[Federal Register Volume 75, Number 83 (Friday, April 30, 2010)]
[Notices]
[Pages 22874-22881]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-10033]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 29256; File No. 812-13534]
Claymore Exchange-Traded Fund Trust 3, et al.; Notice of
Application
April 23, 2010.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (``Act'') for an exemption from sections
2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act and rule 22c-1 under the
Act, and under sections 6(c) and 17(b) of the Act for an exemption from
sections 17(a)(1) and (a)(2) of the Act, and under section 12(d)(1)(J)
for an exemption from sections 12(d)(1)(A) and (B) of the Act.
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Applicants: Claymore Exchange-Traded Fund Trust 3 (the ``Trust''),
Claymore Securities, Inc. (the ``Distributor'') and Claymore Advisors,
LLC (the ``Adviser'').
Summary of Application: Applicants request an order that permits:
(a) Series of certain actively managed open-end management investment
companies to issue shares (``Shares'') redeemable in large aggregations
only (``Creation Units''); (b) secondary market transactions in Shares
to occur at negotiated market prices; (c) certain series to pay
redemption proceeds under certain circumstances more than seven days
from the tender of Shares for redemption; (d) certain affiliated
persons of the series to deposit securities into, and receive
securities from, the series in connection with the purchase and
redemption of Creation Units; and (e) certain registered management
investment companies and unit investment trusts outside of the
[[Page 22875]]
same group of investment companies as the series to acquire Shares.
Filing Dates: The application was filed on May 20, 2008 and amended
on September 24, 2008, June 9, 2009, December 17, 2009 and April 23,
2010.
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 May 17, 2010, and should be accompanied by proof of
service on applicants, in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-1090. Applicants, 2455 Corporate West
Drive, Lisle, IL 60532.
FOR FURTHER INFORMATION CONTACT: Laura L. Solomon, Senior Counsel, at
(202) 551-6915, or Julia Kim Gilmer, Branch Chief, at (202) 551-6871
(Division of Investment Management, Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or an applicant
using the Company name box, at http://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicants' Representations
1. The Trust is organized as a Delaware statutory trust and is
registered under the Act as an open-end management investment company.
The Trust will offer the Claymore Active National Municipal ETF (the
``Initial Fund''). The Initial Fund's investment objectives are to seek
current income exempt from regular federal income tax and outperform
the fund's performance benchmark, the Barclays Capital 7[dash]Year
Municipal Bond Index.
2. Applicants request that the order apply to any future series of
the Trust or any series of Claymore Exchange-Traded Fund Trust or
Claymore Exchange-Traded Fund Trust 2 or other open-end management
investment companies that may utilize active management investment
strategies (``Future Funds'' and together with the Initial Fund, the
``Funds'').\1\ Funds may invest in equity securities or fixed income
securities (``Fixed Income Funds'') traded in U.S. markets, or
securities traded on global markets only (such Funds, the ``Foreign
Funds'').\2\ Any Future Fund will (a) be advised by the Adviser or an
entity controlling, controlled by, or under common control with the
Adviser, and (b) comply with the terms and conditions of the
application.
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\1\ All entities that currently intend to rely on the order are
named as applicants. Any other entity that relies on the order in
the future will comply with the terms and conditions of the
application. An Investing Fund (as defined below) may rely on the
order only to invest in the Funds and not in any other registered
investment company.
\2\ Neither the Initial Fund nor any Future Fund will invest in
options contracts, futures contracts, or swap agreements.
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3. The Adviser, a Delaware limited liability company, is registered
as an investment adviser under the Investment Advisers Act of 1940
(``Advisers Act'') and will be the investment adviser to the Funds. The
Adviser may retain subadvisers (each, a ``Fund Sub-Adviser'') in
connection with the Funds. Any Fund Sub-Adviser will be registered
under the Advisers Act. The Distributor, a Kansas corporation, is
registered as a broker-dealer under the Securities Exchange Act of 1934
(``Exchange Act'') and will serve as the principal underwriter and
distributor for each of the Funds. The Distributor is an affiliated
person of the Adviser within the meaning of section 2(a)(3)(C) of the
Act.
4. The Funds will issue Shares in Creation Units of at least 50,000
Shares. All orders to purchase Creation Units must be placed with the
Distributor by or through a party that has entered into an agreement
with the Trust, the Distributor and the transfer agent to the Trust
(``Authorized Participant''). An Authorized Participant must be either:
(a) A broker-dealer or other participant in the continuous net
settlement system of the National Securities Clearing Corporation, a
clearing agency registered with the Commission; or (b) a participant in
the Depository Trust Company (``DTC,'' and such participant, ``DTC
Participant''). Shares of each Fund generally will be purchased in
Creation Units in exchange for an in-kind deposit by the purchaser of a
portfolio of securities (the ``Deposit Securities''), designated by the
Adviser, together with the deposit of a specified cash payment (``Cash
Component'' together with the Deposit Securities, the ``Fund
Deposit''). The Cash Component is an amount equal to the difference
between: (a) The net asset value (``NAV'') per Creation Unit of the
Fund; and (b) the total aggregate market value per Creation Unit of the
Deposit Securities.\3\ Applicants state that operating on an
exclusively ``in-kind'' basis for one or more Funds may present
operational problems for such Funds. Each Fund may permit, under
certain circumstances, an in-kind purchaser to substitute cash-in-lieu
of depositing some or all of the Deposit Securities.
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\3\ In addition to the list of names and amount of each security
constituting the current Deposit Securities, it is intended that, on
each day that a Fund is open, including as required by section 22(e)
of the Act (``Business Day''), the Cash Component effective as of
the previous Business Day, as well as the estimated Cash Component
for the current day, will be made available. The Stock Exchange will
disseminate, every 15 seconds throughout the trading day through the
facilities of the Consolidated Tape Association, an amount
representing on a per Share basis, the sum of the current value of
the Deposit Securities and the estimated Cash Component.
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5. An investor purchasing or redeeming a Creation Unit from a Fund
will be charged a fee (``Transaction Fee'') to prevent the dilution of
the interests of the remaining shareholders resulting from costs in
connection with the purchase or sale of Creation Units.\4\ The
Transaction Fees relevant to each Fund and the method of calculating
Transaction Fees will be fully disclosed in the prospectus
(``Prospectus'')\5\ or statement of additional information (``SAI''),
respectively, of such Fund. All orders to purchase Creation Units will
be placed with the Distributor by or through an Authorized Participant
and it will be the Distributor's responsibility to transmit such orders
to the Funds. The Distributor also will be responsible for delivering
the Prospectus to those persons purchasing Creation Units, and for
maintaining records of both the orders placed with it and the
confirmations of acceptance furnished by it.
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\4\ Where a Fund permits a purchaser to substitute cash-in-lieu
of depositing a portion of the Deposit Securities, the purchaser may
be assessed a higher Transaction Fee to cover the cost of purchasing
such Deposit Securities, including brokerage costs, and part or all
of the spread between the expected bid and the offer side of the
market relating to such Deposit Securities.
\5\ All representations and conditions contained in the
application that require a Fund to disclose particular information
in the Fund's Prospectus and/or annual report shall remain effective
with respect to the Fund until the time that the Fund complies with
the disclosure requirements adopted by the Commission in Investment
Co. Act Release No. 28584 (Jan. 13, 2009).
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6. Purchasers of Shares in Creation Units may hold such Shares or
may sell such Shares into the secondary market. Shares will be listed
and traded at negotiated prices on a national
[[Page 22876]]
securities exchange as defined in section 2(a)(26) of the Act (``Stock
Exchange''). It is expected that a Stock Exchange specialist
(``Specialist'') or market maker (``Market Maker'') will be assigned to
Shares and maintain a market for Shares.\6\ The price of Shares trading
on the Stock Exchange will be based on a current bid/offer market.
Shares sold in the secondary market will be subject to customary
brokerage commissions and charges.
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\6\ If Shares are listed on The NASDAQ Stock Market
(``Nasdaq''), no Specialist will be contractually obligated to make
a market in Shares. Rather, under Nasdaq's listing requirements two
or more Market Makers will be registered in Shares and required to
make a continuous, two-sided market or face regulatory sanctions.
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7. Applicants expect that purchasers of Creation Units will include
arbitrageurs. A Specialist or Market Maker, in providing a fair and
orderly secondary market for the Shares, also may purchase Creation
Units for use in its market-making activities. Applicants expect that
secondary market purchasers of Shares will include both institutional
investors and retail investors.\7\ Applicants expect that the price at
which the Shares trade will be disciplined by arbitrage opportunities
created by the ability to continually purchase or redeem Creation Units
at their NAV, which should ensure that the Shares will not trade at a
material discount or premium in relation to their NAV.
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\7\ Shares will be registered in book-entry form only. DTC or
its nominee will be the record registered owner of all outstanding
Shares. Beneficial ownership of Shares will be shown on the records
of DTC or DTC Participants.
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8. Shares will not be individually redeemable, and owners of Shares
may acquire those Shares from a Fund, or tender such Shares for
redemption to the Fund, in Creation Units only. To redeem, an investor
must accumulate enough Shares to constitute a Creation Unit. Redemption
requests must be placed by or through an Authorized Participant.\8\ An
investor redeeming a Creation Unit generally will receive: (a) A
portfolio of securities (``Fund Securities''), designated to be
delivered for Creation Unit redemptions on the date that the request
for redemption is submitted; and (b) a ``Cash Redemption Amount''
(together with the Fund Securities, the ``Fund Redemption'') equal to
the difference between the NAV of the Shares being redeemed and the
market value of the Fund Securities. An investor may receive the cash
equivalent of a Fund Security in certain circumstances, such as if the
investor is restrained from effecting transactions in the security by
regulation or policy. The redeeming investor also must pay to the Fund
a Transaction Fee.
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\8\ Applicants state that any Fund that is a Fixed Income Fund
also intends to substitute a cash-in-lieu amount to replace any
Deposit Security or Fund Security (defined below) that is a ``to-be-
announced transaction'' or ``TBA Transaction.'' A TBA transaction is
a method of trading mortgage-backed securities. In a TBA
Transaction, the buyer and seller agree upon general trade
parameters such as agency, settlement date, par amount and price.
The actual pools delivered generally are determined two days prior
to the settlement date. The amount of substituted cash in the case
of a TBA Transaction will be equivalent to the value of the TBA
Transaction listed as a Deposit Security or Fund Security.
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9. Applicants state that in accepting Deposit Securities and
satisfying redemptions with Fund Securities, the relevant Funds will
comply with the federal securities laws, including that the Deposit
Securities and Fund Securities are sold in transactions that would be
exempt from registration under the Securities Act of 1933 (``Securities
Act'').\9\ To the extent in-kind purchases and redemptions are
utilized, a Creation Unit will be purchased or redeemed from the Funds
for a basket of Deposit Securities or Fund Securities that corresponds
pro rata, to the extent practicable, to the Fund portfolio plus a
specified cash amount.\10\
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\9\ In accepting Deposit Securities and satisfying redemptions
with Fund Securities that are restricted securities eligible for
resale pursuant to rule 144A under the Securities Act, the Fund will
comply with the conditions of rule 144A. The Prospectus for a Fund
will also state that an Authorized Participant that is not a
``Qualified Institutional Buyer'' as defined in rule 144A under the
Securities Act will not be able to receive, as part of a redemption,
restricted securities eligible for resale under rule 144A.
\10\ In some cases, for example, applicants state that it is
impossible to break up bonds beyond certain minimum sizes needed for
transfer and settlement, so there may be minor differences between a
basket of Deposit Securities or Fund Securities and a true pro rata
slice of a Fund's portfolio.
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10. Neither the Trust nor any Fund will be advertised or marketed
as an ``open-end investment company'' or a ``mutual fund.'' Instead,
each Fund will be marketed as an ``actively-managed exchange-traded
fund.'' Any advertising material where features of obtaining, buying or
selling Creation Units are described or where there is reference to
redeemability will prominently disclose that Shares are not
individually redeemable and that owners of Shares may acquire Shares
from a Fund and tender those Shares for redemption to a Fund in
Creation Units only. The same approach will be followed in the SAI,
shareholder reports and any marketing or advertising materials issued
or circulated in connection with the Shares.
11. The Funds' Web site, which will be publicly available prior to
the public offering of Shares, will include the Prospectus and other
information about the Funds that is updated on a daily basis,
including, for each Fund, the mid-point of the bid-ask spread at the
time of the calculation of NAV (``Bid/Ask Price''). On each Business
Day, before the commencement of trading in Shares on the Stock
Exchange, the Fund will disclose on its Web site the identities and
quantities of the equity or fixed income securities in its portfolio
(``Portfolio Securities'') and other assets held by the Fund that will
form the basis for the Fund's calculation of NAV at the end of the
Business Day.\11\
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\11\ Applicants note that under accounting procedures followed
by the Funds, trades made on the prior Business Day (``T'') will be
booked and reflected in NAV on the current Business Day (``T + 1'').
Accordingly, the Funds will be able to disclose at the beginning of
the Business Day the portfolio that will form the basis for the NAV
calculation at the end of the Business Day.
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Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the Act
granting an exemption from sections 2(a)(32), 5(a)(1), 22(d) and 22(e)
of the Act and rule 22c-1 under the Act, and under sections 6(c) and
17(b) of the Act granting an exemption from sections 17(a)(1) and
(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.
2. Section 6(c) of the Act provides that the Commission may exempt
any person, security or transaction, or any class of persons,
securities or transactions, from any provision of the Act, if and to
the extent that such exemption is necessary or appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Act.
Section 17(b) of the Act authorizes the Commission to exempt a proposed
transaction from section 17(a) of the Act if evidence establishes that
the terms of the transaction, including the consideration to be paid or
received, are reasonable and fair and do not involve overreaching on
the part of any person concerned, and the proposed transaction is
consistent with the policies of the registered investment company and
the general provisions of the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may exempt any person, security, or
transaction, or any class or classes of persons, securities or
transactions, from any provision of section 12(d)(1) if the exemption
is consistent with the public interest and the protection of investors.
[[Page 22877]]
Sections 5(a)(1) and 2(a)(32) of the Act
3. Section 5(a)(1) of the Act defines an ``open-end company'' as a
management investment company that is offering for sale or has
outstanding any redeemable security of which it is the issuer. Section
2(a)(32) of the Act defines a redeemable security as any security,
other than short-term paper, under the terms of which the holder, upon
its presentation to the issuer, is entitled to receive approximately a
proportionate share of the issuer's current net assets, or the cash
equivalent. Because Shares will not be individually redeemable,
applicants request an order that would permit each Fund, as a series of
an open-end management investment company, to issue Shares that are
redeemable in Creation Units only. Applicants state that investors may
purchase Shares in Creation Units from each Fund and redeem Creation
Units from each Fund. Applicants further state that because the market
price of Shares will be disciplined by arbitrage opportunities,
investors should be able to sell Shares in the secondary market at
prices that do not vary substantially from their NAV.
Section 22(d) of the Act and Rule 22c-1 under the Act
4. Section 22(d) of the Act, among other things, prohibits a dealer
from selling a redeemable security, which is currently being offered to
the public by or through a principal underwriter, except at a current
public offering price described in the prospectus. Rule 22c-1 under the
Act generally requires that a dealer selling, redeeming, or
repurchasing a redeemable security do so only at a price based on its
NAV. Applicants state that secondary market trading in Shares will take
place at negotiated prices, not at a current offering price described
in the prospectus, and not at a price based on NAV. Thus, purchases and
sales of Shares in the secondary market will not comply with section
22(d) of the Act and rule 22c-1 under the Act. Applicants request an
exemption under section 6(c) from these provisions.
5. Applicants assert that the concerns sought to be addressed by
section 22(d) of the Act and rule 22c-1 under the Act with respect to
pricing are equally satisfied by the proposed method of pricing Shares.
Applicants maintain that while there is little legislative history
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to (a) prevent dilution caused by
certain riskless-trading schemes by principal underwriters and contract
dealers, (b) prevent unjust discrimination or preferential treatment
among buyers resulting from sales at different prices, and (c) assure
an orderly distribution of investment company shares by eliminating
price competition from non-contract dealers offering shares at less
than the published sales price and repurchasing shares at more than the
published redemption price.
6. Applicants believe that none of these purposes will be thwarted
by permitting Shares to trade in the secondary market at negotiated
prices. Applicants state that (a) secondary market trading in Shares
does not involve the Funds as parties and cannot result in dilution of
an investment in Shares, and (b) to the extent different prices exist
during a given trading day, or from day to day, such variances occur as
a result of third-party market forces, such as supply and demand.
Therefore, applicants assert that secondary market transactions in
Shares will not lead to discrimination or preferential treatment among
purchasers. Finally, applicants contend that the proposed distribution
system will be orderly because arbitrage activity will ensure that the
difference between the market price of Shares and their NAV remains
narrow.
Section 22(e) of the Act
7. Section 22(e) of the Act generally prohibits a registered
investment company from suspending the right of redemption or
postponing the date of payment of redemption proceeds for more than
seven days after the tender of a security for redemption. Applicants
state that settlement of redemptions for Foreign Funds will be
contingent not only on the settlement cycle of the United States
securities markets, but also on delivery cycles in local markets for
underlying foreign securities held by the Foreign Funds. Applicants
state that current delivery cycles for transferring Portfolio
Securities to redeeming investors, coupled with local market holiday
schedules, in certain circumstances, will cause the delivery process
for Foreign Funds to be longer than seven calendar days. Applicants
request relief under section 6(c) of the Act from section 22(e) to
allow Foreign Funds only to pay redemption proceeds up to 12 calendar
days after the tender of a Creation Unit for redemption. Except as
disclosed in the relevant Foreign Fund's Prospectus and/or SAI,
applicants expect that each Foreign Fund will be able to deliver
redemption proceeds within seven days.\12\
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\12\ Rule 15c6-1 under the Exchange Act requires that most
securities transactions be settled within three business days of the
trade date. Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations that they
may otherwise have under rule 15c6-1.
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8. Applicants state that section 22(e) was designed to prevent
unreasonable, undisclosed and unforeseen delays in the payment of
redemption proceeds. Applicants assert that the requested relief will
not lead to the problems that section 22(e) was designed to prevent.
Applicants state that the SAI will disclose those local holidays (over
the period of at least one year following the date of the SAI), if any,
that are expected to prevent the delivery of redemption proceeds in
seven calendar days, and the maximum number of days, up to 12 calendar
days, needed to deliver the proceeds for each Foreign Fund. Applicants
are not seeking relief from section 22(e) with respect to Foreign Funds
that do not effect creations and redemptions of Creation Units in-kind.
Section 12(d)(1) of the Act
9. Section 12(d)(1)(A) of the Act prohibits a registered investment
company from acquiring shares of an investment company if the
securities represent more than 3% of the total outstanding voting stock
of the acquired company, more than 5% of the total assets of the
acquiring company, or, together with the securities of any other
investment companies, more than 10% of the total assets of the
acquiring company. Section 12(d)(1)(B) of the Act prohibits a
registered open-end investment company, its principal underwriter, or
any other broker or dealer from selling its shares to another
investment company if the sale will cause the acquiring company to own
more than 3% of the acquired company's voting stock, or if the sale
will cause more than 10% of the acquired company's voting stock to be
owned by investment companies generally.
10. Applicants request relief to permit Investing Funds (as defined
below) to acquire Shares in excess of the limits in section 12(d)(1)(A)
of the Act and to permit the Funds, their principal underwriters and
any broker or dealer registered under the Exchange Act (``Broker'') to
sell Shares to Investing Funds in excess of the limits in section
12(d)(l)(B) of the Act. Applicants request that these exemptions apply
to: (a) Any Fund that is currently or subsequently part of the same
``group of investment companies'' as the Initial Fund within the
meaning of section 12(d)(1)(G)(ii) of the Act as well as any principal
underwriter for the Fund and
[[Page 22878]]
any Brokers selling Shares of a Fund to an Investing Fund; and (b) each
management investment company or unit investment trust registered under
the Act that is not part of the same ``group of investment companies''
as the Funds within the meaning of section 12(d)(1)(G)(ii) of the Act
and that enters into a FOF Participation Agreement (as defined below)
with a Fund (such management investment companies are referred to
herein as ``Investing Management Companies,'' such unit investment
trusts are referred to herein as ``Investing Trusts,'' and Investing
Management Companies and Investing Trusts together are referred to
herein as ``Investing Funds''). Investing Funds do not include the
Funds. Each Investing Trust will have a sponsor (``Sponsor'') and each
Investing Management Company will have an investment adviser within the
meaning of section 2(a)(20)(A) of the Act (``Investing Fund Adviser'')
that does not control, is not controlled by or under common control
with the Adviser. Each Investing Management Company may also have one
or more investment advisers within the meaning of section 2(a)(20)(B)
of the Act (each, a ``Sub-Adviser'').
11. Applicants assert that the proposed transactions will not lead
to any of the abuses that section 12(d)(1) was designed to prevent.
Applicants submit that the proposed conditions to the requested relief
address the concerns underlying the limits in section 12(d)(1), which
include concerns about undue influence, excessive layering of fees and
overly complex structures.
12. Applicants believe that neither the Investing Funds nor an
Investing Fund Affiliate would be able to exert undue influence over a
Fund.\13\ To limit the control that an Investing Fund may have over a
Fund, applicants propose a condition prohibiting the Investing Fund
Adviser, Sponsor or any person controlling, controlled by, or under
common with the Investing Fund Adviser or Sponsor; and any investment
company and any issuer that would be an investment company but for
sections 3(c)(1) or 3(c)(7) of the Act that is advised or sponsored by
the Investing Fund Adviser, the Sponsor, or any person controlling,
controlled by, or under common control with the Investing Fund Adviser
or Sponsor (``Investing Fund's Advisory Group'') from controlling
(individually or in the aggregate) a Fund within the meaning of section
2(a)(9) of the Act. The same prohibition would apply to any Sub-
Adviser, any person controlling, controlled by, or under common control
with the Sub-Adviser, and any investment company or issuer that would
be an investment company but for section 3(c)(1) or 3(c)(7) of the Act
(or portion of such investment company or issuer) advised or sponsored
by the Sub-Adviser or any person controlling, controlled by, or under
common control with the Sub-Adviser (``Investing Fund's Sub-Advisory
Group'').
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\13\ An ``Investing Fund Affiliate'' is an Investing Fund
Adviser, Sub-Adviser, Sponsor, promoter, and principal underwriter
of an Investing Fund, and any person controlling, controlled by, or
under common control with any of these entities. ``Fund Affiliate''
is an investment adviser, promoter, or principal underwriter of a
Fund or any person controlling, controlled by or under common
control with any of these entities.
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13. Applicants propose other conditions to limit the potential for
undue influence over the Funds, including that 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 any offering of securities during the existence
of any underwriting or selling syndicate of which a principal
underwriter is an Underwriting Affiliate (``Affiliated Underwriting'').
An ``Underwriting Affiliate'' is a principal underwriter in any
underwriting or selling syndicate that is an officer, director, member
of an advisory board, Investing Fund Adviser, Sub-Adviser, employee or
Sponsor of the Investing Fund, or a person of which any such officer,
director, member of an advisory board, Investing Fund Adviser, Sub-
Adviser, employee, or Sponsor is an affiliated person (except any
person whose relationship to the Fund is covered by section 10(f) of
the Act is not an Underwriting Affiliate).
14. Applicants do not believe that the proposed arrangement will
involve excessive layering of fees. The board of directors or trustees
of any Investing Management Company, including a majority of the
directors or trustees who are not ``interested persons'' within the
meaning of section 2(a)(19) of the Act (``disinterested directors or
trustees''), will be required to find that the advisory fees charged
under the contract are based on services provided that will be in
addition to, rather than duplicative of, services provided under the
advisory contract of any Fund in which the Investing Management Company
may invest. In addition, the Investing Fund Adviser, an Investing
Trust's trustee (``Trustee'') or Sponsor, as applicable, will waive
fees otherwise payable to it by the Investing Fund in an amount at
least equal to any compensation (including fees received pursuant to
any plan adopted by a Fund under rule 12b-1 under the Act) received
from a Fund by the Investing Fund Adviser, Trustee or Sponsor, or an
affiliated person of the Investing Fund Adviser, Trustee or Sponsor
(other than any advisory fees paid to the Investing Fund Adviser,
Trustee or Sponsor or its affiliated person by a Fund), in connection
with the investment by the Investing Fund in the Funds. Applicants also
state that any sales charges and/or service fees charged with respect
to shares of an Investing Fund will not exceed the limits applicable to
a fund of funds as set forth in NASD Conduct Rule 2830.\14\
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\14\ All references to NASD Conduct Rule 2830 also include any
successor or replacement rule that may be adopted by the Financial
Industry Regulatory Authority.
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15. Applicants submit that the proposed arrangement will not create
an overly complex fund structure. Applicants note that a Fund will be
prohibited from acquiring securities of any investment company, or of
any 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.
16. To ensure that an Investing Fund is aware of the terms and
conditions of the requested order, the Investing Fund must enter into
an agreement with the respective Funds (``FOF Participation
Agreement''). The FOF Participation Agreement will include an
acknowledgement from the Investing Fund that it may rely on the order
only to invest in the Funds and not in any other investment company.
Section 17(a) of the Act
17. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such person (``second tier affiliates''), from selling any security to
or purchasing any security from the company. Section 2(a)(3) of the Act
defines ``affiliated person'' to include any person directly or
indirectly owning, controlling, or holding with power to vote 5% or
more of the outstanding voting securities of the other person and any
person directly or indirectly controlling, controlled by, or under
common control with, the other person. Section 2(a)(9) of the Act
provides that a control relationship will be presumed where one person
owns more than 25% of another person's voting securities. The Funds may
be deemed to be controlled by the Adviser or an entity controlling,
controlled by or under common control with the Adviser and hence
affiliated persons of each other. In addition, the Funds may be deemed
to be under common control
[[Page 22879]]
with any other registered investment company (or series thereof)
advised by the Adviser or an entity controlling, controlled by or under
common control with the Adviser (an ``Affiliated Fund'').
18. Applicants request an exemption under sections 6(c) and 17(b)
of the Act from section 17(a) of the Act in order to permit in-kind
purchases and redemptions of Creation Units by persons that are
affiliated persons or second tier affiliates of the Funds solely by
virtue of one or more of the following: (1) Holding 5% or more, or more
than 25%, of the Shares of the Trust or one or more Funds; (2) an
affiliation with a person with an ownership interest described in (1);
or (3) holding 5% or more, or more than 25%, of the shares of one or
more Affiliated Funds. Applicants also request an exemption in order to
permit each Fund to sell Shares to and redeem Shares from, and engage
in the in-kind transactions that would accompany such sales and
redemptions with, any Investing Fund of which the Fund is an affiliated
person or second tier affiliate.\15\
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\15\ Applicants state that although they believe that an
Investing Fund generally will purchase Shares in the secondary
market, an Investing Fund might seek to transact in Creation Units
directly with a Fund.
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19. Applicants contend that no useful purpose would be served by
prohibiting such affiliated persons from making in-kind purchases or
in-kind redemptions of Shares of a Fund in Creation Units. All
shareholders of Creation Units, regardless of affiliation, will be
given the same opportunities with respect to creations and redemptions
in-kind. Fund Deposits and Fund Redemptions will be valued in the same
manner as those Portfolio Securities currently held by the relevant
Funds. Therefore, applicants state that in-kind purchases and
redemptions will afford no opportunity for the specified affiliated
persons of a Fund to effect a transaction detrimental to the other
holders of Shares. Applicants also believe that in-kind purchases and
redemptions will not result in abusive self dealing or overreaching of
the Fund.
20. Applicants also submit that the sale of Shares to and
redemption of Shares from an Investing Fund satisfies the standards for
relief under sections 17(b) and 6(c) of the Act. Applicants note that
any consideration paid for the purchase or redemption of Shares
directly from a Fund will be based on the NAV of the Fund in accordance
with policies and procedures set forth in the Fund's registration
statement.\16\ Applicants also state that the proposed transactions
will be consistent with the policies of each Investing Fund and Fund
and with the general purposes of the Act.
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\16\ Applicants acknowledge that the receipt of compensation by
(a) an affiliated person of an Investing Fund, or an affiliated
person of such person, for the purchase by the Investing Fund of
Shares of a Fund or (b) an affiliated person of a Fund, or an
affiliated person of such person, for the sale by the Fund of its
Shares to an Investing Fund, may be prohibited by section 17(e)(1)
of the Act. The FOF Participation Agreement also will include this
acknowledgment.
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Applicants' Conditions
The applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions: \17\
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\17\ See note 5, supra.
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A. Actively-Managed Exchange-Traded Fund Relief
1. Each Prospectus will clearly disclose that, for purposes of the
Act, Shares are issued by a registered investment company and that the
acquisition of Shares by investment companies and companies relying on
sections 3(c)(1) or 3(c)(7) of the Act is subject to the restrictions
of section 12(d)(1) of the Act, except as permitted by an exemptive
order that permits registered investment companies to invest in a Fund
beyond the limits in section 12(d)(1), subject to certain terms and
conditions, including that the registered investment company enter into
a FOF Participation Agreement with the Fund regarding the terms of the
investment.
2. As long as the Funds operate in reliance on the requested order,
the Shares of the Funds will be listed on a Stock Exchange.
3. Neither the Trust nor any Fund will be advertised or marketed as
an open-end investment company or a mutual fund. Each Fund's Prospectus
will prominently disclose that the Fund is an actively managed
exchange-traded fund. Each Prospectus will prominently disclose that
the Shares are not individually redeemable shares and will disclose
that the owners of the Shares may acquire those Shares from the Fund
and tender those Shares for redemption to the Fund in Creation Units
only. Any advertising material that describes the purchase or sale of
Creation Units or refers to redeemability will prominently disclose
that the Shares are not individually redeemable and that owners of the
Shares may acquire those Shares from the Fund and tender those Shares
for redemption to the Fund in Creation Units only.
4. The Web site for the Funds, which is and will be publicly
accessible at no charge, will contain the following information, on a
per Share basis, for each Fund: (a) The prior Business Day's NAV and
the Bid/Ask Price, and a calculation of the premium or discount of the
Bid/Ask Price against such NAV; and (b) data in chart format displaying
the frequency distribution of discounts and premiums of the daily Bid/
Ask Price against the NAV, within appropriate ranges, for each of the
four previous calendar quarters (or for the life of the Fund, if
shorter).
5. The Prospectus and annual report for each Fund will also
include: (a) The information listed in condition A.4(b), (i) in the
case of the Prospectus, for the most recently completed year (and the
most recently completed quarter or quarters, as applicable) and (ii) in
the case of the annual report, for the immediately preceding five years
(or for the life of the Fund, if shorter), and (b) calculated on a per
Share basis for one-, five- and ten-year periods (or for the life of
the Fund, if shorter), the cumulative total return and the average
annual total return based on NAV and Bid/Ask Price.
6. On each Business Day, before commencement of trading in Shares
on the Stock Exchange, the Fund will disclose on its Web site the
identities and quantities of the Portfolio Securities and other assets
held by the Fund that will form the basis for the Fund's calculation of
NAV at the end of the Business Day.
7. The Adviser or Fund Sub-Adviser, directly or indirectly, will
not cause any Authorized Participant (or any investor on whose behalf
an Authorized Participant may transact with the Fund) to acquire any
Deposit Security for the Fund through a transaction in which the Fund
could not engage directly.
8. The requested relief to permit ETF operations will expire on the
effective date of any Commission rule under the Act that provides
relief permitting the operation of actively managed exchange-traded
funds.
B. Section 12(d)(1) Relief
1. The members of the Investing Fund's Advisory Group will not
control (individually or in the aggregate) a Fund within the meaning of
section 2(a)(9) of the Act. The members of the Investing Fund's Sub-
Advisory Group will not control (individually or in the aggregate) a
Fund within the meaning of section 2(a)(9) of the Act. If, as a result
of a decrease in the outstanding voting securities of a Fund, the
Investing Fund's Advisory Group or the Investing Fund's Sub-Advisory
Group, each in the aggregate, becomes a holder of more than 25 percent
of the outstanding
[[Page 22880]]
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 Sub-Adviser or a person
controlling, controlled by or under common control with the Sub-Adviser
acts as the investment adviser within the meaning of section
2(a)(20)(A) of the Act.
2. No Investing Fund or Investing Fund Affiliate will cause any
existing or potential investment by the Investing Fund in a Fund to
influence the terms of any services or transactions between the
Investing Fund or an Investing Fund Affiliate and the Fund or a Fund
Affiliate.
3. The board of directors or trustees of an Investing Management
Company, including a majority of the disinterested directors or
trustees, will adopt procedures reasonably designed to assure that the
Investing Fund Adviser and any 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.
4. Once an investment by an Investing Fund in the securities of a
Fund exceeds the limit in section l2(d)(1)(A)(i) of the Act, the board
of trustees (``Board'') of a Fund, including a majority of the
disinterested Board members, 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: (a) Is fair and
reasonable in relation to the nature and quality of the services and
benefits received by the Fund; (b) 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 (c) does not
involve overreaching on the part of any person concerned. This
condition does not apply with respect to any services or transactions
between a Fund and its investment adviser(s), or any person
controlling, controlled by or under common control with such investment
adviser(s).
5. The 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
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 Sub-Adviser will waive fees otherwise payable to the 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 Sub-Adviser, or an affiliated person of the Sub-Adviser, other than
any advisory fees paid to the 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 Sub-Adviser. In the
event that the Sub-Adviser waives fees, the benefit of the waiver will
be passed through to the Investing Management Company.
6. No Investing Fund or Investing Fund Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Fund)
will cause a Fund to purchase a security in an Affiliated Underwriting.
7. The Board of the Fund, including a majority of the disinterested
Board members, 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: (a) Whether the purchases were consistent with the
investment objectives and policies of the Fund; (b) 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 (c) 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.
8. Each Fund will maintain and preserve permanently in an easily
accessible place a written copy of the procedures described in the
preceding condition, and any modifications to such procedures, and will
maintain and preserve for a period of not less than six years from the
end of the fiscal year in which any purchase in an Affiliated
Underwriting occurred, the first two years in an easily accessible
place, a written record of each purchase of securities in Affiliated
Underwritings once an investment by an Investing Fund in the securities
of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act,
setting forth from whom the securities were acquired, the identity of
the underwriting syndicate's members, the terms of the purchase, and
the information or materials upon which the Board's determinations were
made.
9. Before investing in a Fund in excess of the limit in section
12(d)(1)(A), an Investing Fund will execute a FOF Participation
Agreement with the Fund stating that their respective boards of
directors or trustees and their investment advisers, or Trustee and
Sponsor, as applicable, understand the terms and conditions of the
order, and agree to fulfill their responsibilities under the order. At
the time of its investment in shares of a Fund in excess of the limit
in section 12(d)(1)(A)(i), an Investing Fund will notify the Fund of
the investment. At such time, the Investing Fund will also transmit to
the Fund a list of the names of each Investing Fund Affiliate and
Underwriting Affiliate. The Investing Fund will notify the Fund of any
changes to the list as soon as reasonably practicable after a change
occurs. The Fund and the Investing Fund will maintain and preserve a
copy of the order, the FOF Participation Agreement, and the list with
any updated information for the duration of the investment and for a
period of not less than six years thereafter, the first two years in an
easily accessible place.
10. Before approving any advisory contract under section 15 of the
Act, the board of directors or trustees of each Investing Management
Company, including a majority of the disinterested directors or
trustees, will find that the advisory fees charged under such contract
are based on services provided that will be in addition to, rather than
duplicative of, the services provided under the advisory contract(s) of
any Fund in which the Investing Management Company may invest. These
findings and their basis will be
[[Page 22881]]
recorded fully in the minute books of the appropriate Investing
Management Company.
11. Any sales charges and/or service fees charged with respect to
shares of an Investing Fund will not exceed the limits applicable to a
fund of funds as set forth in NASD Conduct Rule 2830.
12. No Fund 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.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-10033 Filed 4-29-10; 8:45 am]
BILLING CODE 8011-01-P