securities and the
Trust: 48 Wall Street, New York, NY
10005; ALPS, P.O. Box 328, Denver, CO
80201.
FOR FURTHER INFORMATION CONTACT:
Aidan H. O’Connor, Senior Counsel, at
(202) 551–6808, or David P. Bartels,
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
Web site by searching for the file
number, or for an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
Applicants’ Representations
1. The Trust is a Delaware statutory
trust and will register under the Act as
an open-end management investment
company with multiple series. Each
series will operate as an exchange
traded fund (‘‘ETF’’).
2. ETF Securities will be the
investment adviser to the initial series
of the Trust (‘‘Initial Funds’’). Each
Adviser (as defined below) will be
registered as an investment adviser
under the Investment Advisers Act of
1940 (‘‘Advisers Act’’). The Adviser may
enter into sub-advisory agreements with
one or more investment advisers to act
as sub-advisers to particular Funds
(each, a ‘‘Sub-Adviser’’). Any SubAdviser will either be registered under
the Advisers Act or will not be required
to register thereunder.
3. The Trust will enter into a
distribution agreement with one or more
distributors. Each distributor for a Fund
will be a broker-dealer (‘‘Broker’’)
registered under the Securities
Exchange Act of 1934 (‘‘Exchange Act’’)
and will act as distributor and principal
underwriter (‘‘Distributor’’) for one or
more of the Funds. No Distributor will
be affiliated with any national securities
exchange, as defined in Section 2(a)(26)
of the Act (‘‘Exchange’’). The Distributor
for each Fund will comply with the
terms and conditions of the requested
order. ALPS, a Colorado corporation
and broker-dealer registered under the
Exchange Act, will act as the initial
Distributor of the Funds.
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4. Applicants request that the order
apply to the Initial Funds and any
additional series of the Trust, and any
other open-end management investment
company or series thereof, that may be
created in the future (‘‘Future Funds’’
and together with the Initial Funds,
‘‘Funds’’), each of which will operate as
an ETF and will track a specified index
comprised of domestic or foreign equity
and/or fixed income securities (each, an
‘‘Underlying Index’’). Any Future Fund
will (a) be advised by ETF Securities or
an entity controlling, controlled by, or
under common control with ETF
Securities (each, an ‘‘Adviser’’) and (b)
comply with the terms and conditions
of the application.1
5. Each Fund will hold certain
securities, currencies, other assets, and
other investment positions (‘‘Portfolio
Holdings’’) selected to correspond
generally to the performance of its
Underlying Index. The Underlying
Indexes will be comprised solely of
equity and/or fixed income securities
issued by one or more of the following
categories of issuers: (i) Domestic
issuers and (ii) non-domestic issuers
meeting the requirements for trading in
U.S. markets. Other Funds will be based
on Underlying Indexes that will be
comprised solely of foreign and
domestic, or solely foreign, equity and/
or fixed income securities (‘‘Foreign
Funds’’).
6. Applicants represent that each
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
Foreign Funds, Component Securities
and Depositary Receipts 3 representing
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 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 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
Fund will not invest in any Depositary Receipts that
the Adviser or any Sub-Adviser deems to be illiquid
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Component Securities. Each Fund may
also invest up to 20% of its assets in
certain index futures, options, options
on index futures, swap contracts or
other derivatives, as related to its
respective Underlying Index and its
Component Securities, cash and cash
equivalents, other investment
companies, as well as in securities and
other instruments not included in its
Underlying Index but which the Adviser
believes will help the Fund track its
Underlying Index. A Fund may also
engage in short sales in accordance with
its investment objective.
7. Each Trust may issue 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 Long/Short Fund
will establish (i) exposures equal to
approximately 100% of the long
positions specified by the Long/Short
Index 4 and (ii) exposures equal to
approximately 100% of the short
positions specified by the Long/Short
Index. Each 130/30 Fund will include
strategies that: (i) Establish long
positions in securities so that total long
exposure represents approximately
130% of a Fund’s net assets; and (ii)
simultaneously establish short positions
in other securities so that total short
exposure represents approximately 30%
of such Fund’s net assets. Each Business
Day, for each Long/Short Fund and 130/
30 Fund, the Adviser will provide full
portfolio transparency on the Fund’s
publicly available Web site (‘‘Web site’’)
by making available the Fund’s Portfolio
Holdings (defined below) before the
commencement of trading of Shares on
the Listing Exchange (defined below).5
The information provided on the Web
site will be formatted to be readerfriendly.
8. A Fund will utilize either a
replication or representative sampling
strategy to track its Underlying Index. A
Fund using a replication strategy will
invest in the Component Securities of
its Underlying Index in the same
approximate proportions as in such
Underlying Index. A Fund using a
or for which pricing information is not readily
available. No affiliated person of a Fund, the
Adviser or any Sub-Adviser will serve as the
depositary bank for any Depositary Receipts held by
a Fund.
4 Underlying Indexes that include both long and
short positions in securities are referred to as
‘‘Long/Short Indexes.’’
5 Under accounting procedures followed by each
Fund, trades made on the prior Business Day (‘‘T’’)
will be booked and reflected in NAV on the current
Business Day (T+1). Accordingly, the Funds will be
able to disclose at the beginning of the Business Day
the portfolio that will form the basis for the NAV
calculation at the end of the Business Day.
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representative sampling strategy will
hold some, but not necessarily all of the
Component Securities of its Underlying
Index. Applicants state that a 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 Fund will
have an annual tracking error relative to
the performance of its Underlying Index
of less than 5%.
9. Each Fund will be entitled to use
its Underlying Index pursuant to either
a licensing agreement with the entity
that compiles, creates, sponsors or
maintains the Underlying Index (each,
an ‘‘Index Provider’’) or a sub-licensing
arrangement with the Adviser, which
will have a licensing agreement with
such Index Provider.6 A ‘‘Self-Indexing
Fund’’ is a Fund for which 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 the Trust or
a Fund, of the Adviser, of any SubAdviser to or promoter of a Fund, or of
the Distributor (each, an ‘‘Affiliated
Index Provider’’) will serve as the Index
Provider. In the case of Self-Indexing
Funds, an Affiliated Index Provider will
create a proprietary, rules-based
methodology to create Underlying
Indexes (each an ‘‘Affiliated Index’’).7
Except with respect to the Self-Indexing
Funds, no Index Provider is or will be
an Affiliated Person, or a Second-Tier
Affiliate, of a Trust or a Fund, of the
Adviser, of any Sub-Adviser to or
6 The licenses for the Self-Indexing Funds will
specifically state that the Affiliated Index Provider
(as defined below), or in case of a sub-licensing
agreement, the Adviser, must provide the use of the
Affiliated Indexes (as defined below) and related
intellectual property at no cost to the Trust and the
Self-Indexing Funds.
7 The Affiliated Indexes may be made available to
registered investment companies, as well as
separately managed accounts of institutional
investors and privately offered funds that are not
deemed to be ‘‘investment companies’’ in reliance
on section 3(c)(1) or 3(c)(7) of the Act for which the
Adviser acts as adviser or subadviser (‘‘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 subadviser
(‘‘Unaffiliated Accounts’’). The Affiliated Accounts
and the Unaffiliated Accounts, like the Funds,
would seek to track the performance of one or more
Underlying Index(es) by investing in the
constituents of such Underlying 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 Fund.
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promoter of a Fund, or of the
Distributor.
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.
11. Applicants propose that each SelfIndexing Fund will post on its Web site,
on each day the Fund is open, including
any day when it satisfies redemption
requests as required by Section 22(e) of
the Act (a ‘‘Business Day’’), before
commencement of trading of Shares on
the Listing Exchange, the identities and
quantities of the Portfolio Holdings that
will form the basis for the Fund’s
calculation of its NAV at the end of the
Business Day. Applicants believe that
requiring Self-Indexing Funds to
maintain full portfolio transparency will
also provide an additional mechanism
for addressing any such potential
conflicts of interest.
12. 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 SelfIndexing Funds.8
13. Each Adviser and any SubAdviser 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, ETF
8 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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Securities will adopt 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 ETS Securities or an
associated person (‘‘Inside Information
Policy’’). Any other Adviser or SubAdviser will be required to adopt and
maintain a similar Inside Information
Policy. In accordance with the Code of
Ethics 9 and Inside Information Policy of
the Adviser and any Sub-Adviser,
personnel of those entities with
knowledge about the composition of the
Portfolio Deposit 10 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, an Index Provider will not
provide any information relating to
changes to an Underlying Index’s
methodology for the inclusion of
component securities, the inclusion or
exclusion of specific component
securities, or methodology for the
calculation or the return of component
securities, in advance of a public
announcement of such changes by the
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.
14. 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
9 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’’).
10 The instruments and cash that the purchaser is
required to deliver in exchange for the Creation
Units it is purchasing are referred to as the
‘‘Portfolio Deposit.’’
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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.
Applications for prior orders granted to
Self-Indexing Funds have received relief
to operate such funds on the basis
discussed above.11
15. The Shares of each 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’’).12 On any given Business
Day, the names and quantities of the
instruments that constitute the Deposit
Instruments and the names and
quantities of the instruments that
constitute the Redemption Instruments
will be identical, unless the Fund is
Rebalancing (as defined below). In
addition, the Deposit Instruments and
the Redemption Instruments will each
correspond pro rata to the positions in
the Fund’s portfolio (including cash
positions) 13 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
11 See, e.g., Guggennheim Funds Investment
Advisors, LLC, Investment Company Act Release
Nos. 30560 (June 14, 2013) (notice) and 30598 (July
10, 2013) (order); Sigman Investment Advisors,
LLC, Investment company Act Release Nos. 30559
(June 14, 2013) (notice) and 30597 (July 10, 2013)
(order); Transparent Value Trust, et al., Investment
Company Act Release Nos. 30558 (June 14, 2013)
(notice) and 30596 (July 10, 2013) (order); and
Horizons ETF Trust, et al., Investment Company
Act Release Nos. 30803 (November 21, 2013)
(notice) and 30833 (December 17, 2013) (order).
12 The Funds must comply with the federal
securities laws in accepting Deposit Instruments
and satisfying redemptions with Redemption
Instruments, including that the Deposit Instruments
and Redemption Instruments are sold in
transactions that would be exempt from registration
under the Securities Act of 1933 (‘‘Securities Act’’).
In accepting Deposit Instruments and satisfying
redemptions with Redemption Instruments that are
restricted securities eligible for resale pursuant to
rule 144A under the Securities Act, the Funds will
comply with the conditions of rule 144A.
13 The portfolio used for this purpose will be the
same portfolio used to calculate the Fund’s NAV for
the Business Day.
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are not tradeable round lots; 14 (c) TBA
Transactions, short positions,
derivatives and other positions that
cannot be transferred in kind 15 will be
excluded from the Deposit Instruments
and the Redemption Instruments; 16 (d)
to the extent the Fund determines, on a
given Business Day, to use a
representative sampling of the Fund’s
portfolio; 17 or (e) for temporary periods,
to effect changes in the Fund’s portfolio
as a result of the rebalancing of its
Underlying Index (any such change, a
‘‘Rebalancing’’). If there is a difference
between the 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’’).
16. 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 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 Fund determines to
require the purchase or redemption, as
applicable, to be made entirely in
cash;18 (d) if, on a given Business Day,
14 A tradeable round lot for a security will be the
standard unit of trading in that particular type of
security in its primary market.
15 This includes instruments that can be
transferred in kind only with the consent of the
original counterparty to the extent the Fund does
not intend to seek such consents.
16 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 (as defined
below).
17 A 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 Fund’s portfolio; (ii) consists
entirely of instruments that are already included in
the Fund’s portfolio; and (iii) is the same for all
Authorized Participants on a given Business Day.
18 In determining whether a particular Fund will
sell or redeem Creation Units entirely on a cash or
in-kind basis (whether for a given day or a given
order), the key consideration will be the benefit that
would accrue to the Fund and its investors. For
instance, in bond transactions, the Adviser may be
able to obtain better execution than Share
purchasers because of the Adviser’s size, experience
and potentially stronger relationships in the fixed
income markets. Purchases of Creation Units either
on an all cash basis or in-kind are expected to be
neutral to the Funds from a tax perspective. In
contrast, cash redemptions typically require selling
portfolio holdings, which may result in adverse tax
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the 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 Foreign 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 Fund permits
an Authorized Participant to deposit or
receive (as applicable) cash in lieu of
some or all of the Deposit Instruments
or Redemption Instruments,
respectively, solely because: (i) Such
instruments are, in the case of the
purchase of a Creation Unit, not
available in sufficient quantity; (ii) such
instruments are not eligible for trading
by an Authorized Participant or the
investor on whose behalf the
Authorized Participant is acting; or (iii)
a holder of Shares of a Foreign Fund
holding non-U.S. investments would be
subject to unfavorable income tax
treatment if the holder receives
redemption proceeds in kind.19
17. Creation Units will consist of
specified large aggregations of Shares
(e.g., 25,000 Shares) as determined by
the Adviser, and it is expected that the
initial price of a Creation Unit will
range from $1 million to $10 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 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 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.
18. Each Business Day, before the
open of trading on the Exchange on
which Shares are primarily listed
(‘‘Listing Exchange’’), each Fund will
consequences for the remaining Fund shareholders
that would not occur with an in-kind redemption.
As a result, tax consideration may warrant in-kind
redemptions.
19 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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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 Fund
stated on a per individual Share basis
representing the sum of (i) the estimated
Cash Amount and (ii) the current value
of the Deposit Instruments.
19. Transaction expenses, including
operational processing and brokerage
costs, will be incurred by a Fund when
investors purchase or redeem Creation
Units in-kind and such costs have the
potential to dilute the interests of the
Fund’s existing shareholders. Each
Fund will 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.20 The
Distributor will be responsible for
delivering the 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.
20. Shares of each Fund will be listed
and traded individually on an
Exchange. It is expected that one or
more member firms of an Exchange will
be designated to act as a market maker
(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.
21. 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.21 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.
22. Shares will not be individually
redeemable, and owners of Shares may
acquire those Shares from the Fund, or
tender such Shares for redemption to
the Fund, in Creation Units only. To
redeem, an investor must accumulate
enough Shares to constitute a Creation
Unit. Redemption requests must be
placed 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.
23. Neither the Trust nor any Fund
will be advertised or marketed or
otherwise held out as a traditional openend investment company or a ‘‘mutual
fund.’’ Instead, each such 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 Fund or
tender such Shares for redemption to
the Fund in Creation Units only. The
Funds will provide copies of their
annual and semi-annual shareholder
reports to DTC Participants for
distribution to beneficial owners of
Shares.
20 Where a Fund permits an in-kind purchaser to
substitute cash-in-lieu of depositing one or more of
the requisite Deposit Instruments, the purchaser
may be assessed a higher Transaction Fee to cover
the cost of purchasing such Deposit Instruments.
21 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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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
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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
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.
rljohnson on DSK3VPTVN1PROD 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 Funds to register as open-end
management investment companies and
issue Shares that are redeemable in
Creation Units only. Applicants state
that investors may purchase Shares in
Creation Units and redeem Creation
Units from each Fund. Applicants
further state that because Creation Units
may always be purchased and redeemed
at NAV, the price of Shares on the
secondary market should not vary
materially from NAV.
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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 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 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
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71473
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
Foreign 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 securities held by
a Foreign 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 Foreign
Funds only, applicants hereby request
relief under section 6(c) from the
requirement imposed by section 22(e) to
allow Foreign Funds to pay redemption
proceeds within fourteen calendar days
following the tender of Creation Units
for redemption.22
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 a Foreign
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
Foreign 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
22 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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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
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
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
Funds, and any principal underwriter
for the 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
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15:30 Dec 01, 2014
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influence over a Fund.23 To limit the
control that a Fund of Funds may have
over a 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 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 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 Fund) will cause
a Fund to purchase a security in an
offering of securities during the
existence of an underwriting or selling
syndicate of which a principal
underwriter is an Underwriting Affiliate
(‘‘Affiliated Underwriting’’). An
‘‘Underwriting Affiliate’’ is a principal
underwriter in any underwriting or
selling syndicate that is an officer,
director, member of an advisory board,
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
23 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 ‘‘Fund Affiliate’’ is an investment adviser,
promoter, or principal underwriter of a Fund and
any person controlling, controlled by or under
common control with any of these entities.
PO 00000
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Fmt 4703
Sfmt 4703
relationship to the 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 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 Fund under rule 12b–1
under the Act) received from a 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 Fund, in connection with
the investment by the Fund of Funds in
the 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 2830.24
17. Applicants submit that the
proposed arrangement will not create an
overly complex fund structure.
Applicants note that no 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
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 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
24 Any references to NASD Conduct Rule 2830
include any successor or replacement FINRA rule
to NASD Conduct Rule 2830.
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rljohnson on DSK3VPTVN1PROD with NOTICES
to invest in the Funds and not in any
other investment company.
18. Applicants also note that a 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 Fund would still
retain its ability to 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 Funds
may be deemed to be controlled by the
Adviser or an entity controlling,
controlled by or under common control
with the Adviser and hence affiliated
persons of each other. In addition, the
Funds may be deemed to be under
common control with any other
registered investment company (or
series thereof) advised by 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 Funds, may be deemed affiliated
persons of the Trust or such 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 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 Funds, or
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15:30 Dec 01, 2014
Jkt 235001
Second-Tier Affiliates of the Funds,
solely by virtue of one or more of the
following: (a) Holding 5% or more, or in
excess of 25%, of the outstanding
Shares of one or more Funds; (b) 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 ‘‘inkind’’ purchases or ‘‘in-kind’’
redemptions of Shares of a 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 Fund
will be valued in the identical manner
as those Portfolio Holdings currently
held by such 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 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 Holdings held by a 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 Fund.
Similarly, applicants submit that, by
using the same standards for valuing
Portfolio Holdings held by a Fund as are
used for calculating ‘‘in-kind’’
redemptions or purchases, the 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
Fund to track closely its Underlying
Index and therefore aid in achieving the
Fund’s objectives.
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71475
22. Applicants also seek relief under
sections 6(c) and 17(b) from section
17(a) to permit a Fund that is an
affiliated person, or an affiliated person
of an affiliated person, of a Fund of
Funds to sell its Shares to and redeem
its Shares from a Fund of Funds, and to
engage in the accompanying in-kind
transactions with the Fund of Funds.25
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
Fund will be based on the NAV of the
Fund.26 Applicants believe that any
proposed transactions directly between
the 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 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
date of any Commission rule under the
25 Although applicants believe that most Funds of
Funds will purchase Shares in the secondary
market and will not purchase Creation Units
directly from a Fund, a Fund of Funds might seek
to transact in Creation Units directly with a 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 Fund, relief from Section 17(a) would not be
necessary. However, the requested relief would
apply to direct sales of Shares in Creation Units by
a Fund to 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 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.
26 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
Fund or (b) an affiliated person of a Fund, or an
affiliated person of such person, for the sale by the
Fund of its Shares to 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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Act that provides relief permitting the
operation of index-based ETFs.
2. As long as a Fund operates in
reliance on the requested order, the
Shares of such Fund will be listed on an
Exchange.
3. Neither the Trust nor any Fund will
be advertised or marketed as an openend investment company or a mutual
fund. Any advertising material that
describes the purchase or sale of
Creation Units or refers to redeemability
will prominently disclose that Shares
are not individually redeemable and
that owners of Shares may acquire those
Shares from the Fund and tender those
Shares for redemption to a Fund in
Creation Units only.
4. The Web site, which is and will be
publicly accessible at no charge, will
contain, on a per Share basis for each
Fund, the prior Business Day’s NAV and
the market closing price or the 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, Long/
Short Fund and 130/30 Fund will post
on the Web site on each Business Day,
before commencement of trading of
Shares on the Exchange, the Fund’s
Portfolio Holdings.
6. No Adviser or any Sub-Adviser to
a Self-Indexing Fund, 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 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 Fund within the meaning of section
2(a)(9) of the Act. If, as a result of a
decrease in the outstanding voting
securities of a Fund, the 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 Fund, it will vote
its Shares of the Fund in the same
proportion as the vote of all other
holders of the Fund’s Shares. This
condition does not apply to the Fund of
Funds’ Sub-Advisory Group with
respect to a Fund for which the Fund of
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15:30 Dec 01, 2014
Jkt 235001
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 Fund to influence the terms
of any services or transactions between
the Fund of Funds or Fund of Funds
Affiliate and the Fund or a Fund
Affiliate.
3. The board of directors or trustees of
an Investing Management Company,
including a majority of the 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 Fund or Fund
Affiliate in connection with any services
or transactions.
4. Once an investment by a Fund of
Funds in the securities of a Fund
exceeds the limits in section
12(d)(1)(A)(i) of the Act, the Board of
the 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 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 Fund; (ii) is
within the range of consideration that
the Fund would be required to pay to
another unaffiliated entity in connection
with the same services or transactions;
and (iii) does not involve overreaching
on the part of any person concerned.
This condition does not apply with
respect to any services or transactions
between a Fund and its investment
adviser(s), or any person controlling,
controlled by or under common control
with such investment adviser(s).
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 Fund
under rule 12b–l under the Act)
received from a 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
PO 00000
Frm 00101
Fmt 4703
Sfmt 4703
trustee or Sponsor of the Investing
Trust, other than any advisory fees paid
to the Fund of Funds Adviser, or trustee
or Sponsor of an Investing Trust, or its
affiliated person by the Fund, in
connection with the investment by the
Fund of Funds in the 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 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 SubAdviser or its affiliated person by the
Fund, in connection with the
investment by the Investing
Management Company in the Fund
made at the direction of the 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 Fund) will cause a Fund to
purchase a security in any Affiliated
Underwriting.
7. The Board of a Fund, including a
majority of the non-interested Board
members, will adopt procedures
reasonably designed to monitor any
purchases of securities by the Fund in
an Affiliated Underwriting, once an
investment by a Fund of Funds in the
securities of the Fund exceeds the limit
of section 12(d)(1)(A)(i) of the Act,
including any purchases made directly
from an Underwriting Affiliate. The
Board will review these purchases
periodically, but no less frequently than
annually, to determine whether the
purchases were influenced by the
investment by the Fund of Funds in the
Fund. The Board will consider, among
other things: (i) Whether the purchases
were consistent with the investment
objectives and policies of the Fund; (ii)
how the performance of securities
purchased in an Affiliated Underwriting
compares to the performance of
comparable securities purchased during
a comparable period of time in
underwritings other than Affiliated
Underwritings or to a benchmark such
as a comparable market index; and (iii)
whether the amount of securities
purchased by the Fund in Affiliated
Underwritings and the amount
purchased directly from an
Underwriting Affiliate have changed
significantly from prior years. The
Board will take any appropriate actions
based on its review, including, if
E:\FR\FM\02DEN1.SGM
02DEN1
71477
rljohnson on DSK3VPTVN1PROD with NOTICES
Federal Register / Vol. 79, No. 231 / Tuesday, December 2, 2014 / Notices
appropriate, the institution of
procedures designed to ensure that
purchases of securities in Affiliated
Underwritings are in the best interest of
shareholders of the Fund.
8. Each Fund will maintain and
preserve permanently in an easily
accessible place a written copy of the
procedures described in the preceding
condition, and any modifications to
such procedures, and will maintain and
preserve for a period of not less than six
years from the end of the fiscal year in
which any purchase in an Affiliated
Underwriting occurred, the first two
years in an easily accessible place, a
written record of each purchase of
securities in Affiliated Underwritings
once an investment by a Fund of Funds
in the securities of the Fund exceeds the
limit of section 12(d)(1)(A)(i) of the Act,
setting forth from whom the securities
were acquired, the identity of the
underwriting syndicate’s members, the
terms of the purchase, and the
information or materials upon which
the Board’s determinations were made.
9. Before investing in a Fund in
excess of the 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 Fund in
excess of the limit in section
12(d)(1)(A)(i), a Fund of Funds will
notify the Fund of the investment. At
such time, the Fund of Funds will also
transmit to the Fund a list of the names
of each Fund of Funds Affiliate and
Underwriting Affiliate. The Fund of
Funds will notify the Fund of any
changes to the list of the names as soon
as reasonably practicable after a change
occurs. The Fund and the 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
VerDate Sep<11>2014
15:30 Dec 01, 2014
Jkt 235001
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 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 Fund acquires
securities of another investment
company pursuant to exemptive relief
from the Commission permitting the
Fund to acquire securities of one or
more investment companies for shortterm cash management purposes.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
NASDAQ is filing with the
Commission a proposal to amend
Chapter VI, Section 5 (Minimum
Increments) of the rules of the NASDAQ
Options Market (‘‘NOM’’) to extend
through June 30, 2015, the Penny Pilot
Program in options classes in certain
issues (‘‘Penny Pilot’’ or ‘‘Pilot’’), and to
change the date when delisted classes
may be replaced in the Penny Pilot.3
The Exchange requests that the
Commission waive the 30-day operative
delay period to the extent needed for
timely industry-wide implementation of
the proposal.
The text of the amended Exchange
rule is set forth immediately below.
Proposed new language is in italics
and proposed deleted language is
[bracketed].
For the Commission, by the Division of
Investment Management, under delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
Options Rules
[FR Doc. 2014–28313 Filed 12–1–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73686; File No. SR–
NASDAQ–2014–115]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
a Proposed Rule Change Relating to
Extension of the Exchange’s Penny
Pilot Program and Replacement of
Penny Pilot Issues That Have Been
Delisted
November 25, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1, and Rule 19b–4 2 thereunder,
notice is hereby given that on November
21, 2014, The NASDAQ Stock Market
LLC (‘‘NASDAQ’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III, below, which Items
have been prepared by NASDAQ. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00102
Fmt 4703
Sfmt 4703
NASDAQ Stock Market Rules
*
*
*
Chapter VI
*
*
*
*
Trading Systems
*
*
*
Sec. 5 Minimum Increments
(a) The Board may establish minimum
quoting increments for options contracts
traded on NOM. Such minimum
increments established by the Board
will be designated as a stated policy,
practice, or interpretation with respect
to the administration of this Section
within the meaning of Section 19 of the
Exchange Act and will be filed with the
SEC as a rule change for effectiveness
upon filing. Until such time as the
Board makes a change in the
increments, the following principles
shall apply:
(1)–(2) No Change.
(3) For a pilot period scheduled to
expire on [December 31, 2014]June 30,
2015, if the options series is trading
pursuant to the Penny Pilot program one
(1) cent if the options series is trading
at less than $3.00, five (5) cents if the
options series is trading at $3.00 or
higher, unless for QQQQs, SPY and
IWM where the minimum quoting
increment will be one cent for all series
regardless of price. A list of such
options shall be communicated to
3 The Penny Pilot was established in March 2008
and was last extended in 2014. See Securities
Exchange Act Release Nos. 57579 (March 28, 2008),
73 FR 18587 (April 4, 2008) (SR–NASDAQ–2008–
026) (notice of filing and immediate effectiveness
establishing Penny Pilot); and 72244 (May 23,
2014), 79 FR 31151 (May 30, 2014) (SR–NASDAQ–
2014–056) (notice of filing and immediate
effectiveness extending the Penny Pilot through
December 31, 2014).
E:\FR\FM\02DEN1.SGM
02DEN1
]]>Agencies
[Federal Register Volume 79, Number 231 (Tuesday, December 2, 2014)]
[Notices]
[Pages 71469-71477]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-28313]
[[Page 71469]]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 31346; 812-14292]
ETF Securities Advisors LLC, et al.; Notice of Application
November 24, 2014.
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 of Application: Applicants request an order that would
permit (a) series of certain open-end management investment companies
to issue shares (``Shares'') redeemable in large aggregations only
(``Creation Units''); (b) secondary market transactions in Shares to
occur at negotiated market prices 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: ETF Securities Advisors LLC (``ETF Securities''), ETFS
Trust (``Trust'') and ALPS Distributors, Inc. (``ALPS'').
Filing Dates: The application was filed on March 18, 2014, and
amended on July 30, 2014 and November 4, 2014.
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 19, 2014, and should be accompanied by proof of
service on applicants, in the form of an affidavit, or for lawyers, a
certificate of service. Pursuant to rule 0-5 under the Act, hearing
requests should state the nature of the writer's interest, any facts
bearing upon the desirability of a hearing on the matter, 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: Secretary, Securities and Exchange Commission, 100 F Street
NE., Washington, DC 20549-1090; Applicants: ETF Securities and the
Trust: 48 Wall Street, New York, NY 10005; ALPS, P.O. Box 328, Denver,
CO 80201.
FOR FURTHER INFORMATION CONTACT: Aidan H. O'Connor, Senior Counsel, at
(202) 551-6808, or David P. Bartels, 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 Web site by searching for the file number, or for an
applicant using the Company name box, at https://www.sec.gov/search/search.htm or by calling (202) 551-8090.
Applicants' Representations
1. The Trust is a Delaware statutory trust and will register under
the Act as an open-end management investment company with multiple
series. Each series will operate as an exchange traded fund (``ETF'').
2. ETF Securities will be the investment adviser to the initial
series of the Trust (``Initial Funds''). Each Adviser (as defined
below) will be registered as an investment adviser under the Investment
Advisers Act of 1940 (``Advisers Act''). The Adviser may enter into
sub-advisory agreements with one or more investment advisers to act as
sub-advisers to particular Funds (each, a ``Sub-Adviser''). Any Sub-
Adviser will either be registered under the Advisers Act or will not be
required to register thereunder.
3. The Trust will enter into a distribution agreement with one or
more distributors. Each distributor for a Fund will be a broker-dealer
(``Broker'') registered under the Securities Exchange Act of 1934
(``Exchange Act'') and will act as distributor and principal
underwriter (``Distributor'') for one or more of the Funds. No
Distributor will be affiliated with any national securities exchange,
as defined in Section 2(a)(26) of the Act (``Exchange''). The
Distributor for each Fund will comply with the terms and conditions of
the requested order. ALPS, a Colorado corporation and broker-dealer
registered under the Exchange Act, will act as the initial Distributor
of the Funds.
4. Applicants request that the order apply to the Initial Funds and
any additional series of the Trust, and any other open-end management
investment company or series thereof, that may be created in the future
(``Future Funds'' and together with the Initial Funds, ``Funds''), each
of which will operate as an ETF and will track a specified index
comprised of domestic or foreign equity and/or fixed income securities
(each, an ``Underlying Index''). Any Future Fund will (a) be advised by
ETF Securities or an entity controlling, controlled by, or under common
control with ETF Securities (each, an ``Adviser'') and (b) comply with
the terms and conditions of the application.\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 Funds and not in any
other registered investment company.
---------------------------------------------------------------------------
5. Each Fund will hold certain securities, currencies, other
assets, and other investment positions (``Portfolio Holdings'')
selected to correspond generally to the performance of its Underlying
Index. The Underlying Indexes will be comprised solely of equity and/or
fixed income securities issued by one or more of the following
categories of issuers: (i) Domestic issuers and (ii) non-domestic
issuers meeting the requirements for trading in U.S. markets. Other
Funds will be based on Underlying Indexes that will be comprised solely
of foreign and domestic, or solely foreign, equity and/or fixed income
securities (``Foreign Funds'').
6. Applicants represent that each 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 Foreign
Funds, Component Securities and Depositary Receipts \3\ representing
[[Page 71470]]
Component Securities. Each Fund may also invest up to 20% of its assets
in certain index futures, options, options on index futures, swap
contracts or other derivatives, as related to its respective Underlying
Index and its Component Securities, cash and cash equivalents, other
investment companies, as well as in securities and other instruments
not included in its Underlying Index but which the Adviser believes
will help the Fund track its Underlying Index. A Fund may also engage
in short sales in accordance with its investment objective.
---------------------------------------------------------------------------
\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 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 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 Fund, the Adviser or any Sub-Adviser will
serve as the depositary bank for any Depositary Receipts held by a
Fund.
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7. Each Trust may issue 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
Long/Short Fund will establish (i) exposures equal to approximately
100% of the long positions specified by the Long/Short Index \4\ and
(ii) exposures equal to approximately 100% of the short positions
specified by the Long/Short Index. Each 130/30 Fund will include
strategies that: (i) Establish long positions in securities so that
total long exposure represents approximately 130% of a Fund's net
assets; and (ii) simultaneously establish short positions in other
securities so that total short exposure represents approximately 30% of
such Fund's net assets. Each Business Day, for each Long/Short Fund and
130/30 Fund, the Adviser will provide full portfolio transparency on
the Fund's publicly available Web site (``Web site'') by making
available the Fund's Portfolio Holdings (defined below) before the
commencement of trading of Shares on the Listing Exchange (defined
below).\5\ The information provided on the Web site will be formatted
to be reader-friendly.
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\4\ Underlying Indexes that include both long and short
positions in securities are referred to as ``Long/Short Indexes.''
\5\ Under accounting procedures followed by each Fund, trades
made on the prior Business Day (``T'') will be booked and reflected
in NAV on the current Business Day (T+1). Accordingly, the Funds
will be able to disclose at the beginning of the Business Day the
portfolio that will form the basis for the NAV calculation at the
end of the Business Day.
---------------------------------------------------------------------------
8. A Fund will utilize either a replication or representative
sampling strategy to track its Underlying Index. A Fund using a
replication strategy will invest in the Component Securities of its
Underlying Index in the same approximate proportions as in such
Underlying Index. A 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 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 Fund will have an annual tracking error
relative to the performance of its Underlying Index of less than 5%.
9. Each Fund will be entitled to use its Underlying Index pursuant
to either a licensing agreement with the entity that compiles, creates,
sponsors or maintains the Underlying Index (each, an ``Index
Provider'') or a sub-licensing arrangement with the Adviser, which will
have a licensing agreement with such Index Provider.\6\ A ``Self-
Indexing Fund'' is a Fund for which 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 the
Trust or a Fund, of the Adviser, of any Sub-Adviser to or promoter of a
Fund, or of the Distributor (each, an ``Affiliated Index Provider'')
will serve as the Index Provider. In the case of Self-Indexing Funds,
an Affiliated Index Provider will create a proprietary, rules-based
methodology to create Underlying Indexes (each an ``Affiliated
Index'').\7\ Except with respect to the Self-Indexing Funds, no Index
Provider is or will be an Affiliated Person, or a Second-Tier
Affiliate, of a Trust or a Fund, of the Adviser, of any Sub-Adviser to
or promoter of a Fund, or of the Distributor.
---------------------------------------------------------------------------
\6\ The licenses for the Self-Indexing Funds will specifically
state that the Affiliated Index Provider (as defined below), or in
case of a sub-licensing agreement, the Adviser, must provide the use
of the Affiliated Indexes (as defined below) and related
intellectual property at no cost to the Trust and the Self-Indexing
Funds.
\7\ The Affiliated Indexes may be made available to registered
investment companies, as well as separately managed accounts of
institutional investors and privately offered funds that are not
deemed to be ``investment companies'' in reliance on section 3(c)(1)
or 3(c)(7) of the Act for which the Adviser acts as adviser or
subadviser (``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 subadviser (``Unaffiliated Accounts''). The Affiliated Accounts
and the Unaffiliated Accounts, like the Funds, would seek to track
the performance of one or more Underlying Index(es) by investing in
the constituents of such Underlying 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 Fund.
---------------------------------------------------------------------------
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.
11. Applicants propose that each Self-Indexing Fund will post on
its Web site, on each day the Fund is open, including any day when it
satisfies redemption requests as required by Section 22(e) of the Act
(a ``Business Day''), before commencement of trading of Shares on the
Listing Exchange, the identities and quantities of the Portfolio
Holdings that will form the basis for the Fund's calculation of its NAV
at the end of the Business Day. Applicants believe that requiring Self-
Indexing Funds to maintain full portfolio transparency will also
provide an additional mechanism for addressing any such potential
conflicts of interest.
12. 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.\8\
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\8\ 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. Each 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, ETF
[[Page 71471]]
Securities will adopt 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 ETS Securities or an associated person
(``Inside Information Policy''). Any other Adviser or Sub-Adviser will
be required to adopt and maintain a similar Inside Information Policy.
In accordance with the Code of Ethics \9\ and Inside Information Policy
of the Adviser and any Sub-Adviser, personnel of those entities with
knowledge about the composition of the Portfolio Deposit \10\ 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, an Index Provider will not provide any
information relating to changes to an Underlying Index's methodology
for the inclusion of component securities, the inclusion or exclusion
of specific component securities, or methodology for the calculation or
the return of component securities, in advance of a public announcement
of such changes by the 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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\9\ 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'').
\10\ The instruments and cash that the purchaser is required to
deliver in exchange for the Creation Units it is purchasing are
referred to as the ``Portfolio Deposit.''
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14. 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. Applications for prior orders granted to Self-Indexing
Funds have received relief to operate such funds on the basis discussed
above.\11\
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\11\ See, e.g., Guggennheim Funds Investment Advisors, LLC,
Investment Company Act Release Nos. 30560 (June 14, 2013) (notice)
and 30598 (July 10, 2013) (order); Sigman Investment Advisors, LLC,
Investment company Act Release Nos. 30559 (June 14, 2013) (notice)
and 30597 (July 10, 2013) (order); Transparent Value Trust, et al.,
Investment Company Act Release Nos. 30558 (June 14, 2013) (notice)
and 30596 (July 10, 2013) (order); and Horizons ETF Trust, et al.,
Investment Company Act Release Nos. 30803 (November 21, 2013)
(notice) and 30833 (December 17, 2013) (order).
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15. The Shares of each 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'').\12\ On any given Business Day, the names and quantities
of the instruments that constitute the Deposit Instruments and the
names and quantities of the instruments that constitute the Redemption
Instruments will be identical, unless the Fund is Rebalancing (as
defined below). In addition, the Deposit Instruments and the Redemption
Instruments will each correspond pro rata to the positions in the
Fund's portfolio (including cash positions) \13\ 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; \14\ (c)
TBA Transactions, short positions, derivatives and other positions that
cannot be transferred in kind \15\ will be excluded from the Deposit
Instruments and the Redemption Instruments; \16\ (d) to the extent the
Fund determines, on a given Business Day, to use a representative
sampling of the Fund's portfolio; \17\ or (e) for temporary periods, to
effect changes in the Fund's portfolio as a result of the rebalancing
of its Underlying Index (any such change, a ``Rebalancing''). If there
is a difference between the 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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\12\ The Funds must comply with the federal securities laws in
accepting Deposit Instruments and satisfying redemptions with
Redemption Instruments, including that the Deposit Instruments and
Redemption Instruments are sold in transactions that would be exempt
from registration under the Securities Act of 1933 (``Securities
Act''). In accepting Deposit Instruments and satisfying redemptions
with Redemption Instruments that are restricted securities eligible
for resale pursuant to rule 144A under the Securities Act, the Funds
will comply with the conditions of rule 144A.
\13\ The portfolio used for this purpose will be the same
portfolio used to calculate the Fund's NAV for the Business Day.
\14\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
\15\ This includes instruments that can be transferred in kind
only with the consent of the original counterparty to the extent the
Fund does not intend to seek such consents.
\16\ 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 (as defined
below).
\17\ A 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 Fund's portfolio; (ii) consists
entirely of instruments that are already included in the Fund's
portfolio; and (iii) is the same for all Authorized Participants on
a given Business Day.
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16. 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 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 Fund determines to require the purchase or redemption,
as applicable, to be made entirely in cash;\18\ (d) if, on a given
Business Day,
[[Page 71472]]
the 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 Foreign 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 Fund permits an Authorized Participant to deposit or receive
(as applicable) cash in lieu of some or all of the Deposit Instruments
or Redemption Instruments, respectively, solely because: (i) Such
instruments are, in the case of the purchase of a Creation Unit, not
available in sufficient quantity; (ii) such instruments are not
eligible for trading by an Authorized Participant or the investor on
whose behalf the Authorized Participant is acting; or (iii) a holder of
Shares of a Foreign Fund holding non-U.S. investments would be subject
to unfavorable income tax treatment if the holder receives redemption
proceeds in kind.\19\
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\18\ In determining whether a particular Fund will sell or
redeem Creation Units entirely on a cash or in-kind basis (whether
for a given day or a given order), the key consideration will be the
benefit that would accrue to the Fund and its investors. For
instance, in bond transactions, the Adviser may be able to obtain
better execution than Share purchasers because of the Adviser's
size, experience and potentially stronger relationships in the fixed
income markets. Purchases of Creation Units either on an all cash
basis or in-kind are expected to be neutral to the Funds from a tax
perspective. In contrast, cash redemptions typically require selling
portfolio holdings, which may result in adverse tax consequences for
the remaining Fund shareholders that would not occur with an in-kind
redemption. As a result, tax consideration may warrant in-kind
redemptions.
\19\ 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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17. Creation Units will consist of specified large aggregations of
Shares (e.g., 25,000 Shares) as determined by the Adviser, and it is
expected that the initial price of a Creation Unit will range from $1
million to $10 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 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
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.
18. Each Business Day, before the open of trading on the Exchange
on which Shares are primarily listed (``Listing Exchange''), each Fund
will cause to be published through the NSCC the names and quantities of
the instruments comprising the Deposit Instruments and the Redemption
Instruments, as well as the estimated 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 Fund stated on
a per individual Share basis representing the sum of (i) the estimated
Cash Amount and (ii) the current value of the Deposit Instruments.
19. Transaction expenses, including operational processing and
brokerage costs, will be incurred by a Fund when investors purchase or
redeem Creation Units in-kind and such costs have the potential to
dilute the interests of the Fund's existing shareholders. Each Fund
will 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.\20\ The Distributor will be
responsible for delivering the 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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\20\ Where a Fund permits an in-kind purchaser to substitute
cash-in-lieu of depositing one or more of the requisite Deposit
Instruments, the purchaser may be assessed a higher Transaction Fee
to cover the cost of purchasing such Deposit Instruments.
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20. Shares of each Fund will be listed and traded individually on
an Exchange. It is expected that one or more member firms of an
Exchange will be designated to act as a market maker (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.
21. 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.\21\ 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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\21\ 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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22. Shares will not be individually redeemable, and owners of
Shares may acquire those Shares from the Fund, or tender such Shares
for redemption to the Fund, in Creation Units only. To redeem, an
investor must accumulate enough Shares to constitute a Creation Unit.
Redemption requests must be placed 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.
23. Neither the Trust nor any Fund will be advertised or marketed
or otherwise held out as a traditional open-end investment company or a
``mutual fund.'' Instead, each such 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 Fund or tender such
Shares for redemption to the Fund in Creation Units only. The 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
[[Page 71473]]
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 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 Funds to register as
open-end management investment companies and issue Shares that are
redeemable in Creation Units only. Applicants state that investors may
purchase Shares in Creation Units and redeem Creation Units from each
Fund. Applicants further state that because 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
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 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 Foreign 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 securities held by a Foreign 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 Foreign Funds
only, applicants hereby request relief under section 6(c) from the
requirement imposed by section 22(e) to allow Foreign Funds to pay
redemption proceeds within fourteen calendar days following the tender
of Creation Units for redemption.\22\
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\22\ 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 a Foreign 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 Foreign 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
[[Page 71474]]
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
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 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
Funds, and any principal underwriter for the 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 Fund.\23\
To limit the control that a Fund of Funds may have over a 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
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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\23\ 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
``Fund Affiliate'' is an investment adviser, promoter, or principal
underwriter of a 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 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 Fund) will cause a Fund to purchase a
security in an offering of securities during the existence of an
underwriting or selling syndicate of which a principal underwriter is
an Underwriting Affiliate (``Affiliated Underwriting''). An
``Underwriting Affiliate'' is a principal underwriter in any
underwriting or selling syndicate that is an officer, director, member
of an advisory board, 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 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 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 Fund under rule 12b-1 under the Act) received from a 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 Fund, in connection with the investment by
the Fund of Funds in the 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.\24\
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\24\ 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 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 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 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
[[Page 71475]]
to invest in the Funds and not in any other investment company.
18. Applicants also note that a 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 Fund
would still retain its ability to 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 Funds may be deemed to be controlled by the Adviser or
an entity controlling, controlled by or under common control with the
Adviser and hence affiliated persons of each other. In addition, the
Funds may be deemed to be under common control with any other
registered investment company (or series thereof) advised by 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
Funds, may be deemed affiliated persons of the Trust or such 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 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 Funds, or Second-Tier
Affiliates of the Funds, solely by virtue of one or more of the
following: (a) Holding 5% or more, or in excess of 25%, of the
outstanding Shares of one or more Funds; (b) 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 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 Fund will be valued in the identical
manner as those Portfolio Holdings currently held by such 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 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 Holdings held by a 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 Fund. Similarly, applicants submit
that, by using the same standards for valuing Portfolio Holdings held
by a Fund as are used for calculating ``in-kind'' redemptions or
purchases, the 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 Fund to track closely its Underlying Index and therefore aid in
achieving the Fund's objectives.
22. Applicants also seek relief under sections 6(c) and 17(b) from
section 17(a) to permit a Fund that is an affiliated person, or an
affiliated person of an affiliated person, of a Fund of Funds to sell
its Shares to and redeem its Shares from a Fund of Funds, and to engage
in the accompanying in-kind transactions with the Fund of Funds.\25\
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 Fund will be based on the NAV of the Fund.\26\
Applicants believe that any proposed transactions directly between the
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 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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\25\ Although applicants believe that most Funds of Funds will
purchase Shares in the secondary market and will not purchase
Creation Units directly from a Fund, a Fund of Funds might seek to
transact in Creation Units directly with a 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 Fund,
relief from Section 17(a) would not be necessary. However, the
requested relief would apply to direct sales of Shares in Creation
Units by a Fund to 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 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.
\26\ 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
Fund or (b) an affiliated person of a Fund, or an affiliated person
of such person, for the sale by the Fund of its Shares to 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 date of any Commission rule under the
[[Page 71476]]
Act that provides relief permitting the operation of index-based ETFs.
2. As long as a Fund operates in reliance on the requested order,
the Shares of such Fund will be listed on an Exchange.
3. Neither the Trust nor any Fund will be advertised or marketed as
an open-end investment company or a mutual fund. Any advertising
material that describes the purchase or sale of Creation Units or
refers to redeemability will prominently disclose that Shares are not
individually redeemable and that owners of Shares may acquire those
Shares from the Fund and tender those Shares for redemption to a Fund
in Creation Units only.
4. The Web site, which is and will be publicly accessible at no
charge, will contain, on a per Share basis for each Fund, the prior
Business Day's NAV and the market closing price or the 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, Long/Short Fund and 130/30 Fund will
post on the Web site on each Business Day, before commencement of
trading of Shares on the Exchange, the Fund's Portfolio Holdings.
6. No Adviser or any Sub-Adviser to a Self-Indexing Fund, 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 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 Fund within the
meaning of section 2(a)(9) of the Act. If, as a result of a decrease in
the outstanding voting securities of a Fund, the 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 Fund, it will vote its Shares of the Fund in the
same proportion as the vote of all other holders of the Fund's Shares.
This condition does not apply to the Fund of Funds' Sub-Advisory Group
with respect to a 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 Fund to
influence the terms of any services or transactions between the Fund of
Funds or Fund of Funds Affiliate and the Fund or a Fund Affiliate.
3. The board of directors or trustees of an Investing Management
Company, including a majority of the 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 Fund or Fund Affiliate in
connection with any services or transactions.
4. Once an investment by a Fund of Funds in the securities of a
Fund exceeds the limits in section 12(d)(1)(A)(i) of the Act, the Board
of the 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 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 Fund; (ii) is within the range of
consideration that the Fund would be required to pay to another
unaffiliated entity in connection with the same services or
transactions; and (iii) does not involve overreaching on the part of
any person concerned. This condition does not apply with respect to any
services or transactions between a Fund and its investment adviser(s),
or any person controlling, controlled by or under common control with
such investment adviser(s).
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 Fund under
rule 12b-l under the Act) received from a 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, or trustee or Sponsor of an Investing Trust, or its affiliated
person by the Fund, in connection with the investment by the Fund of
Funds in the 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 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 Fund, in connection with the investment by
the Investing Management Company in the 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 Fund)
will cause a Fund to purchase a security in any Affiliated
Underwriting.
7. The Board of a Fund, including a majority of the non-interested
Board members, will adopt procedures reasonably designed to monitor any
purchases of securities by the Fund in an Affiliated Underwriting, once
an investment by a Fund of Funds in the securities of the Fund exceeds
the limit of section 12(d)(1)(A)(i) of the Act, including any purchases
made directly from an Underwriting Affiliate. The Board will review
these purchases periodically, but no less frequently than annually, to
determine whether the purchases were influenced by the investment by
the Fund of Funds in the Fund. The Board will consider, among other
things: (i) Whether the purchases were consistent with the investment
objectives and policies of the Fund; (ii) how the performance of
securities purchased in an Affiliated Underwriting compares to the
performance of comparable securities purchased during a comparable
period of time in underwritings other than Affiliated Underwritings or
to a benchmark such as a comparable market index; and (iii) whether the
amount of securities purchased by the Fund in Affiliated Underwritings
and the amount purchased directly from an Underwriting Affiliate have
changed significantly from prior years. The Board will take any
appropriate actions based on its review, including, if
[[Page 71477]]
appropriate, the institution of procedures designed to ensure that
purchases of securities in Affiliated Underwritings are in the best
interest of shareholders of the Fund.
8. Each Fund will maintain and preserve permanently in an easily
accessible place a written copy of the procedures described in the
preceding condition, and any modifications to such procedures, and will
maintain and preserve for a period of not less than six years from the
end of the fiscal year in which any purchase in an Affiliated
Underwriting occurred, the first two years in an easily accessible
place, a written record of each purchase of securities in Affiliated
Underwritings once an investment by a Fund of Funds in the securities
of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act,
setting forth from whom the securities were acquired, the identity of
the underwriting syndicate's members, the terms of the purchase, and
the information or materials upon which the Board's determinations were
made.
9. Before investing in a Fund in excess of the 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 Fund in excess of the limit in section 12(d)(1)(A)(i), a
Fund of Funds will notify the Fund of the investment. At such time, the
Fund of Funds will also transmit to the Fund a list of the names of
each Fund of Funds Affiliate and Underwriting Affiliate. The Fund of
Funds will notify the Fund of any changes to the list of the names as
soon as reasonably practicable after a change occurs. The Fund and the
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 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 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 Fund acquires securities of another investment company
pursuant to exemptive relief from the Commission permitting the 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. 2014-28313 Filed 12-1-14; 8:45 am]
BILLING CODE 8011-01-P
