Fidelity Beach Street Trust, et al.; Notice of Application, 64140-64147 [2019-25070]
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Federal Register / Vol. 84, No. 224 / Wednesday, November 20, 2019 / Notices
competitive standing in the financial
markets.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act.24
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
Phlx–2019–48 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–Phlx–2019–48. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
24 15
U.S.C. 78s(b)(3)(A)(ii).
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communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–Phlx–2019–48 and should
be submitted on or before December 11,
2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–25103 Filed 11–19–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
33683; 812–14364]
Fidelity Beach Street Trust, et al.;
Notice of Application
November 14, 2019.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of an application for
exemptive relief.
AGENCY:
Applicants
request an order under section 6(c) of
the Investment Company Act of 1940
(‘‘Act’’) for an exemption from sections
2(a)(32), 5(a)(1), 22(d), and 22(e) of the
Act and rule 22c–1 under the Act, under
sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and
17(a)(2) of the Act, and under section
12(d)(1)(J) of the Act for an exemption
from sections 12(d)(1)(A) and
12(d)(1)(B) of the Act. If granted, the
requested order would permit registered
open-end investment companies that are
exchange-traded funds (‘‘ETFs’’) and are
actively managed to operate without
SUMMARY OF APPLICATION:
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being subject to a daily portfolio
transparency condition.
APPLICANTS: Fidelity Management &
Research Company and FMR Co., Inc.
(collectively, ‘‘FMR’’); Fidelity Beach
Street Trust (the ‘‘Trust’’); and Fidelity
Distributors Corporation.
FILING DATES: The application was filed
on September 26, 2014, and amended
on January 26, 2018, May 18, 2018,
August 8, 2018, April 30, 2019, June 7,
2019, July 16, 2019, October 15, 2019,
October 22, 2019 and November 8, 2019.
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 9, 2019, 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: Fidelity Beach Street Trust,
Fidelity Management & Research
Company, FMR Co., Inc., and Fidelity
Distributors Corporation, 245 Summer
Street, Boston, Massachusetts 02210.
FOR FURTHER INFORMATION CONTACT:
Bradley Gude, Senior Counsel; Andrea
Ottomanelli Magovern, 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
website 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.
I. Introduction
1. Applicants seek to introduce a
novel type of actively-managed ETF that
would not be required to disclose its
portfolio holdings on a daily basis (each,
a ‘‘Fund’’). Due to their characteristics,
ETFs (including those proposed by
Applicants) are only permitted to
operate in reliance on Commission
exemptive relief from certain provisions
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of the Act and rules thereunder.1
Accordingly, Applicants seek an order:
Under section 6(c) of the Act for an
exemption from sections 2(a)(32),
5(a)(1), 22(d), and 22(e) of the Act and
rule 22c–1 thereunder; under sections
6(c) and 17(b) of the Act granting 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 (B) of the Act.
The requested order would permit: (a)
The Funds 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
Funds to pay redemption proceeds,
under certain circumstances, more than
seven days after the tender of Shares for
redemption; (d) certain affiliated
persons of a Fund to deposit securities
into, and receive securities from, the
Fund 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
Funds (‘‘Investing Funds’’) to acquire
Shares of the Funds.
2. Section 6(c) allows the Commission
to exempt any person, security, or
transaction, or any class thereof, only ‘‘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].’’ As discussed
below, the Commission believes that the
Funds meet the standard for exemptive
relief under section 6(c) of the Act.2
Accordingly, the Commission intends to
grant the requested relief.
II. Background
A. Open-End Investment Companies
and Net Asset Value
3. The Act defines an investment
company as an ‘‘issuer’’ of ‘‘any
security’’ which ‘‘is or holds itself out
as being engaged primarily . . . in the
1 The Commission first granted exemptive relief
to operate ETFs in the early 1990s when the first
index-based ETFs were developed. See SPDR Trust
Series I, Investment Company Act Release Nos.
18959 (Sept. 17, 1992) (notice) and 19055 (Oct. 26,
1992) (order). See generally Exchange Traded
Funds, Investment Company Act Release No. 33646
(Sept. 25, 2019) (‘‘ETF Rule Adopting Release’’), at
section I. The Commission has also granted ETFs
exemptive relief from Sections 12(d)(1)(A) and (B)
of the Act. See generally Fund of Funds
Arrangements, Investment Company Act Release
No. 33329 (Dec. 19, 2018).
2 See infra section IV for a discussion of all the
relief requested by Applicants, including relief
under sections 17(b) and 12(d)(1)(J) of the Act.
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business of investing . . . in
securities.’’ 3 Shares in an investment
company represent proportionate
interests in its investment portfolio, and
their value fluctuates in relation to the
changes in the value of that portfolio.
4. The most common form of
investment company, the ‘‘open-end’’
investment company or mutual fund, is
required by law to redeem its securities
on demand at a price approximating the
securities’ proportionate share of the
fund’s NAV at the time of redemption.4
These funds also continuously issue and
sell new shares, thereby replenishing
their investment capital.
5. Because open-end investment
companies are required by law to
redeem their shares based on investors’
demands, shares of the funds have
historically not traded on exchanges or
in other secondary markets.5
B. Exemptions Under the Act for
Actively Managed ETFs
6. ETFs, including those proposed by
Applicants, are a type of open-end fund.
But unlike traditional open-end funds,
ETFs are made available to investors
primarily through secondary market
transactions on exchanges.
7. In order for this to take place, ETFs
require various exemptions from the
provisions of the Act and the rules
thereunder. Critically, in granting such
exemptions to date, the Commission has
required that a mechanism exist to
ensure that ETF shares would trade at
a price that is at or close to the NAV per
share of the ETF.6
8. Such a mechanism is essential for
ETFs to operate because ETFs do not
sell or redeem their individual shares at
NAV per share as required by the Act.
Instead, large broker-dealers that have
contractual arrangements with an ETF
(each, an ‘‘Authorized Participant’’)
purchase and redeem ETF shares
directly from the ETF, but only in large
blocks called ‘‘creation units.’’
Traditionally, an Authorized Participant
that purchases a creation unit of ETF
shares first deposits with the ETF a
‘‘basket’’ of securities and other assets
(e.g., cash) identified by the ETF that
day, and then receives the creation unit
of ETF shares in return for those assets.
The basket is generally representative of
3 15
U.S.C. 80a–3(a); 80a–3(a)(1).
section 22(d) and rule 22c–1; see also infra
section IV.A (discussing section 22(d) and rule 22c–
1).
5 This stems from section 22(d) of the Act, which
in effect fixes the prices at which redeemable
securities, including open-end shares, are sold. The
result is a system that precludes dealers from
making a secondary market in open-end shares.
6 This has been a required representation in all
ETF orders since the Commission issued the first
order. See supra note 1.
4 See
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the ETF’s portfolio and is equal in value
to the aggregate NAV of ETF shares in
the creation unit. After purchasing a
creation unit, the Authorized
Participant may sell the component ETF
shares in secondary market transactions.
Investors then purchase individual
shares in the secondary market. The
redemption process is the reverse of the
purchase process: the Authorized
Participant acquires a creation unit of
ETF shares and redeems it for a basket
of securities and other assets.
9. The combination of the creation
and redemption process with the
secondary market trading in ETF shares
provides arbitrage opportunities that are
designed to help keep the market price
of ETF shares at or close to the NAV per
share of the ETF.7 For example, if ETF
shares begin trading on national
securities exchanges at a ‘‘discount’’ (a
price below the estimated intraday NAV
per share of the ETF), an Authorized
Participant can purchase ETF shares in
secondary market transactions and, after
accumulating enough shares to
comprise a creation unit, redeem them
from the ETF in exchange for the more
valuable securities and other assets in
the ETF’s redemption basket. In
addition to purchasing ETF shares,
Authorized Participants also are likely
to hedge their intraday risk. Thus, for
example, when ETF shares are trading at
a discount to the estimated intraday
NAV per share of the ETF, an
Authorized Participant may also
simultaneously short the securities in
the ETF’s redemption basket. At the end
of the day, the Authorized Participant
will return the creation unit of ETF
shares to the ETF in exchange for the
ETF’s basket assets, and use such assets
to cover its short positions. Those
purchases reduce the supply of ETF
shares in the market, and thus tend to
drive up the market price of the shares
to a level closer to the NAV per share
of the ETF.8
10. Conversely, if the market price for
ETF shares reflects a ‘‘premium’’ (a
price above the estimated intraday NAV
per share of the ETF), an Authorized
Participant can deposit a basket of
securities and other assets in exchange
for the more valuable creation unit of
ETF shares, and then sell the individual
7 See Investment Company Institute, 2019
Investment Company Fact Book (2019), at 88–89;
ETF Rule Adopting Release, supra note 1, at note
31 and accompanying text.
8 The Authorized Participant’s purchase of the
ETF shares in the secondary market, combined with
the sale of the redemption basket securities, may
also create upward pressure on the price of ETF
shares and/or downward pressure on the price of
redemption basket securities, driving the market
price of ETF shares and the value of the ETF’s
portfolio holdings closer together.
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shares in the market to realize its profit.9
An Authorized Participant also is likely
to hedge its intraday risk when ETF
shares are trading at a premium. Thus,
for example, when the shares of an ETF
are trading at a premium, an Authorized
Participant may buy the securities in the
ETF’s purchase basket in the secondary
market and sell short the ETF shares. At
the end of the day, the Authorized
Participant will deposit the basket assets
in exchange for a creation unit of ETF
shares, which it will then use to cover
its short positions. The Authorized
Participant will receive a profit from
having paid less for the ETF shares than
it received for the assets in the purchase
basket. These transactions would
increase the supply of ETF shares in the
secondary market, and thus tend to
drive down the price of ETF shares to
a level closer to the NAV per share of
the ETF.
11. Market participants can also
engage in arbitrage activity without
using the creation or redemption
processes described above. For example,
if a market participant believes that an
ETF is overvalued relative to its
underlying or reference assets (i.e.,
trading at a premium), the market
participant may sell ETF shares short
and buy the underlying or reference
assets, wait for the trading prices to
move toward parity, and then close out
the positions in both the ETF shares and
the underlying or reference assets to
realize a profit from the relative
movement of their trading prices.
Similarly, a market participant could
buy ETF shares and sell the underlying
or reference assets short in an attempt
to profit when an ETF’s shares are
trading at a discount to the ETF’s
underlying or reference assets. As
discussed above, this type of trading of
an ETF’s shares and the ETF’s
underlying or reference assets may bring
the prices of the ETF’s shares and its
portfolio assets closer together through
market pressure.
12. In assessing whether to grant
exemptive relief to actively managed
ETFs in the past, the Commission has
required a mechanism that would keep
the market prices of ETF shares at or
close to the NAV per share of the ETF.10
9 The Authorized Participant’s purchase of the
basket assets, combined with the sale of ETF shares,
may also create downward pressure on the price of
ETF shares, upward pressure on the price of
purchase basket securities, or both, bringing the
market price of ETF shares and the value of the
ETF’s portfolio holdings closer together.
10 Until recently, the Commission only approved
a mechanism dependent on daily portfolio
transparency. See generally ETF Rule Adopting
Release, supra note 1, at section II.C.4. Last May,
the Commission issued an order granting relief to
actively managed ETFs that, like the Funds, do not
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This close tie between market price and
NAV per share of the ETF is the
foundation for why the prices at which
retail investors buy and sell ETF shares
are similar to the prices at which
Authorized Participants are able to buy
and redeem shares directly from the
ETF at NAV. In granting relief from
section 22(d) of the Act and rule 22c-1
under the Act, the Commission relies on
this close tie between what retail
investors pay and what Authorized
Participants pay to make the finding
that the ETF’s shareholders are being
treated equitably when buying and
selling shares.11
III. The Application
A. The Applicants
13. The Trust is organized as a
business trust under the laws of the
Commonwealth of Massachusetts and is
registered with the Commission as an
open-end management investment
company. Fidelity Management &
Research Company or FMR Co., Inc.,
each a Massachusetts corporation
registered as an investment adviser
under the Investment Advisers Act of
1940 (‘‘Advisers Act’’), would serve as
the investment adviser to the initial
Funds. Fidelity Distributors
Corporation, a Massachusetts
corporation, is a registered broker-dealer
under the Securities Exchange Act of
1934, as amended (‘‘Exchange Act’’),
and will act as distributor and principal
underwriter of the Funds.
B. Applicants’ Proposal
14. Applicants seek exemptive relief
under section 6(c) to allow them to
introduce actively-managed Funds that
would not disclose their portfolio
holdings on a daily basis.12 Applicants
disclose their complete portfolio holdings on a
daily basis. See Precidian ETFs Trust, et al.,
Investment Company Act Release No. 33440 (Apr.
8, 2019) (the ‘‘Precidian Notice’’) and 33477 (May
20, 2019) (the ‘‘Precidian Order’’). Applicants’
proposed arbitrage mechanism differs from that in
the Precidian Order.
11 See supra note 4 and accompanying text.
12 Applicants request that the order apply to
series of the Trust identified and described in the
application as well as to additional series of the
Trust and any other open-end management
investment company or series thereof that seek to
rely on the relief requested in the application, each
of which will operate as an actively-managed ETF.
Any Fund will: (a) Be advised by Fidelity
Management & Research Company, FMR Co., Inc.,
or an entity controlling, controlled by, or under
common control with Fidelity Management &
Research Company or FMR Co., Inc. (each such
entity and any successor thereto is included in the
term ‘‘Adviser’’); and (b) comply with the terms and
conditions of the application. The Adviser may
retain one or more sub-advisers (each a ‘‘SubAdviser’’) for the Funds. Any Sub-Adviser will be
registered under the Advisers Act. For purposes of
the requested order, the term ‘‘successor’’ is limited
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maintain that operating the Funds as
fully-transparent actively-managed ETFs
would make the Funds susceptible to
‘‘front running’’ and ‘‘free riding’’ by
other investors and/or managers, which
can harm, and result in substantial costs
to, the Funds and their shareholders.13
15. Applicants believe that the Funds
would allow investors to access active
investment strategies offered by certain
investment advisers that are currently
only available via mutual funds, while
also taking advantage of the traditional
benefits of ETFs (e.g., lower fund costs,
tax efficiencies and intraday liquidity).
16. Applicants state that the relief in
the application is similar to the relief
granted in exemptive orders issued to
existing actively managed ETFs, except
for certain differences permitting the
Funds to operate on a non-transparent
basis.14 These material differences are
discussed below.
a. Tracking Basket. Each day a Fund
would publish a basket of securities and
cash that, while different from the
Fund’s portfolio, is designed to closely
track its daily performance (the
‘‘Tracking Basket’’).15 In addition, every
day the Fund would disclose the
percentage weight overlap between the
holdings of the prior business day’s
Tracking Basket compared to the
holdings of the Fund that formed the
basis for the Fund’s calculation of NAV
at the end of the prior business day (the
‘‘Tracking Basket Weight Overlap’’).
Such number would help market
participants evaluate the risk that the
performance of the Tracking Basket may
deviate from the performance of the
portfolio holdings of a Fund.
Applicants state that the Tracking
Basket would serve as a pricing and
hedging tool for market participants to
identify and take advantage of arbitrage
opportunities. Because the Tracking
Basket would be designed to closely
track the daily performance of the
Fund’s holdings, the Tracking Basket
would serve to estimate the value of
those holdings. For the same reason,
trading the Tracking Basket would allow
market participants to get exposure to
the performance of the Fund’s holdings,
so that a Fund’s Tracking Basket could
serve to hedge a position in the Fund’s
Shares. Further, the Tracking Basket
would serve as the creation/redemption
to an entity that results from a reorganization into
another jurisdiction or a change in the type of
business organization.
13 See application at 15 and 30.
14 Cf. Precidian Order supra note 10.
15 The Funds would, at a minimum, provide the
quarterly portfolio disclosures required for mutual
funds. See rule 30b1–9 under the Act and Form N–
PORT.
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basket when Authorized Participants
exchange creation units with the Fund.
Also in order to facilitate arbitrage,
each Fund’s portfolio and Tracking
Basket will only include certain
securities that trade on an exchange
contemporaneously with the Fund’s
Shares.16 Because the securities would
be exchange traded, market participants
would be able to accurately price and
readily trade the securities in the
Tracking Basket for purposes of
assessing the intraday value of the
Fund’s portfolio holdings and to hedge
their positions in the Fund’s shares.17
b. Arbitrage Transactions in the
Funds. Applicants state that, given the
correlation between a Fund’s Tracking
Basket and its portfolio holdings, the
Tracking Basket would serve as a
pricing signal to identify arbitrage
opportunities when its value and the
secondary market price of the Shares
diverge. If Shares began trading at a
discount to the Tracking Basket, an
authorized participant could purchase
the Shares in secondary market
transactions and, after accumulating
enough Shares to comprise a creation
unit, redeem them from the Fund in
exchange for a redemption basket
reflecting the NAV per share of the
Fund’s portfolio holdings.18 The
16 Each Fund may invest only in ETFs, Exchangetraded notes, Exchange-traded common stocks,
common stocks listed on a foreign exchange that
trade on such exchange contemporaneously with
the Shares, Exchange-traded preferred stocks,
Exchange-traded American depositary receipts,
Exchange-traded real estate investment trusts,
Exchange-traded commodity pools, Exchangetraded metals trusts, Exchange-traded currency
trusts, and exchange-traded futures that trade
contemporaneously with the Shares, as well as cash
and cash equivalents. For purposes of the
application, exchange-traded futures are U.S. listed
futures contracts where the futures contract’s
reference asset is an asset that the Fund could
invest in directly, or in the case of an index future,
is based on an index of a type of asset that the Fund
could invest in directly. All futures contracts that
a Fund may invest in will be traded on a U.S.
futures exchange. For these purposes, an
‘‘Exchange’’ is a national securities exchange as
defined in section 2(a)(26) of the Act. No Fund will
invest in a ‘‘penny stock’’ as defined in Exchange
Act Rule 3a51–1, borrow for investment purposes,
hold short positions, or purchase any security that
is illiquid at the time of purchase. The Tracking
Basket will be subject to the same limitations.
17 A Fund’s Tracking Basket may include
‘‘Representative ETFs,’’ which would be U.S.
exchange-traded ETFs selected for inclusion in the
Tracking Basket such that, when aggregated with
the other Tracking Basket components, the Tracking
Basket corresponds to the Fund’s overall holdings
exposures. As such, a Fund may receive
Representative ETFs in the basket of securities it
exchanges for a creation unit of its shares. On
account of this use of Representative ETFs,
Applicants are asking for a minor modification of
a standard condition of the Commission’s fund of
funds relief. See infra note 37.
18 In addition to purchasing Shares, an authorized
participant also would likely hedge its intraday risk
by shorting the securities in the Tracking Basket
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purchases of Shares would reduce the
supply of Shares in the market, and thus
tend to drive up the Shares’ market
price closer to the Fund’s NAV.19
Alternatively, if Shares are trading at a
premium, the transactions in the
arbitrage process are reversed.
Applicants further state that, like with
traditional ETFs, market participants
also can engage in arbitrage without
using the creation or redemption
processes.20 For example, if a Fund is
trading at a premium to the Tracking
Basket, the market participant may sell
Shares short and take a long position in
the Tracking Basket securities, wait for
the trading prices to move toward
parity, and then close out the positions
in both the Shares and the securities, to
realize a profit from the relative
movement of their trading prices.
Similarly, a market participant could
buy Shares and take a short position in
the Tracking Basket securities in an
attempt to profit when Shares are
trading at a discount to the Tracking
Basket.
c. Protective conditions. Applicants
have agreed to comply with certain
conditions in addition to those included
in prior ETF exemptive orders.21 First,
the Funds will provide certain public
disclosures to explain to investors how
they differ from traditional ETFs and
inform investors that the Funds’ bid-ask
spreads and premiums/discounts may
be larger than those for traditional ETFs
due to the lack of transparency, thus
making trading in the Funds’ Shares
more expensive. The Funds will also
disclose that market participants may
attempt to reverse engineer a Fund’s
trading strategy, which, if successful,
could increase opportunities for trading
practices that may disadvantage the
Fund and its shareholders.22 Each Fund
will include a legend (the ‘‘Legend’’) in
a prominent location on the outside
cover page of its prospectus, as well as
on its website and any marketing
materials, that will highlight for
investors the differences between the
Funds and fully transparent actively
managed ETFs and the above costs and
(the same as in the redemption basket) in an
amount corresponding to its long position in
Shares. After the authorized participant returns a
creation unit to the Fund in exchange for a
redemption basket, the authorized participant can
use the basket securities to cover its short positions.
Cf. supra note 8.
19 The purchase of the Shares in the secondary
market, combined with the sale of the redemption
basket securities, may also drive the market price
of Shares and the value of the Fund’s portfolio
holdings closer together. See supra note 8.
20 See supra paragraph 11.
21 These are substantially the same as conditions
included in the Precidian Order. See Precidian
Notice supra note 10, at paragraph 17(d).
22 See application at 24.
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64143
risk.23 Unless otherwise requested by
the staff of the Commission, the Legend
will read as follows:
This ETF is different from traditional ETFs.
Traditional ETFs tell the public what assets
they hold each day. This ETF will not. This
may create additional risks for your
investment. For example:
• You may have to pay more money to
trade the ETF’s shares. This ETF will provide
less information to traders, who tend to
charge more for trades when they have less
information.
• The price you pay to buy ETF shares on
an exchange may not match the value of the
ETF’s portfolio. The same is true when you
sell shares. These price differences may be
greater for this ETF compared to other ETFs
because it provides less information to
traders.
• These additional risks may be even
greater in bad or uncertain market
conditions.
• The ETF will publish on its website each
day a ‘‘Tracking Basket’’ designed to help
trading in shares of the ETF. While the
Tracking Basket includes some of the ETF’s
holdings, it is not the ETF’s actual portfolio.
The differences between this ETF and
other ETFs may also have advantages. By
keeping certain information about the ETF
secret, this ETF may face less risk that other
traders can predict or copy its investment
strategy. This may improve the ETF’s
performance. If other traders are able to copy
or predict the ETF’s investment strategy,
however, this may hurt the ETF’s
performance.
For additional information regarding the
unique attributes and risks of the ETF, see
section [ ] below.
17. Second, Applicants will comply
with the requirements of Regulation Fair
Disclosure (‘‘Reg. FD’’) as if it applied to
them, thus prohibiting the Fund’s
selective disclosure of any material
nonpublic information.24 Because the
Funds will not publicly disclose their
portfolio holdings daily, the selective
disclosure of material nonpublic
information, including information
other than portfolio information, would
be more likely to provide an unfair
23 See
application at 23–25; 53.
17 CFR 243. ETFs are not otherwise subject
to Reg. FD. The federal securities laws and an
investment adviser’s fiduciary duties permit the
disclosure of an ETF’s nonpublic portfolio
information to selected third parties only when the
ETF has legitimate business purposes for doing so
and the recipients are subject to a duty of
confidentiality, including a duty not to trade on the
nonpublic information. See Exchange Traded
Funds, Investment Company Act Release No. 33140
(Jun. 28, 2018), at text accompanying notes 225–226
(proposing rule 6c–11 and discussing Reg. FD). Reg.
FD’s Rule 100(b)(2)(iii) exempts from Reg. FD
certain communications made in connection with a
securities offering registered under the Securities
Act. Applicants would not rely on this exemption;
as the Funds will be continuously offered, this
exemption would likely make the condition
requiring Applicants to comply with Reg. FD
meaningless.
24 See
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advantage to the recipient than in other
ETFs.
18. Third, the Funds and their
Adviser will take remedial actions as
necessary if the Funds do not function
as anticipated. For the first three years
after launch, a Fund will establish
certain thresholds for its level of
Tracking Error,25 premiums/discounts,
and spreads, so that, upon the Fund’s
crossing a threshold, the Adviser will
promptly call a meeting of the Fund’s
board of directors, or a designated
committee thereof,26 and will present
the board or committee with
recommendations for appropriate
remedial measures.27 The board or
committee would then consider the
continuing viability of the Fund,
whether shareholders are being harmed,
and what, if any, action would be
appropriate.28 In addition, Applicants
have agreed to provide to Commission
staff on a periodic basis certain metrics
and other such information as the staff
may request in order to facilitate the
staff’s ongoing monitoring of the
Funds.29
IV. Requested Exemptive Relief
19. Applicants request an order under
section 6(c) of the Act for an exemption
from sections 2(a)(32), 5(a)(1), 22(d), and
22(e) of the Act and rule 22c–1 under
the Act, under sections 6(c) and 17(b) of
the Act for an exemption from sections
17(a)(1) and 17(a)(2) of the Act, and
under section 12(d)(1)(J) of the Act for
25 ‘‘Tracking Error’’ is the standard deviation over
the past three months of the daily proxy spread (i.e.,
the difference, in percentage terms, between the
Tracking Basket’s per share NAV and that of the
Fund at the end of the trading day).
26 The requirement to call a meeting of the board
or committee promptly after reaching a threshold
will be met if the Adviser makes the required
communications, and the board or committee
undertakes the considerations specified in the
application, during the applicable time period but
in advance of the threshold actually being reached.
27 See application at 25–26. For the first three
years after launch of a Fund, its board or committee
would promptly meet (1) if the Tracking Error
exceeds 1%; or (2) if, for 30 or more days in any
quarter or 15 days in a row (a) the absolute
difference between either the market closing price
or Bid/Ask Price, on one hand, and NAV, on the
other, exceeds 2%, or (b) the bid/ask spread exceeds
2%. A Fund may adopt additional or lower (i.e.,
less than 1% for the Tracking Error or less than 2%
for the others) thresholds to the extent deemed
appropriate and approved by the Fund’s board or
a designated committee thereof.
28 For at least three years after launch of each
Fund, the Board will also undertake these
considerations on an annual basis, regardless of
whether the Fund’s preset thresholds have been
crossed. Potential actions may include, but are not
limited to, changing lead market makers, listing the
Fund on a different exchange, changing the size of
creation units, modifications to the Tracking Basket
process, changing the Fund’s investment objective
or strategy, and liquidating the Fund. See
application at 25.
29 See application at 54, condition 7.
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18:21 Nov 19, 2019
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an exemption from sections 12(d)(1)(A)
and (B) of the Act.
20. Applicants’ request for relief is
novel only under section 22(d) and rule
22c–1 due to the proposed alternative
arbitrage mechanism. In all other
respects, Applicants are seeking relief
that the Commission has previously
granted to existing ETFs. As discussed
above, the requested relief would be
available to any open-end investment
company that is an actively-managed
ETF operating in compliance with the
terms and conditions of the order and
that is advised by an Adviser.30
21. Section 6(c) of the Act provides
that the Commission may exempt any
person, security or transaction, or any
class of persons, securities or
transactions, from any provisions of the
Act, if and to the extent that such
exemption is necessary or appropriate
in the public interest and consistent
with the protection of investors and the
purposes fairly intended by the policy
and provisions of the Act. Section 17(b)
of the Act authorizes the Commission to
exempt a proposed transaction from
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 purposes of
the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may
exempt any person, security, or
transaction, or any class or classes of
persons, securities or transactions, from
any provision of section 12(d)(1) if the
exemption is consistent with the public
interest and the protection of investors.
30 Applicants request that the terms and
conditions of the requested order apply to other
registered open-end management investment
companies or series thereof not advised by the
Adviser (‘‘Licensed Funds’’). Applicants anticipate
that the Adviser or an affiliate thereof would enter
into license agreements with the registered
investment advisers advising the Licensed Funds
(together with the Licensed Funds, the ‘‘Future
Applicants’’). Applicants further expect that Future
Applicants would apply for a separate exemptive
order that incorporates by reference all the terms
and conditions of the requested order and any
amendments thereto. See application at 2. See also
Precidian Notice supra note 10, at note 41 and in
re Eaton Vance Management, et al., File No. 812–
14139, Fourth Amendment, filed Sept. 25, 2014;
Investment Company Act Rel. No. 31333 (Nov. 6,
2014) (notice), Investment Company Act Rel. No.
31361 (Dec. 2, 2014) (order). See also, e.g., in re
American Beacon Nextshares Trust, et al., File No.
812–14417, First Amendment, filed Feb. 23, 2015;
Investment Company Act Rel. No. 31498 (Mar. 6,
2015) (notice); Investment Company Act Rel. No.
31542 (Apr. 1, 2015) (order).
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A. Novel Relief Under Section 22(d) and
Rule 22c–1
22. Section 22(d) of the Act, among
other things, prohibits a dealer from
selling a redeemable security that is
currently being offered to the public by
or through a principal underwriter other
than at a current public offering price
described in the fund’s prospectus. Rule
22c–1 under the Act requires open-end
funds, their principal underwriters, and
dealers in fund shares (and certain
others) to sell and redeem fund shares
at a price based on the current NAV
next computed after receipt of an order
to buy or redeem.
23. Together, section 22(d) and rule
22c–1 are designed to: (i) Prevent
dilution caused by certain riskless
trading practices of principal
underwriters and dealers; (ii) prevent
unjust discrimination or preferential
treatment among investors purchasing
and redeeming fund shares; and (iii)
preserve an orderly distribution of
investment company shares.31
24. Applicants believe that none of
these concerns will be raised by
permitting Shares to trade in the
secondary market at negotiated prices.
Applicants state that secondary market
trading in Shares does not involve the
Funds as parties and cannot result in
dilution of an investment in Shares, and
to the extent different prices for Shares
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
state that the proposed distribution
system will be orderly because anyone
will be able to sell or acquire Shares on
an exchange and arbitrage activity
should ensure that secondary market
transactions occur at prices at or close
to the Fund’s NAV.
25. In considering relief from section
22(d) and rule 22c–1 for ETFs, the
Commission has focused on whether the
ETFs’ arbitrage mechanism addresses
the concerns underlying those
provisions. The Commission believes
that the alternative arbitrage mechanism
proposed by Applicants can work in an
efficient manner to maintain a Fund’s
secondary market prices close to its
NAV.32 The Commission recognizes,
however, that the lack of full
transparency may cause the Funds to
trade with spreads and premiums/
discounts that are larger than those of
31 See ETF Rule Adopting Release, supra note 1,
at text accompanying note 116.
32 See supra paragraph 16(b).
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kind purchases of creation units and the
redemption procedures for in-kind
redemptions of creation units will be
the same for all purchases and
redemptions and basket securities will
be valued in the same manner as those
portfolio securities currently held by the
Funds. Applicants also seek relief from
the prohibitions on affiliated
transactions in section 17(a) to permit a
Fund to sell its Shares to and redeem its
B. Other Relief
Shares from an Investing Fund, and to
26. The additional exemptive relief
engage in the accompanying in-kind
Applicants seek is relief routinely
transactions with the Investing Fund.35
granted to ETFs, and does not raise
The purchase of creation units by an
novel issues on account of the lack of
Investing Fund directly from a Fund
daily portfolio transparency.
will be accomplished in accordance
27. Sections 5(a)(1) and 2(a)(32) of the with the policies of the Investing Fund
Act. First, because the Shares will not be and will be based on the NAVs of the
individually redeemable, Applicants
Funds.
request an exemption from section
30. Section 12(d)(1) of the Act. Third,
5(a)(1) and section 2(a)(32) of the Act
Applicants request an exemption to
that would permit the Funds to register
permit Investing Funds to acquire Fund
Shares beyond the limits of section
as open-end management investment
12(d)(1)(A) of the Act and permit the
companies and issue Shares that are
Funds, and any principal underwriter
redeemable in creation units only.
28. Section 22(e) of the Act. Second,
for the Funds, and/or any broker or
Applicants seek relief from section 22(e) dealer registered under the Exchange
to permit Funds to satisfy redemption
Act, to sell Fund Shares to Investing
requests more than seven days from the
Funds beyond the limits of section
tender of Shares for redemption with
12(d)(1)(B) of the Act.36 The
application’s terms and conditions are
respect to foreign securities where the
designed to, among other things, help
settlement cycle, coupled with local
prevent any potential (i) undue
holiday schedules, would not permit a
influence over a Fund through control
Fund to satisfy redemption requests
or voting power, or in connection with
within the seven days required under
certain services, transactions, and
section 22(e) of the Act. A Fund would
underwritings, (ii) excessive layering of
deliver the foreign securities as soon as
practicable, but in no event later than 15 fees, and (iii) overly complex fund
structures, which are the concerns
days after the tender of Shares.
underlying the limits in sections
29. Sections 17(a)(1) and (2) of the
12(d)(1)(A) and (B) of the Act.
Act. Second, Applicants request an
exemption from sections 17(a)(1) and
C. Consideration of Possible Concerns
17(a)(2) of the Act to permit persons that Relating to the Requested Relief
are affiliated persons, or second-tier
31. As part of our review, we have
affiliates, of the Funds, solely by virtue
considered possible concerns regarding
of certain ownership interests, to
the requested relief, including, among
effectuate purchases and redemptions
others, concerns related to the proposed
in-kind. The deposit procedures for inarbitrage mechanism, the use of
Tracking Baskets, and reverse
33 The performance of a Fund’s Tracking Basket
comparable, fully transparent ETFs.33
Nonetheless, as long as arbitrage
continues to keep the Fund’s secondary
market price and NAV close, and does
so efficiently so that spreads remain
narrow, the Commission believes that
investors would benefit from the
opportunity to invest in active strategies
through a vehicle that offers the
traditional benefits of ETFs.34
and portfolio holdings may deviate to some extent,
which would make market participants’ estimates
of the profitability of their arbitrage transactions
less precise. To account for this possibility, market
participants would likely require wider spreads to
trade Shares.
34 Investors will have the information necessary
to compare the costs associated with investing in
the Funds with the costs of investing in other ETFs
and mutual funds. See Item 3 of Form N–1A;
condition 2. Cf. ETF Rule Adopting Release, supra
note 1, at text following note 119 (noting that for
fully transparent ETFs, ‘‘under certain
circumstances, including during periods of market
stress, the arbitrage mechanism may work less
effectively for a period of time,’’ but that ‘‘on
balance, . . . investors are more likely to weigh the
potential benefits of ETFs (e.g., low cost and
intraday trading) against any potential for market
price deviations when deciding whether to utilize
ETFs.’’ Cf. Precidian Notice supra note 10, at 19–
20.
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35 The requested relief would apply to direct sales
of shares in creation units by a Fund to an Investing
Fund and redemptions of those shares. Applicants,
moreover, 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 a second-tier affiliate, of an
Investing Fund because an Adviser or an entity
controlling, controlled by or under common control
with an Adviser provides investment advisory
services to that Investing Fund.
36 Applicants requested a modification to a
standard condition of the Commission’s fund of
funds relief that would prohibit the Funds from
themselves investing in another registered
investment company beyond the section 12(d)(1)
limits. Applicants require this modification to
permit a Fund to acquire Representative ETFs
beyond the limits of section 12(d)(1) solely for the
purpose of effecting transactions in creation units.
See infra condition 21.
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64145
engineering, as discussed below. We
believe, however, that the Applicants’
proposed terms and conditions
sufficiently address such concerns.
32. Proposed Arbitrage Mechanism.
One possible concern is that the
proposed arbitrage mechanism may not
facilitate effective arbitrage, which
could result in significant deviations
between the secondary market price and
NAV per share of a Fund. We believe
that the proposed arbitrage mechanism
can work in an efficient manner to
maintain secondary market prices of
Shares close to their NAV while
providing investors with the
opportunity to invest in active strategies
through a vehicle that offers the
traditional benefits of ETFs.37 In
addition, to the extent that the Funds do
not function as anticipated, Applicants
have undertaken to take remedial
actions as appropriate.38
33. Use of Tracking Baskets.
Applicants have also addressed possible
implications of using a Tracking Basket
as an arbitrage mechanism. First,
Applicants note that a Fund’s Tracking
Basket would not misrepresent the
Fund’s holdings or cause investor
confusion.39 To that effect, the Funds
would provide disclosures in their
prospectus, marketing materials and
website clearly indicating the Tracking
Basket’s purpose and that it is not the
Fund’s portfolio holdings.40 Second,
Applicants state that they would design
their Tracking Basket so that
arbitrageurs’ trading will not have a
significant market impact on the
securities in the Tracking Basket, in
particular those that a Fund does not
hold for investment purposes.41
34. Reverse Engineering. A third
possible concern is that other market
participants may be able to reverse
engineer current activity in a Fund’s
holdings and use such information to
the disadvantage of the Fund,
Authorized Participants and
shareholders. Applicants have
represented that they will operate the
Funds in a manner designed to
37 See
supra paragraphs 15 and 16.
supra paragraph 18.
39 See application at 32–33.
40 See application at 33. In addition, every day the
Funds would disseminate the Tracking Basket
Weight Overlap, which would inform market
participants as to the degree to which the Tracking
Basket and the Fund’s portfolio actually differ. See
application at 12 and 33.
41 Specifically, the Funds expect to include in the
Tracking Basket only assets that are liquid and have
a high trading volume. See application at 31.
Further, Applicants note that their proposed use of
a Tracking Basket is not novel in this respect.
Currently, arbitrageurs for fully-transparent ETFs
may use securities that are not in the ETFs’
portfolio to hedge their positions in the ETFs’
shares. See application at 31–32.
38 See
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minimize the risk of reverse engineering
and we anticipate that the Funds will
have the ability to minimize such risk.42
Indeed, we note that the Applicants
have a significant incentive to minimize
this risk, considering that the purpose of
their proposed arbitrage mechanism is
to facilitate the operation of ETFs that
limit the ETFs’ susceptibility to
predatory trading practices, like ‘‘front
running’’ and ‘‘free riding.’’ 43
V. Applicants’ Conditions 44
Applicants agree that any order of the
Commission granting the requested
relief will be subject to the following
conditions:
A. ETF Relief
1. As long as a Fund operates in
reliance on the requested order, the
Shares of the Fund will be listed on an
exchange.
2. The website for the Funds, which
is and will be publicly accessible at no
charge, will contain, on a per Share
basis, for each Fund the prior business
day’s NAV and market closing price or
Bid/Ask Price of the Shares, a
calculation of the premium or discount
of the market closing price or Bid/Ask
Price against such NAV, and any other
information regarding premiums and
discounts as may be required for other
ETFs under rule 6c–11 under the Act, as
amended. The website will also disclose
any information regarding the bid-ask
spread for each Fund as may be required
for other ETFs under rule 6c–11 under
the Act, as amended.
3. Each Fund will include the Legend
in a prominent location on the outside
cover page of its prospectus, as well as
on its website and any marketing
materials.
4. On each business day, before the
commencement of trading of Shares,
each Fund will publish on its website
the Tracking Basket and the Tracking
Basket Weight Overlap for that day.
5. No Adviser or Sub-Adviser, directly
or indirectly, will cause any Authorized
Participant (or any investor on whose
behalf an Authorized Participant may
transact with the Fund) to acquire any
42 Our Division of Economic Research and
Analysis (‘‘DERA’’) considered whether the current
activity in a Fund’s holdings could be reverse
engineered and concluded that the answer depends
on the specifics of each Fund, including the size of
the Fund’s universe of potential portfolio
selections, the mechanics of how the Fund’s
Tracking Basket is constructed in relationship to the
Fund’s portfolio holdings, the type of information
disclosed about the Fund’s portfolio holdings, and
the degree of overlap between the Fund’s Tracking
Basket and its portfolio holdings. The Funds would
disclose this risk to investors. See application at 24.
43 See application at 30.
44 Capitalized terms not otherwise defined herein
shall have the same meaning as in the application.
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17:21 Nov 19, 2019
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deposit instrument for a Fund through
a transaction in which the Fund could
not engage directly.
6. The requested relief to permit ETF
operations will expire on the effective
date of any Commission rule under the
Act that provides relief permitting the
operation of actively managed ETFs that
disclose a proxy portfolio on each
business day, without fully disclosing
the ETF’s entire portfolio at the same
time.
7. Each Fund will provide the
Commission staff with periodic reports
(for which confidential treatment may
be requested) containing such
information as the Commission staff
may request.
8. Each Fund and each person acting
on behalf of a Fund will comply with
and agree to be subject to the
requirements of Regulation Fair
Disclosure as if it applied to them
(except that the exemptions provided in
Rule 100(b)(2)(iii) therein shall not
apply).
9. Each Fund will maintain and
preserve, for a period of not less than
five years, in an easily accessible place,
(i) all written agreements (or copies
thereof) between an Authorized
Participant and the Fund or one of its
service providers that allows the
Authorized Participant to place orders
for the purchase or redemption of
creation units; (ii) a copy of the
Tracking Basket published on the
Fund’s website for each business day;
and (iii) a list of all creation or
redemption baskets exchanged with an
Authorized Participant where cash was
included in the basket in lieu of some
or all of the Tracking Basket securities
(except for cash included because the
securities are not eligible for trading by
the Authorized Participant or the
investor on whose behalf the
Authorized Participant is acting), the
amount of any such cash in lieu and the
identity of the Authorized Participant
conducting the transaction.
B. Section 12(d)(1) Relief
10. The members of the Investing
Fund’s Advisory Group will not control
(individually or in the aggregate) a Fund
within the meaning of section 2(a)(9) of
the Act. The members of the Investing
Fund’s Sub-Advisory Group will not
control (individually or in the aggregate)
a Fund within the meaning of section
2(a)(9) of the Act. If, as a result of a
decrease in the outstanding voting
securities of a Fund, the Investing
Fund’s Advisory Group or the Investing
Fund’s Sub-Advisory Group, each in the
aggregate, becomes a holder of more
than 25 percent of the outstanding
voting securities of a Fund, it will vote
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its Shares of the Fund in the same
proportion as the vote of all other
holders of the Fund’s Shares. This
condition does not apply to the
Investing Fund’s Sub-Advisory Group
with respect to a Fund for which the
Investing Fund Sub-Adviser or a person
controlling, controlled by or under
common control with the Investing
Fund Sub-Adviser acts as the
investment adviser within the meaning
of section 2(a)(20)(A) of the Act.
11. No Investing Fund or Investing
Fund Affiliate will cause any existing or
potential investment by the Investing
Fund in a Fund to influence the terms
of any services or transactions between
the Investing Fund or an Investing Fund
Affiliate and the Fund or a Fund
Affiliate.
12. The board of directors or trustees
of an Investing Management Company,
including a majority of the independent
directors or trustees, will adopt
procedures reasonably designed to
ensure that the Investing Fund Adviser
and any Investing Fund 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 an Investing
Fund Affiliate from a Fund or a Fund
Affiliate in connection with any services
or transactions.
13. Once an investment by an
Investing Fund in the Shares of a Fund
exceeds the limit in section
12(d)(1)(A)(i) of the Act, the Board of a
Fund, including a majority of the
independent directors or trustees, will
determine that any consideration paid
by the Fund to the Investing Fund or an
Investing Fund Affiliate in connection
with any services or transactions: (i) Is
fair and reasonable in relation to the
nature and quality of the services and
benefits received by the Fund; (ii) is
within the range of consideration that
the Fund would be required to pay to
another unaffiliated entity in connection
with the same services or transactions;
and (iii) does not involve overreaching
on the part of any person concerned.
This condition does not apply with
respect to any services or transactions
between a Fund and its investment
adviser(s), or any person controlling,
controlled by or under common control
with such investment adviser(s).
14. The Investing Fund Adviser, or
Trustee or Sponsor, as applicable, will
waive fees otherwise payable to it by the
Investing Fund in an amount at least
equal to any compensation (including
fees received pursuant to any plan
adopted by a Fund under rule 12b–l
under the Act) received from a Fund by
the Investing Fund Adviser, or Trustee
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or Sponsor, or an affiliated person of the
Investing Fund Adviser, or Trustee or
Sponsor, other than any advisory fees
paid to the Investing Fund Adviser, or
Trustee or Sponsor, or its affiliated
person by the Fund, in connection with
the investment by the Investing Fund in
the Fund. Any Investing Fund SubAdviser will waive fees otherwise
payable to the Investing Fund SubAdviser, directly or indirectly, by the
Investing Management Company in an
amount at least equal to any
compensation received from a Fund by
the Investing Fund Sub-Adviser, or an
affiliated person of the Investing Fund
Sub-Adviser, other than any advisory
fees paid to the Investing Fund 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 Investing
Fund Sub-Adviser. In the event that the
Investing Fund Sub-Adviser waives
fees, the benefit of the waiver will be
passed through to the Investing
Management Company.
15. No Investing Fund or Investing
Fund Affiliate (except to the extent it is
acting in its capacity as an investment
adviser to a Fund) will cause a Fund to
purchase a security in an Affiliated
Underwriting.
16. The Board of a Fund, including a
majority of the independent directors or
trustees, will adopt procedures
reasonably designed to monitor any
purchases of securities by the Fund in
an Affiliated Underwriting, once an
investment by an Investing Fund in the
securities of the Fund exceeds the limit
of section 12(d)(1)(A)(i) of the Act,
including any purchases made directly
from an Underwriting Affiliate. The
Board will review these purchases
periodically, but no less frequently than
annually, to determine whether the
purchases were influenced by the
investment by the Investing Fund in the
Fund. The Board will consider, among
other things: (i) Whether the purchases
were consistent with the investment
objectives and policies of the Fund; (ii)
how the performance of securities
purchased in an Affiliated Underwriting
compares to the performance of
comparable securities purchased during
a comparable period of time in
underwritings other than Affiliated
Underwritings or to a benchmark such
as a comparable market index; and (iii)
whether the amount of securities
purchased by the Fund in Affiliated
Underwritings and the amount
purchased directly from an
Underwriting Affiliate have changed
significantly from prior years. The
Board will take any appropriate actions
VerDate Sep<11>2014
17:21 Nov 19, 2019
Jkt 250001
based on its review, including, if
appropriate, the institution of
procedures designed to assure that
purchases of securities in Affiliated
Underwritings are in the best interest of
shareholders of the Fund.
17. Each Fund will maintain and
preserve permanently in an easily
accessible place a written copy of the
procedures described in the preceding
condition, and any modifications to
such procedures, and will maintain and
preserve for a period of not less than six
years from the end of the fiscal year in
which any purchase in an Affiliated
Underwriting occurred, the first two
years in an easily accessible place, a
written record of each purchase of
securities in Affiliated Underwritings
once an investment by an Investing
Fund in the securities of the Fund
exceeds the limit of section
12(d)(1)(A)(i) of the Act, setting forth
from whom the securities were
acquired, the identity of the
underwriting syndicate’s members, the
terms of the purchase, and the
information or materials upon which
the Board’s determinations were made.
18. Before investing in a Fund in
excess of the limits in section
12(d)(1)(A), an Investing Fund will
execute a FOF Participation Agreement
with the Fund stating that their
respective boards of directors or trustees
and their investment advisers, or
Trustee and Sponsor, as applicable,
understand the terms and conditions of
the order, and agree to fulfill their
responsibilities under the order. At the
time of its investment in Shares of a
Fund in excess of the limit in section
12(d)(1)(A)(i), an Investing Fund will
notify the Fund of the investment. At
such time, the Investing Fund will also
transmit to the Fund a list of the names
of each Investing Fund Affiliate and
Underwriting Affiliate. The Investing
Fund will notify the Fund of any
changes to the list as soon as reasonably
practicable after a change occurs. The
Fund and the Investing Fund will
maintain and preserve a copy of the
order, the FOF Participation Agreement,
and the list with any updated
information for the duration of the
investment and for a period of not less
than six years thereafter, the first two
years in an easily accessible place.
19. Before approving any advisory
contract under section 15 of the Act, the
board of directors or trustees of each
Investing Management Company,
including a majority of the independent
directors or trustees, will find that the
advisory fees charged under such
contract are based on services provided
that will be in addition to, rather than
duplicative of, the services provided
PO 00000
Frm 00110
Fmt 4703
Sfmt 4703
64147
under the advisory contract(s) of any
Fund in which the Investing
Management Company may invest.
These findings and their basis will be
recorded fully in the minute books of
the appropriate Investing Management
Company.
20. Any sales charges and/or service
fees charged with respect to shares of an
Investing Fund will not exceed the
limits applicable to a fund of funds as
set forth in FINRA Rule 2341.
21. 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
(i) 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; and (ii) in
connection with a Fund’s receipt of
Representative ETFs included in its
Tracking Basket solely for purposes of
effecting transactions in Creation
Units.45
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–25070 Filed 11–19–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87540; File No. SR–FINRA–
2019–028]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Allow
FINRA To Publish or Distribute
Aggregated Transaction Information
and Statistics on U.S. Treasury
Securities
November 14, 2019.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
12, 2019, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
45 If the Commission rescinds the Section 12(d)(1)
Relief in connection with the adoption of a rule
providing similar relief, but that would not, in
substance, make the exception in this subparagraph
(ii) available, such exception will nonetheless
continue be available with respect to such rule to
a Fund relying on the requested ETF Relief, unless
the Commission provides otherwise with specific
reference to the Applicants.
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
E:\FR\FM\20NON1.SGM
20NON1
]]>Agencies
[Federal Register Volume 84, Number 224 (Wednesday, November 20, 2019)]
[Notices]
[Pages 64140-64147]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25070]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 33683; 812-14364]
Fidelity Beach Street Trust, et al.; Notice of Application
November 14, 2019.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for exemptive relief.
-----------------------------------------------------------------------
Summary of Application: Applicants request an order under section 6(c)
of the Investment Company Act of 1940 (``Act'') for an exemption from
sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of the Act and rule 22c-1
under the Act, under sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and 17(a)(2) of the Act, and under
section 12(d)(1)(J) of the Act for an exemption from sections
12(d)(1)(A) and 12(d)(1)(B) of the Act. If granted, the requested order
would permit registered open-end investment companies that are
exchange-traded funds (``ETFs'') and are actively managed to operate
without being subject to a daily portfolio transparency condition.
Applicants: Fidelity Management & Research Company and FMR Co., Inc.
(collectively, ``FMR''); Fidelity Beach Street Trust (the ``Trust'');
and Fidelity Distributors Corporation.
Filing Dates: The application was filed on September 26, 2014, and
amended on January 26, 2018, May 18, 2018, August 8, 2018, April 30,
2019, June 7, 2019, July 16, 2019, October 15, 2019, October 22, 2019
and November 8, 2019.
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 9, 2019, 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: Fidelity Beach Street Trust,
Fidelity Management & Research Company, FMR Co., Inc., and Fidelity
Distributors Corporation, 245 Summer Street, Boston, Massachusetts
02210.
FOR FURTHER INFORMATION CONTACT: Bradley Gude, Senior Counsel; Andrea
Ottomanelli Magovern, 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 website 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.
I. Introduction
1. Applicants seek to introduce a novel type of actively-managed
ETF that would not be required to disclose its portfolio holdings on a
daily basis (each, a ``Fund''). Due to their characteristics, ETFs
(including those proposed by Applicants) are only permitted to operate
in reliance on Commission exemptive relief from certain provisions
[[Page 64141]]
of the Act and rules thereunder.\1\ Accordingly, Applicants seek an
order: Under section 6(c) of the Act for an exemption from sections
2(a)(32), 5(a)(1), 22(d), and 22(e) of the Act and rule 22c-1
thereunder; under sections 6(c) and 17(b) of the Act granting 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 (B)
of the Act. The requested order would permit: (a) The Funds 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 Funds to pay redemption proceeds, under certain circumstances,
more than seven days after the tender of Shares for redemption; (d)
certain affiliated persons of a Fund to deposit securities into, and
receive securities from, the Fund 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 Funds (``Investing Funds'') to
acquire Shares of the Funds.
---------------------------------------------------------------------------
\1\ The Commission first granted exemptive relief to operate
ETFs in the early 1990s when the first index-based ETFs were
developed. See SPDR Trust Series I, Investment Company Act Release
Nos. 18959 (Sept. 17, 1992) (notice) and 19055 (Oct. 26, 1992)
(order). See generally Exchange Traded Funds, Investment Company Act
Release No. 33646 (Sept. 25, 2019) (``ETF Rule Adopting Release''),
at section I. The Commission has also granted ETFs exemptive relief
from Sections 12(d)(1)(A) and (B) of the Act. See generally Fund of
Funds Arrangements, Investment Company Act Release No. 33329 (Dec.
19, 2018).
---------------------------------------------------------------------------
2. Section 6(c) allows the Commission to exempt any person,
security, or transaction, or any class thereof, only ``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].''
As discussed below, the Commission believes that the Funds meet the
standard for exemptive relief under section 6(c) of the Act.\2\
Accordingly, the Commission intends to grant the requested relief.
---------------------------------------------------------------------------
\2\ See infra section IV for a discussion of all the relief
requested by Applicants, including relief under sections 17(b) and
12(d)(1)(J) of the Act.
---------------------------------------------------------------------------
II. Background
A. Open-End Investment Companies and Net Asset Value
3. The Act defines an investment company as an ``issuer'' of ``any
security'' which ``is or holds itself out as being engaged primarily .
. . in the business of investing . . . in securities.'' \3\ Shares in
an investment company represent proportionate interests in its
investment portfolio, and their value fluctuates in relation to the
changes in the value of that portfolio.
---------------------------------------------------------------------------
\3\ 15 U.S.C. 80a-3(a); 80a-3(a)(1).
---------------------------------------------------------------------------
4. The most common form of investment company, the ``open-end''
investment company or mutual fund, is required by law to redeem its
securities on demand at a price approximating the securities'
proportionate share of the fund's NAV at the time of redemption.\4\
These funds also continuously issue and sell new shares, thereby
replenishing their investment capital.
---------------------------------------------------------------------------
\4\ See section 22(d) and rule 22c-1; see also infra section
IV.A (discussing section 22(d) and rule 22c-1).
---------------------------------------------------------------------------
5. Because open-end investment companies are required by law to
redeem their shares based on investors' demands, shares of the funds
have historically not traded on exchanges or in other secondary
markets.\5\
---------------------------------------------------------------------------
\5\ This stems from section 22(d) of the Act, which in effect
fixes the prices at which redeemable securities, including open-end
shares, are sold. The result is a system that precludes dealers from
making a secondary market in open-end shares.
---------------------------------------------------------------------------
B. Exemptions Under the Act for Actively Managed ETFs
6. ETFs, including those proposed by Applicants, are a type of
open-end fund. But unlike traditional open-end funds, ETFs are made
available to investors primarily through secondary market transactions
on exchanges.
7. In order for this to take place, ETFs require various exemptions
from the provisions of the Act and the rules thereunder. Critically, in
granting such exemptions to date, the Commission has required that a
mechanism exist to ensure that ETF shares would trade at a price that
is at or close to the NAV per share of the ETF.\6\
---------------------------------------------------------------------------
\6\ This has been a required representation in all ETF orders
since the Commission issued the first order. See supra note 1.
---------------------------------------------------------------------------
8. Such a mechanism is essential for ETFs to operate because ETFs
do not sell or redeem their individual shares at NAV per share as
required by the Act. Instead, large broker-dealers that have
contractual arrangements with an ETF (each, an ``Authorized
Participant'') purchase and redeem ETF shares directly from the ETF,
but only in large blocks called ``creation units.'' Traditionally, an
Authorized Participant that purchases a creation unit of ETF shares
first deposits with the ETF a ``basket'' of securities and other assets
(e.g., cash) identified by the ETF that day, and then receives the
creation unit of ETF shares in return for those assets. The basket is
generally representative of the ETF's portfolio and is equal in value
to the aggregate NAV of ETF shares in the creation unit. After
purchasing a creation unit, the Authorized Participant may sell the
component ETF shares in secondary market transactions. Investors then
purchase individual shares in the secondary market. The redemption
process is the reverse of the purchase process: the Authorized
Participant acquires a creation unit of ETF shares and redeems it for a
basket of securities and other assets.
9. The combination of the creation and redemption process with the
secondary market trading in ETF shares provides arbitrage opportunities
that are designed to help keep the market price of ETF shares at or
close to the NAV per share of the ETF.\7\ For example, if ETF shares
begin trading on national securities exchanges at a ``discount'' (a
price below the estimated intraday NAV per share of the ETF), an
Authorized Participant can purchase ETF shares in secondary market
transactions and, after accumulating enough shares to comprise a
creation unit, redeem them from the ETF in exchange for the more
valuable securities and other assets in the ETF's redemption basket. In
addition to purchasing ETF shares, Authorized Participants also are
likely to hedge their intraday risk. Thus, for example, when ETF shares
are trading at a discount to the estimated intraday NAV per share of
the ETF, an Authorized Participant may also simultaneously short the
securities in the ETF's redemption basket. At the end of the day, the
Authorized Participant will return the creation unit of ETF shares to
the ETF in exchange for the ETF's basket assets, and use such assets to
cover its short positions. Those purchases reduce the supply of ETF
shares in the market, and thus tend to drive up the market price of the
shares to a level closer to the NAV per share of the ETF.\8\
---------------------------------------------------------------------------
\7\ See Investment Company Institute, 2019 Investment Company
Fact Book (2019), at 88-89; ETF Rule Adopting Release, supra note 1,
at note 31 and accompanying text.
\8\ The Authorized Participant's purchase of the ETF shares in
the secondary market, combined with the sale of the redemption
basket securities, may also create upward pressure on the price of
ETF shares and/or downward pressure on the price of redemption
basket securities, driving the market price of ETF shares and the
value of the ETF's portfolio holdings closer together.
---------------------------------------------------------------------------
10. Conversely, if the market price for ETF shares reflects a
``premium'' (a price above the estimated intraday NAV per share of the
ETF), an Authorized Participant can deposit a basket of securities and
other assets in exchange for the more valuable creation unit of ETF
shares, and then sell the individual
[[Page 64142]]
shares in the market to realize its profit.\9\ An Authorized
Participant also is likely to hedge its intraday risk when ETF shares
are trading at a premium. Thus, for example, when the shares of an ETF
are trading at a premium, an Authorized Participant may buy the
securities in the ETF's purchase basket in the secondary market and
sell short the ETF shares. At the end of the day, the Authorized
Participant will deposit the basket assets in exchange for a creation
unit of ETF shares, which it will then use to cover its short
positions. The Authorized Participant will receive a profit from having
paid less for the ETF shares than it received for the assets in the
purchase basket. These transactions would increase the supply of ETF
shares in the secondary market, and thus tend to drive down the price
of ETF shares to a level closer to the NAV per share of the ETF.
---------------------------------------------------------------------------
\9\ The Authorized Participant's purchase of the basket assets,
combined with the sale of ETF shares, may also create downward
pressure on the price of ETF shares, upward pressure on the price of
purchase basket securities, or both, bringing the market price of
ETF shares and the value of the ETF's portfolio holdings closer
together.
---------------------------------------------------------------------------
11. Market participants can also engage in arbitrage activity
without using the creation or redemption processes described above. For
example, if a market participant believes that an ETF is overvalued
relative to its underlying or reference assets (i.e., trading at a
premium), the market participant may sell ETF shares short and buy the
underlying or reference assets, wait for the trading prices to move
toward parity, and then close out the positions in both the ETF shares
and the underlying or reference assets to realize a profit from the
relative movement of their trading prices. Similarly, a market
participant could buy ETF shares and sell the underlying or reference
assets short in an attempt to profit when an ETF's shares are trading
at a discount to the ETF's underlying or reference assets. As discussed
above, this type of trading of an ETF's shares and the ETF's underlying
or reference assets may bring the prices of the ETF's shares and its
portfolio assets closer together through market pressure.
12. In assessing whether to grant exemptive relief to actively
managed ETFs in the past, the Commission has required a mechanism that
would keep the market prices of ETF shares at or close to the NAV per
share of the ETF.\10\ This close tie between market price and NAV per
share of the ETF is the foundation for why the prices at which retail
investors buy and sell ETF shares are similar to the prices at which
Authorized Participants are able to buy and redeem shares directly from
the ETF at NAV. In granting relief from section 22(d) of the Act and
rule 22c-1 under the Act, the Commission relies on this close tie
between what retail investors pay and what Authorized Participants pay
to make the finding that the ETF's shareholders are being treated
equitably when buying and selling shares.\11\
---------------------------------------------------------------------------
\10\ Until recently, the Commission only approved a mechanism
dependent on daily portfolio transparency. See generally ETF Rule
Adopting Release, supra note 1, at section II.C.4. Last May, the
Commission issued an order granting relief to actively managed ETFs
that, like the Funds, do not disclose their complete portfolio
holdings on a daily basis. See Precidian ETFs Trust, et al.,
Investment Company Act Release No. 33440 (Apr. 8, 2019) (the
``Precidian Notice'') and 33477 (May 20, 2019) (the ``Precidian
Order''). Applicants' proposed arbitrage mechanism differs from that
in the Precidian Order.
\11\ See supra note 4 and accompanying text.
---------------------------------------------------------------------------
III. The Application
A. The Applicants
13. The Trust is organized as a business trust under the laws of
the Commonwealth of Massachusetts and is registered with the Commission
as an open-end management investment company. Fidelity Management &
Research Company or FMR Co., Inc., each a Massachusetts corporation
registered as an investment adviser under the Investment Advisers Act
of 1940 (``Advisers Act''), would serve as the investment adviser to
the initial Funds. Fidelity Distributors Corporation, a Massachusetts
corporation, is a registered broker-dealer under the Securities
Exchange Act of 1934, as amended (``Exchange Act''), and will act as
distributor and principal underwriter of the Funds.
B. Applicants' Proposal
14. Applicants seek exemptive relief under section 6(c) to allow
them to introduce actively-managed Funds that would not disclose their
portfolio holdings on a daily basis.\12\ Applicants maintain that
operating the Funds as fully-transparent actively-managed ETFs would
make the Funds susceptible to ``front running'' and ``free riding'' by
other investors and/or managers, which can harm, and result in
substantial costs to, the Funds and their shareholders.\13\
---------------------------------------------------------------------------
\12\ Applicants request that the order apply to series of the
Trust identified and described in the application as well as to
additional series of the Trust and any other open-end management
investment company or series thereof that seek to rely on the relief
requested in the application, each of which will operate as an
actively-managed ETF. Any Fund will: (a) Be advised by Fidelity
Management & Research Company, FMR Co., Inc., or an entity
controlling, controlled by, or under common control with Fidelity
Management & Research Company or FMR Co., Inc. (each such entity and
any successor thereto is included in the term ``Adviser''); and (b)
comply with the terms and conditions of the application. The Adviser
may retain one or more sub-advisers (each a ``Sub-Adviser'') for the
Funds. Any Sub-Adviser will be registered under the Advisers Act.
For purposes of the requested order, the term ``successor'' is
limited to an entity that results from a reorganization into another
jurisdiction or a change in the type of business organization.
\13\ See application at 15 and 30.
---------------------------------------------------------------------------
15. Applicants believe that the Funds would allow investors to
access active investment strategies offered by certain investment
advisers that are currently only available via mutual funds, while also
taking advantage of the traditional benefits of ETFs (e.g., lower fund
costs, tax efficiencies and intraday liquidity).
16. Applicants state that the relief in the application is similar
to the relief granted in exemptive orders issued to existing actively
managed ETFs, except for certain differences permitting the Funds to
operate on a non-transparent basis.\14\ These material differences are
discussed below.
---------------------------------------------------------------------------
\14\ Cf. Precidian Order supra note 10.
---------------------------------------------------------------------------
a. Tracking Basket. Each day a Fund would publish a basket of
securities and cash that, while different from the Fund's portfolio, is
designed to closely track its daily performance (the ``Tracking
Basket'').\15\ In addition, every day the Fund would disclose the
percentage weight overlap between the holdings of the prior business
day's Tracking Basket compared to the holdings of the Fund that formed
the basis for the Fund's calculation of NAV at the end of the prior
business day (the ``Tracking Basket Weight Overlap''). Such number
would help market participants evaluate the risk that the performance
of the Tracking Basket may deviate from the performance of the
portfolio holdings of a Fund.
---------------------------------------------------------------------------
\15\ The Funds would, at a minimum, provide the quarterly
portfolio disclosures required for mutual funds. See rule 30b1-9
under the Act and Form N-PORT.
---------------------------------------------------------------------------
Applicants state that the Tracking Basket would serve as a pricing
and hedging tool for market participants to identify and take advantage
of arbitrage opportunities. Because the Tracking Basket would be
designed to closely track the daily performance of the Fund's holdings,
the Tracking Basket would serve to estimate the value of those
holdings. For the same reason, trading the Tracking Basket would allow
market participants to get exposure to the performance of the Fund's
holdings, so that a Fund's Tracking Basket could serve to hedge a
position in the Fund's Shares. Further, the Tracking Basket would serve
as the creation/redemption
[[Page 64143]]
basket when Authorized Participants exchange creation units with the
Fund.
Also in order to facilitate arbitrage, each Fund's portfolio and
Tracking Basket will only include certain securities that trade on an
exchange contemporaneously with the Fund's Shares.\16\ Because the
securities would be exchange traded, market participants would be able
to accurately price and readily trade the securities in the Tracking
Basket for purposes of assessing the intraday value of the Fund's
portfolio holdings and to hedge their positions in the Fund's
shares.\17\
---------------------------------------------------------------------------
\16\ Each Fund may invest only in ETFs, Exchange-traded notes,
Exchange-traded common stocks, common stocks listed on a foreign
exchange that trade on such exchange contemporaneously with the
Shares, Exchange-traded preferred stocks, Exchange-traded American
depositary receipts, Exchange-traded real estate investment trusts,
Exchange-traded commodity pools, Exchange-traded metals trusts,
Exchange-traded currency trusts, and exchange-traded futures that
trade contemporaneously with the Shares, as well as cash and cash
equivalents. For purposes of the application, exchange-traded
futures are U.S. listed futures contracts where the futures
contract's reference asset is an asset that the Fund could invest in
directly, or in the case of an index future, is based on an index of
a type of asset that the Fund could invest in directly. All futures
contracts that a Fund may invest in will be traded on a U.S. futures
exchange. For these purposes, an ``Exchange'' is a national
securities exchange as defined in section 2(a)(26) of the Act. No
Fund will invest in a ``penny stock'' as defined in Exchange Act
Rule 3a51-1, borrow for investment purposes, hold short positions,
or purchase any security that is illiquid at the time of purchase.
The Tracking Basket will be subject to the same limitations.
\17\ A Fund's Tracking Basket may include ``Representative
ETFs,'' which would be U.S. exchange-traded ETFs selected for
inclusion in the Tracking Basket such that, when aggregated with the
other Tracking Basket components, the Tracking Basket corresponds to
the Fund's overall holdings exposures. As such, a Fund may receive
Representative ETFs in the basket of securities it exchanges for a
creation unit of its shares. On account of this use of
Representative ETFs, Applicants are asking for a minor modification
of a standard condition of the Commission's fund of funds relief.
See infra note 37.
---------------------------------------------------------------------------
b. Arbitrage Transactions in the Funds. Applicants state that,
given the correlation between a Fund's Tracking Basket and its
portfolio holdings, the Tracking Basket would serve as a pricing signal
to identify arbitrage opportunities when its value and the secondary
market price of the Shares diverge. If Shares began trading at a
discount to the Tracking Basket, an authorized participant could
purchase the Shares in secondary market transactions and, after
accumulating enough Shares to comprise a creation unit, redeem them
from the Fund in exchange for a redemption basket reflecting the NAV
per share of the Fund's portfolio holdings.\18\ The purchases of Shares
would reduce the supply of Shares in the market, and thus tend to drive
up the Shares' market price closer to the Fund's NAV.\19\
Alternatively, if Shares are trading at a premium, the transactions in
the arbitrage process are reversed.
---------------------------------------------------------------------------
\18\ In addition to purchasing Shares, an authorized participant
also would likely hedge its intraday risk by shorting the securities
in the Tracking Basket (the same as in the redemption basket) in an
amount corresponding to its long position in Shares. After the
authorized participant returns a creation unit to the Fund in
exchange for a redemption basket, the authorized participant can use
the basket securities to cover its short positions. Cf. supra note
8.
\19\ The purchase of the Shares in the secondary market,
combined with the sale of the redemption basket securities, may also
drive the market price of Shares and the value of the Fund's
portfolio holdings closer together. See supra note 8.
---------------------------------------------------------------------------
Applicants further state that, like with traditional ETFs, market
participants also can engage in arbitrage without using the creation or
redemption processes.\20\ For example, if a Fund is trading at a
premium to the Tracking Basket, the market participant may sell Shares
short and take a long position in the Tracking Basket securities, wait
for the trading prices to move toward parity, and then close out the
positions in both the Shares and the securities, to realize a profit
from the relative movement of their trading prices. Similarly, a market
participant could buy Shares and take a short position in the Tracking
Basket securities in an attempt to profit when Shares are trading at a
discount to the Tracking Basket.
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\20\ See supra paragraph 11.
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c. Protective conditions. Applicants have agreed to comply with
certain conditions in addition to those included in prior ETF exemptive
orders.\21\ First, the Funds will provide certain public disclosures to
explain to investors how they differ from traditional ETFs and inform
investors that the Funds' bid-ask spreads and premiums/discounts may be
larger than those for traditional ETFs due to the lack of transparency,
thus making trading in the Funds' Shares more expensive. The Funds will
also disclose that market participants may attempt to reverse engineer
a Fund's trading strategy, which, if successful, could increase
opportunities for trading practices that may disadvantage the Fund and
its shareholders.\22\ Each Fund will include a legend (the ``Legend'')
in a prominent location on the outside cover page of its prospectus, as
well as on its website and any marketing materials, that will highlight
for investors the differences between the Funds and fully transparent
actively managed ETFs and the above costs and risk.\23\ Unless
otherwise requested by the staff of the Commission, the Legend will
read as follows:
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\21\ These are substantially the same as conditions included in
the Precidian Order. See Precidian Notice supra note 10, at
paragraph 17(d).
\22\ See application at 24.
\23\ See application at 23-25; 53.
This ETF is different from traditional ETFs.
Traditional ETFs tell the public what assets they hold each day.
This ETF will not. This may create additional risks for your
investment. For example:
You may have to pay more money to trade the ETF's
shares. This ETF will provide less information to traders, who tend
to charge more for trades when they have less information.
The price you pay to buy ETF shares on an exchange may
not match the value of the ETF's portfolio. The same is true when
you sell shares. These price differences may be greater for this ETF
compared to other ETFs because it provides less information to
traders.
These additional risks may be even greater in bad or
uncertain market conditions.
The ETF will publish on its website each day a
``Tracking Basket'' designed to help trading in shares of the ETF.
While the Tracking Basket includes some of the ETF's holdings, it is
not the ETF's actual portfolio.
The differences between this ETF and other ETFs may also have
advantages. By keeping certain information about the ETF secret,
this ETF may face less risk that other traders can predict or copy
its investment strategy. This may improve the ETF's performance. If
other traders are able to copy or predict the ETF's investment
strategy, however, this may hurt the ETF's performance.
For additional information regarding the unique attributes and
risks of the ETF, see section [ ] below.
17. Second, Applicants will comply with the requirements of
Regulation Fair Disclosure (``Reg. FD'') as if it applied to them, thus
prohibiting the Fund's selective disclosure of any material nonpublic
information.\24\ Because the Funds will not publicly disclose their
portfolio holdings daily, the selective disclosure of material
nonpublic information, including information other than portfolio
information, would be more likely to provide an unfair
[[Page 64144]]
advantage to the recipient than in other ETFs.
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\24\ See 17 CFR 243. ETFs are not otherwise subject to Reg. FD.
The federal securities laws and an investment adviser's fiduciary
duties permit the disclosure of an ETF's nonpublic portfolio
information to selected third parties only when the ETF has
legitimate business purposes for doing so and the recipients are
subject to a duty of confidentiality, including a duty not to trade
on the nonpublic information. See Exchange Traded Funds, Investment
Company Act Release No. 33140 (Jun. 28, 2018), at text accompanying
notes 225-226 (proposing rule 6c-11 and discussing Reg. FD). Reg.
FD's Rule 100(b)(2)(iii) exempts from Reg. FD certain communications
made in connection with a securities offering registered under the
Securities Act. Applicants would not rely on this exemption; as the
Funds will be continuously offered, this exemption would likely make
the condition requiring Applicants to comply with Reg. FD
meaningless.
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18. Third, the Funds and their Adviser will take remedial actions
as necessary if the Funds do not function as anticipated. For the first
three years after launch, a Fund will establish certain thresholds for
its level of Tracking Error,\25\ premiums/discounts, and spreads, so
that, upon the Fund's crossing a threshold, the Adviser will promptly
call a meeting of the Fund's board of directors, or a designated
committee thereof,\26\ and will present the board or committee with
recommendations for appropriate remedial measures.\27\ The board or
committee would then consider the continuing viability of the Fund,
whether shareholders are being harmed, and what, if any, action would
be appropriate.\28\ In addition, Applicants have agreed to provide to
Commission staff on a periodic basis certain metrics and other such
information as the staff may request in order to facilitate the staff's
ongoing monitoring of the Funds.\29\
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\25\ ``Tracking Error'' is the standard deviation over the past
three months of the daily proxy spread (i.e., the difference, in
percentage terms, between the Tracking Basket's per share NAV and
that of the Fund at the end of the trading day).
\26\ The requirement to call a meeting of the board or committee
promptly after reaching a threshold will be met if the Adviser makes
the required communications, and the board or committee undertakes
the considerations specified in the application, during the
applicable time period but in advance of the threshold actually
being reached.
\27\ See application at 25-26. For the first three years after
launch of a Fund, its board or committee would promptly meet (1) if
the Tracking Error exceeds 1%; or (2) if, for 30 or more days in any
quarter or 15 days in a row (a) the absolute difference between
either the market closing price or Bid/Ask Price, on one hand, and
NAV, on the other, exceeds 2%, or (b) the bid/ask spread exceeds 2%.
A Fund may adopt additional or lower (i.e., less than 1% for the
Tracking Error or less than 2% for the others) thresholds to the
extent deemed appropriate and approved by the Fund's board or a
designated committee thereof.
\28\ For at least three years after launch of each Fund, the
Board will also undertake these considerations on an annual basis,
regardless of whether the Fund's preset thresholds have been
crossed. Potential actions may include, but are not limited to,
changing lead market makers, listing the Fund on a different
exchange, changing the size of creation units, modifications to the
Tracking Basket process, changing the Fund's investment objective or
strategy, and liquidating the Fund. See application at 25.
\29\ See application at 54, condition 7.
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IV. Requested Exemptive Relief
19. Applicants request an order under section 6(c) of the Act for
an exemption from sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of the
Act and rule 22c-1 under the Act, under sections 6(c) and 17(b) of the
Act for an exemption from sections 17(a)(1) and 17(a)(2) of the Act,
and under section 12(d)(1)(J) of the Act for an exemption from sections
12(d)(1)(A) and (B) of the Act.
20. Applicants' request for relief is novel only under section
22(d) and rule 22c-1 due to the proposed alternative arbitrage
mechanism. In all other respects, Applicants are seeking relief that
the Commission has previously granted to existing ETFs. As discussed
above, the requested relief would be available to any open-end
investment company that is an actively-managed ETF operating in
compliance with the terms and conditions of the order and that is
advised by an Adviser.\30\
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\30\ Applicants request that the terms and conditions of the
requested order apply to other registered open-end management
investment companies or series thereof not advised by the Adviser
(``Licensed Funds''). Applicants anticipate that the Adviser or an
affiliate thereof would enter into license agreements with the
registered investment advisers advising the Licensed Funds (together
with the Licensed Funds, the ``Future Applicants''). Applicants
further expect that Future Applicants would apply for a separate
exemptive order that incorporates by reference all the terms and
conditions of the requested order and any amendments thereto. See
application at 2. See also Precidian Notice supra note 10, at note
41 and in re Eaton Vance Management, et al., File No. 812-14139,
Fourth Amendment, filed Sept. 25, 2014; Investment Company Act Rel.
No. 31333 (Nov. 6, 2014) (notice), Investment Company Act Rel. No.
31361 (Dec. 2, 2014) (order). See also, e.g., in re American Beacon
Nextshares Trust, et al., File No. 812-14417, First Amendment, filed
Feb. 23, 2015; Investment Company Act Rel. No. 31498 (Mar. 6, 2015)
(notice); Investment Company Act Rel. No. 31542 (Apr. 1, 2015)
(order).
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21. Section 6(c) of the Act provides that the Commission may exempt
any person, security or transaction, or any class of persons,
securities or transactions, from any provisions of the Act, if and to
the extent that such exemption is necessary or appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Act.
Section 17(b) of the Act authorizes the Commission to exempt a proposed
transaction from 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 purposes of the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may exempt any person, security, or
transaction, or any class or classes of persons, securities or
transactions, from any provision of section 12(d)(1) if the exemption
is consistent with the public interest and the protection of investors.
A. Novel Relief Under Section 22(d) and Rule 22c-1
22. Section 22(d) of the Act, among other things, prohibits a
dealer from selling a redeemable security that is currently being
offered to the public by or through a principal underwriter other than
at a current public offering price described in the fund's prospectus.
Rule 22c-1 under the Act requires open-end funds, their principal
underwriters, and dealers in fund shares (and certain others) to sell
and redeem fund shares at a price based on the current NAV next
computed after receipt of an order to buy or redeem.
23. Together, section 22(d) and rule 22c-1 are designed to: (i)
Prevent dilution caused by certain riskless trading practices of
principal underwriters and dealers; (ii) prevent unjust discrimination
or preferential treatment among investors purchasing and redeeming fund
shares; and (iii) preserve an orderly distribution of investment
company shares.\31\
---------------------------------------------------------------------------
\31\ See ETF Rule Adopting Release, supra note 1, at text
accompanying note 116.
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24. Applicants believe that none of these concerns will be raised
by permitting Shares to trade in the secondary market at negotiated
prices. Applicants state that secondary market trading in Shares does
not involve the Funds as parties and cannot result in dilution of an
investment in Shares, and to the extent different prices for Shares
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 state that the proposed
distribution system will be orderly because anyone will be able to sell
or acquire Shares on an exchange and arbitrage activity should ensure
that secondary market transactions occur at prices at or close to the
Fund's NAV.
25. In considering relief from section 22(d) and rule 22c-1 for
ETFs, the Commission has focused on whether the ETFs' arbitrage
mechanism addresses the concerns underlying those provisions. The
Commission believes that the alternative arbitrage mechanism proposed
by Applicants can work in an efficient manner to maintain a Fund's
secondary market prices close to its NAV.\32\ The Commission
recognizes, however, that the lack of full transparency may cause the
Funds to trade with spreads and premiums/discounts that are larger than
those of
[[Page 64145]]
comparable, fully transparent ETFs.\33\ Nonetheless, as long as
arbitrage continues to keep the Fund's secondary market price and NAV
close, and does so efficiently so that spreads remain narrow, the
Commission believes that investors would benefit from the opportunity
to invest in active strategies through a vehicle that offers the
traditional benefits of ETFs.\34\
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\32\ See supra paragraph 16(b).
\33\ The performance of a Fund's Tracking Basket and portfolio
holdings may deviate to some extent, which would make market
participants' estimates of the profitability of their arbitrage
transactions less precise. To account for this possibility, market
participants would likely require wider spreads to trade Shares.
\34\ Investors will have the information necessary to compare
the costs associated with investing in the Funds with the costs of
investing in other ETFs and mutual funds. See Item 3 of Form N-1A;
condition 2. Cf. ETF Rule Adopting Release, supra note 1, at text
following note 119 (noting that for fully transparent ETFs, ``under
certain circumstances, including during periods of market stress,
the arbitrage mechanism may work less effectively for a period of
time,'' but that ``on balance, . . . investors are more likely to
weigh the potential benefits of ETFs (e.g., low cost and intraday
trading) against any potential for market price deviations when
deciding whether to utilize ETFs.'' Cf. Precidian Notice supra note
10, at 19-20.
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B. Other Relief
26. The additional exemptive relief Applicants seek is relief
routinely granted to ETFs, and does not raise novel issues on account
of the lack of daily portfolio transparency.
27. Sections 5(a)(1) and 2(a)(32) of the Act. First, because the
Shares will not be individually redeemable, Applicants request an
exemption from section 5(a)(1) and section 2(a)(32) of the Act that
would permit the Funds to register as open-end management investment
companies and issue Shares that are redeemable in creation units only.
28. Section 22(e) of the Act. Second, Applicants seek relief from
section 22(e) to permit Funds to satisfy redemption requests more than
seven days from the tender of Shares for redemption with respect to
foreign securities where the settlement cycle, coupled with local
holiday schedules, would not permit a Fund to satisfy redemption
requests within the seven days required under section 22(e) of the Act.
A Fund would deliver the foreign securities as soon as practicable, but
in no event later than 15 days after the tender of Shares.
29. Sections 17(a)(1) and (2) of the Act. Second, Applicants
request an exemption from sections 17(a)(1) and 17(a)(2) of the Act to
permit persons that are affiliated persons, or second-tier affiliates,
of the Funds, solely by virtue of certain ownership interests, to
effectuate purchases and redemptions in-kind. The deposit procedures
for in-kind purchases of creation units and the redemption procedures
for in-kind redemptions of creation units will be the same for all
purchases and redemptions and basket securities will be valued in the
same manner as those portfolio securities currently held by the Funds.
Applicants also seek relief from the prohibitions on affiliated
transactions in section 17(a) to permit a Fund to sell its Shares to
and redeem its Shares from an Investing Fund, and to engage in the
accompanying in-kind transactions with the Investing Fund.\35\ The
purchase of creation units by an Investing Fund directly from a Fund
will be accomplished in accordance with the policies of the Investing
Fund and will be based on the NAVs of the Funds.
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\35\ The requested relief would apply to direct sales of shares
in creation units by a Fund to an Investing Fund and redemptions of
those shares. Applicants, moreover, 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 a
second-tier affiliate, of an Investing Fund because an Adviser or an
entity controlling, controlled by or under common control with an
Adviser provides investment advisory services to that Investing
Fund.
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30. Section 12(d)(1) of the Act. Third, Applicants request an
exemption to permit Investing Funds to acquire Fund Shares beyond the
limits of section 12(d)(1)(A) of the Act and permit the Funds, and any
principal underwriter for the Funds, and/or any broker or dealer
registered under the Exchange Act, to sell Fund Shares to Investing
Funds beyond the limits of section 12(d)(1)(B) of the Act.\36\ The
application's terms and conditions are designed to, among other things,
help prevent any potential (i) undue influence over a Fund through
control or voting power, or in connection with certain services,
transactions, and underwritings, (ii) excessive layering of fees, and
(iii) overly complex fund structures, which are the concerns underlying
the limits in sections 12(d)(1)(A) and (B) of the Act.
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\36\ Applicants requested a modification to a standard condition
of the Commission's fund of funds relief that would prohibit the
Funds from themselves investing in another registered investment
company beyond the section 12(d)(1) limits. Applicants require this
modification to permit a Fund to acquire Representative ETFs beyond
the limits of section 12(d)(1) solely for the purpose of effecting
transactions in creation units. See infra condition 21.
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C. Consideration of Possible Concerns Relating to the Requested Relief
31. As part of our review, we have considered possible concerns
regarding the requested relief, including, among others, concerns
related to the proposed arbitrage mechanism, the use of Tracking
Baskets, and reverse engineering, as discussed below. We believe,
however, that the Applicants' proposed terms and conditions
sufficiently address such concerns.
32. Proposed Arbitrage Mechanism. One possible concern is that the
proposed arbitrage mechanism may not facilitate effective arbitrage,
which could result in significant deviations between the secondary
market price and NAV per share of a Fund. We believe that the proposed
arbitrage mechanism can work in an efficient manner to maintain
secondary market prices of Shares close to their NAV while providing
investors with the opportunity to invest in active strategies through a
vehicle that offers the traditional benefits of ETFs.\37\ In addition,
to the extent that the Funds do not function as anticipated, Applicants
have undertaken to take remedial actions as appropriate.\38\
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\37\ See supra paragraphs 15 and 16.
\38\ See supra paragraph 18.
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33. Use of Tracking Baskets. Applicants have also addressed
possible implications of using a Tracking Basket as an arbitrage
mechanism. First, Applicants note that a Fund's Tracking Basket would
not misrepresent the Fund's holdings or cause investor confusion.\39\
To that effect, the Funds would provide disclosures in their
prospectus, marketing materials and website clearly indicating the
Tracking Basket's purpose and that it is not the Fund's portfolio
holdings.\40\ Second, Applicants state that they would design their
Tracking Basket so that arbitrageurs' trading will not have a
significant market impact on the securities in the Tracking Basket, in
particular those that a Fund does not hold for investment purposes.\41\
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\39\ See application at 32-33.
\40\ See application at 33. In addition, every day the Funds
would disseminate the Tracking Basket Weight Overlap, which would
inform market participants as to the degree to which the Tracking
Basket and the Fund's portfolio actually differ. See application at
12 and 33.
\41\ Specifically, the Funds expect to include in the Tracking
Basket only assets that are liquid and have a high trading volume.
See application at 31. Further, Applicants note that their proposed
use of a Tracking Basket is not novel in this respect. Currently,
arbitrageurs for fully-transparent ETFs may use securities that are
not in the ETFs' portfolio to hedge their positions in the ETFs'
shares. See application at 31-32.
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34. Reverse Engineering. A third possible concern is that other
market participants may be able to reverse engineer current activity in
a Fund's holdings and use such information to the disadvantage of the
Fund, Authorized Participants and shareholders. Applicants have
represented that they will operate the Funds in a manner designed to
[[Page 64146]]
minimize the risk of reverse engineering and we anticipate that the
Funds will have the ability to minimize such risk.\42\ Indeed, we note
that the Applicants have a significant incentive to minimize this risk,
considering that the purpose of their proposed arbitrage mechanism is
to facilitate the operation of ETFs that limit the ETFs' susceptibility
to predatory trading practices, like ``front running'' and ``free
riding.'' \43\
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\42\ Our Division of Economic Research and Analysis (``DERA'')
considered whether the current activity in a Fund's holdings could
be reverse engineered and concluded that the answer depends on the
specifics of each Fund, including the size of the Fund's universe of
potential portfolio selections, the mechanics of how the Fund's
Tracking Basket is constructed in relationship to the Fund's
portfolio holdings, the type of information disclosed about the
Fund's portfolio holdings, and the degree of overlap between the
Fund's Tracking Basket and its portfolio holdings. The Funds would
disclose this risk to investors. See application at 24.
\43\ See application at 30.
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V. Applicants' Conditions 44
---------------------------------------------------------------------------
\44\ Capitalized terms not otherwise defined herein shall have
the same meaning as in the application.
---------------------------------------------------------------------------
Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
A. ETF Relief
1. As long as a Fund operates in reliance on the requested order,
the Shares of the Fund will be listed on an exchange.
2. The website for the Funds, which is and will be publicly
accessible at no charge, will contain, on a per Share basis, for each
Fund the prior business day's NAV and market closing price or Bid/Ask
Price of the Shares, a calculation of the premium or discount of the
market closing price or Bid/Ask Price against such NAV, and any other
information regarding premiums and discounts as may be required for
other ETFs under rule 6c-11 under the Act, as amended. The website will
also disclose any information regarding the bid-ask spread for each
Fund as may be required for other ETFs under rule 6c-11 under the Act,
as amended.
3. Each Fund will include the Legend in a prominent location on the
outside cover page of its prospectus, as well as on its website and any
marketing materials.
4. On each business day, before the commencement of trading of
Shares, each Fund will publish on its website the Tracking Basket and
the Tracking Basket Weight Overlap for that day.
5. No Adviser or Sub-Adviser, directly or indirectly, will cause
any Authorized Participant (or any investor on whose behalf an
Authorized Participant may transact with the Fund) to acquire any
deposit instrument for a Fund through a transaction in which the Fund
could not engage directly.
6. The requested relief to permit ETF operations will expire on the
effective date of any Commission rule under the Act that provides
relief permitting the operation of actively managed ETFs that disclose
a proxy portfolio on each business day, without fully disclosing the
ETF's entire portfolio at the same time.
7. Each Fund will provide the Commission staff with periodic
reports (for which confidential treatment may be requested) containing
such information as the Commission staff may request.
8. Each Fund and each person acting on behalf of a Fund will comply
with and agree to be subject to the requirements of Regulation Fair
Disclosure as if it applied to them (except that the exemptions
provided in Rule 100(b)(2)(iii) therein shall not apply).
9. Each Fund will maintain and preserve, for a period of not less
than five years, in an easily accessible place, (i) all written
agreements (or copies thereof) between an Authorized Participant and
the Fund or one of its service providers that allows the Authorized
Participant to place orders for the purchase or redemption of creation
units; (ii) a copy of the Tracking Basket published on the Fund's
website for each business day; and (iii) a list of all creation or
redemption baskets exchanged with an Authorized Participant where cash
was included in the basket in lieu of some or all of the Tracking
Basket securities (except for cash included because the securities are
not eligible for trading by the Authorized Participant or the investor
on whose behalf the Authorized Participant is acting), the amount of
any such cash in lieu and the identity of the Authorized Participant
conducting the transaction.
B. Section 12(d)(1) Relief
10. The members of the Investing Fund's Advisory Group will not
control (individually or in the aggregate) a Fund within the meaning of
section 2(a)(9) of the Act. The members of the Investing Fund's Sub-
Advisory Group will not control (individually or in the aggregate) a
Fund within the meaning of section 2(a)(9) of the Act. If, as a result
of a decrease in the outstanding voting securities of a Fund, the
Investing Fund's Advisory Group or the Investing Fund's Sub-Advisory
Group, each in the aggregate, becomes a holder of more than 25 percent
of the outstanding voting securities of a Fund, it will vote its Shares
of the Fund in the same proportion as the vote of all other holders of
the Fund's Shares. This condition does not apply to the Investing
Fund's Sub-Advisory Group with respect to a Fund for which the
Investing Fund Sub-Adviser or a person controlling, controlled by or
under common control with the Investing Fund Sub-Adviser acts as the
investment adviser within the meaning of section 2(a)(20)(A) of the
Act.
11. No Investing Fund or Investing Fund Affiliate will cause any
existing or potential investment by the Investing Fund in a Fund to
influence the terms of any services or transactions between the
Investing Fund or an Investing Fund Affiliate and the Fund or a Fund
Affiliate.
12. The board of directors or trustees of an Investing Management
Company, including a majority of the independent directors or trustees,
will adopt procedures reasonably designed to ensure that the Investing
Fund Adviser and any Investing Fund 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 an Investing Fund Affiliate from a Fund or a Fund Affiliate
in connection with any services or transactions.
13. Once an investment by an Investing Fund in the Shares of a Fund
exceeds the limit in section 12(d)(1)(A)(i) of the Act, the Board of a
Fund, including a majority of the independent directors or trustees,
will determine that any consideration paid by the Fund to the Investing
Fund or an Investing Fund Affiliate in connection with any services or
transactions: (i) Is fair and reasonable in relation to the nature and
quality of the services and benefits received by the Fund; (ii) is
within the range of consideration that the Fund would be required to
pay to another unaffiliated entity in connection with the same services
or transactions; and (iii) does not involve overreaching on the part of
any person concerned. This condition does not apply with respect to any
services or transactions between a Fund and its investment adviser(s),
or any person controlling, controlled by or under common control with
such investment adviser(s).
14. The Investing Fund Adviser, or Trustee or Sponsor, as
applicable, will waive fees otherwise payable to it by the Investing
Fund in an amount at least equal to any compensation (including fees
received pursuant to any plan adopted by a Fund under rule 12b-l under
the Act) received from a Fund by the Investing Fund Adviser, or Trustee
[[Page 64147]]
or Sponsor, or an affiliated person of the Investing Fund Adviser, or
Trustee or Sponsor, other than any advisory fees paid to the Investing
Fund Adviser, or Trustee or Sponsor, or its affiliated person by the
Fund, in connection with the investment by the Investing Fund in the
Fund. Any Investing Fund Sub-Adviser will waive fees otherwise payable
to the Investing Fund 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 Investing Fund Sub-Adviser, or
an affiliated person of the Investing Fund Sub-Adviser, other than any
advisory fees paid to the Investing Fund 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 Investing
Fund Sub-Adviser. In the event that the Investing Fund Sub-Adviser
waives fees, the benefit of the waiver will be passed through to the
Investing Management Company.
15. No Investing Fund or Investing Fund Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Fund)
will cause a Fund to purchase a security in an Affiliated Underwriting.
16. The Board of a Fund, including a majority of the independent
directors or trustees, will adopt procedures reasonably designed to
monitor any purchases of securities by the Fund in an Affiliated
Underwriting, once an investment by an Investing Fund in the securities
of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act,
including any purchases made directly from an Underwriting Affiliate.
The Board will review these purchases periodically, but no less
frequently than annually, to determine whether the purchases were
influenced by the investment by the Investing Fund in the Fund. The
Board will consider, among other things: (i) Whether the purchases were
consistent with the investment objectives and policies of the Fund;
(ii) how the performance of securities purchased in an Affiliated
Underwriting compares to the performance of comparable securities
purchased during a comparable period of time in underwritings other
than Affiliated Underwritings or to a benchmark such as a comparable
market index; and (iii) whether the amount of securities purchased by
the Fund in Affiliated Underwritings and the amount purchased directly
from an Underwriting Affiliate have changed significantly from prior
years. The Board will take any appropriate actions based on its review,
including, if appropriate, the institution of procedures designed to
assure that purchases of securities in Affiliated Underwritings are in
the best interest of shareholders of the Fund.
17. Each Fund will maintain and preserve permanently in an easily
accessible place a written copy of the procedures described in the
preceding condition, and any modifications to such procedures, and will
maintain and preserve for a period of not less than six years from the
end of the fiscal year in which any purchase in an Affiliated
Underwriting occurred, the first two years in an easily accessible
place, a written record of each purchase of securities in Affiliated
Underwritings once an investment by an Investing Fund in the securities
of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act,
setting forth from whom the securities were acquired, the identity of
the underwriting syndicate's members, the terms of the purchase, and
the information or materials upon which the Board's determinations were
made.
18. Before investing in a Fund in excess of the limits in section
12(d)(1)(A), an Investing Fund will execute a FOF Participation
Agreement with the Fund stating that their respective boards of
directors or trustees and their investment advisers, or Trustee and
Sponsor, as applicable, understand the terms and conditions of the
order, and agree to fulfill their responsibilities under the order. At
the time of its investment in Shares of a Fund in excess of the limit
in section 12(d)(1)(A)(i), an Investing Fund will notify the Fund of
the investment. At such time, the Investing Fund will also transmit to
the Fund a list of the names of each Investing Fund Affiliate and
Underwriting Affiliate. The Investing Fund will notify the Fund of any
changes to the list as soon as reasonably practicable after a change
occurs. The Fund and the Investing Fund will maintain and preserve a
copy of the order, the FOF Participation Agreement, and the list with
any updated information for the duration of the investment and for a
period of not less than six years thereafter, the first two years in an
easily accessible place.
19. Before approving any advisory contract under section 15 of the
Act, the board of directors or trustees of each Investing Management
Company, including a majority of the independent directors or trustees,
will find that the advisory fees charged under such contract are based
on services provided that will be in addition to, rather than
duplicative of, the services provided under the advisory contract(s) of
any Fund in which the Investing Management Company may invest. These
findings and their basis will be recorded fully in the minute books of
the appropriate Investing Management Company.
20. Any sales charges and/or service fees charged with respect to
shares of an Investing Fund will not exceed the limits applicable to a
fund of funds as set forth in FINRA Rule 2341.
21. 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 (i) 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; and (ii) in connection with a Fund's
receipt of Representative ETFs included in its Tracking Basket solely
for purposes of effecting transactions in Creation Units.\45\
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\45\ If the Commission rescinds the Section 12(d)(1) Relief in
connection with the adoption of a rule providing similar relief, but
that would not, in substance, make the exception in this
subparagraph (ii) available, such exception will nonetheless
continue be available with respect to such rule to a Fund relying on
the requested ETF Relief, unless the Commission provides otherwise
with specific reference to the Applicants.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-25070 Filed 11-19-19; 8:45 am]
BILLING CODE 8011-01-P
