[Federal Register Volume 75, Number 226 (Wednesday, November 24, 2010)]
[Notices]
[Pages 71753-71760]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29588]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 29499; 812-13487]
SSgA Funds Management, Inc., et al.; Notice of Application
November 17, 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, under sections 6(c) and 17(b) of the Act for an exemption from
sections 17(a)(1) and (a)(2) of the Act, and under section 12(d)(1)(J)
of the Act for an exemption from sections 12(d)(1)(A) and (B) of the
Act.
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Applicants: SSgA Funds Management, Inc. (the ``Adviser''), State
Street Global Markets, LLC (the ``Distributor''), SPDR Series Trust and
SPDR Index Shares Funds (each a ``Trust'' and together the ``Trusts'').
Summary of Application: Applicants request an order that permits: (a)
Series of certain open-end management investment companies to issue
shares (``Shares'') redeemable in large aggregations only (``Creation
Units''); (b) secondary market transactions in Shares to occur at
negotiated market prices; (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; (e) certain registered management investment companies and unit
investment trusts outside of the same group of investment companies as
the series to acquire Shares; and (f) certain series to perform
creations and redemptions of Shares in-kind in a master-feeder
structure.
Filing Dates: The application was filed on January 31, 2008, and
amended on May 21, 2008, December 2, 2008, September 3, 2009, July 16,
2010, and November 17, 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 December 10, 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, State Street
Financial Center, One Lincoln Street, Boston, MA 02111.
FOR FURTHER INFORMATION CONTACT: Christine Y. Greenlees, Senior
Counsel, at (202) 551-6879 or Mary Kay Frech, Branch Chief, at (202)
551-6821 (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. Each Trust is a business trust organized under the laws of the
Commonwealth of Massachusetts and registered under the Act as an open-
end management investment company. Each Trust is organized as a series
fund with multiple series.
2. The Adviser, a Massachusetts corporation, is registered as an
investment adviser under the Investment Advisers Act of 1940 (the
``Advisers Act'') and will be the investment adviser to the Funds. The
Adviser may retain sub-advisers (``Sub-Advisers''). Any Sub-Adviser
will be registered under the Advisers Act. The Distributor, a broker-
dealer registered under the Securities Exchange Act of 1934 (the
``Exchange Act''), will serve as the principal underwriter and
distributor of each of the Funds.
3. Applicants are requesting relief to permit the Trusts to create
and operate certain actively managed investment portfolios of the
Trusts (``New Funds'') that offer Shares with limited redeemability
(``ETF Relief'') and to operate in a master-feeder structure.
Applicants request that the ETF Relief apply to future series of the
Trusts or of other open-end management companies that (a) Utilize
active management investment strategies, (b) are advised by the Adviser
or an entity controlling, controlled by, or under common control with
the Adviser, and (c) comply with the terms and condition of the order
(``Future Funds''). The New Funds and Future Funds together are the
``Funds.'' Each Fund will operate as an exchanged-traded fund
(``ETF'').\1\
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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. A Purchasing Fund (as defined below) may rely on the
requested order only to invest in the Funds and not in any other
registered investment company.
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[[Page 71754]]
4. Applicants also request that the order permit certain investment
companies registered under the Act to acquire Shares of Funds beyond
the limitations in section 12(d)(1)(A) and permit certain Funds, and
any principal underwriter for the Funds, and any broker or dealer
registered under the Exchange Act (``Brokers'') to sell Shares beyond
the limitations in section 12(d)(1)(B) (``Fund of Funds Relief'').
Applicants request that any exemption under section 12(d)(1)(J) from
sections 12(d)(1)(A) and (B) for Fund of Funds Relief apply to: (i) Any
registered investment company or unit investment trust that is
currently or subsequently part of the same ``group of investment
companies'' as the Funds within the meaning of section 12(d)(1)(G)(ii)
of the Act as well as any principal underwriter for the Funds and any
Brokers selling Shares of a Fund to a Purchasing Fund (as defined
below); and (ii) 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 as ``Purchasing Management Companies,'' such
unit investment trusts are referred to as ``Purchasing Trusts,'' and
Purchasing Management Companies and Purchasing Trusts are collectively
referred to as ``Purchasing Funds''). Purchasing Funds do not include
the Funds. This relief would not apply to any Fund that is, either
directly or through a master-feeder structure, acquiring securities of
any investment company or company relying on section 3(c)(1) or 3(c)(7)
of the Act in excess of the limits in section 12(d)(1)(A) of the
Act.\2\
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\2\ Applicants expect that the New Funds may rely on section
12(d)(1)(F) or (G) of the Act and, thus, would not be able to rely
on the Fund of Funds Relief. Nonetheless, it is anticipated that
certain Future Funds would rely on the requested Fund of Funds
Relief.
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5. Applicants further request that the order permit the Funds to
acquire shares of other registered investment companies managed by the
Adviser having substantially the same investment objectives as the Fund
(``Master Funds'') beyond the limitation in section 12(d)(1)(A) and
permit the Master Funds, and any principal underwriter for the Master
Fund, to sell shares of the Master Funds to the Funds beyond the
limitations in section 12(d)(1)(B) (``Master-Feeder Relief'').
6. Each New Fund will attempt to achieve a specified investment
objective utilizing an active management strategy, rather than
attempting to replicate the performance of an index. It is currently
anticipated that the investment strategies of the New Funds will be
similar to existing ``target date'' mutual funds, and the New Funds
will seek to achieve their investment objectives by investing in ETFs
and other exchange traded products that are not registered under the
Act, which may or may not be sponsored or advised by the Adviser or one
of its affiliates (``Underlying ETPs''). The New Funds may invest in
Underlying ETPs either directly or through investment in a Master
Fund.\3\ Each Fund, or its respective Master Fund, may invest in
foreign and domestic equity securities, including depositary receipts
(``Depositary Receipts'') and shares of other investment companies, and
in foreign and domestic fixed income securities, including TBA
transactions, as described herein. Neither the New Funds nor any Future
Fund (or its respective Master Fund, if any) will invest in options
contracts, futures contracts or swap agreements.
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\3\ Each Underlying ETP will trade on a Stock Exchange (as
defined below) and will calculate its net asset value per share
(``NAV'') each day.
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7. It is currently anticipated that each New Fund will invest in a
Master Fund with a portfolio of Underlying ETPs instead of directly
holding Underlying ETP shares. Applicants have designed this master-
feeder structure because it is anticipated that, in addition to the New
Funds, other feeder funds will be created in the future and hold shares
of each respective Master Fund. Such other feeder funds could be
traditional mutual funds, the shares of which would be individually
redeemable, other exchange-traded funds, or other pooled investment
vehicles. Any traditional mutual fund feeder funds would also be series
of a separate and distinct registered investment company.\4\
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\4\ There would be no ability to exchange Shares of the New
Funds for shares of any other feeder fund.
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8. The Future Funds may invest, either directly or through a Master
Fund, in equity securities (``Equity Funds'') or fixed income
securities (``Fixed Income Funds'') traded in the U.S. or non-U.S.
markets. Funds that invest, either directly or through a Master Fund,
in foreign equity and/or fixed income securities are ``Foreign Funds.''
Funds that invest, either directly or through a Master Fund, in foreign
and domestic equity securities are ``Global Equity Funds.'' Funds that
invest in foreign and domestic fixed income securities, either directly
or through a Master Fund, are ``Global Fixed Income Funds'' (and
together with the ``Global Equity Funds, ``Global Funds''). The term
``Domestic Funds'' includes any Equity Fund or Fixed Income Fund that
invests, either directly or through a Master Fund, in domestic equity
and/or fixed income securities.
9. Applicants anticipate that many, if not all of the Foreign Funds
will invest a significant portion of their assets in Depositary
Receipts representing foreign securities in which they seek to invest,
including American Depositary Receipts (``ADRs'') and Global Depositary
Receipts (``GDRs''). Depositary Receipts are typically issued by a
financial institution (``Depository'') and evidence ownership interests
in a security or a pool or securities (``Underlying Securities'') that
have been deposited with the Depository.\5\ A Fund will not invest in
any Depositary Receipts that the Adviser or Sub-Adviser deems to be
illiquid or for which pricing information is not readily available.
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\5\ With respect to ADRs, the Depository is typically a U.S.
financial institution and the Underlying Securities are issued by a
foreign issuer. The ADR is registered under the Securities Act of
1933 (``Securities Act'') on Form F-6. ADR trades occur either on a
Stock Exchange (as defined below) or off-exchange. FINRA Rule 6620
requires all off-exchange transactions in ADRs to be reported within
90 seconds and ADR trade reports to be disseminated on a real-time
basis. With respect to GDRs, the Depository may be a foreign or a
U.S. entity, and the Underlying Securities may have a foreign or a
U.S. issuer. All GDRs are sponsored and trade on a foreign exchange.
No affiliated persons of applicants or any Sub-Adviser will serve as
the depositary bank for any Depositary Receipts held by a Fund.
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10. Shares of each Fund will be purchased from the Trusts only in
Creation Units. Creation Units will be separable upon issue into
individual Shares, which will be listed and traded at negotiated prices
on a national securities exchange as defined in section 2(a)(26) of the
Act (``Stock Exchange''). The Funds will issue Shares in Creation Units
of at least 50,000 Shares. Orders to purchase Creation Units may be
placed by or through an ``Authorized Participant,'' which is either (i)
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 (ii) a participant in the
Depository Trust Company (``DTC''), which in either case has executed
an agreement with the Trust and the Distributor with respect to
creations and
[[Page 71755]]
redemptions of Creation Units (``Participant Agreement''). Shares of
each New Fund will be purchased in Creation Units in exchange for an
in-kind deposit by the purchaser of a particular portfolio of
securities (``Deposit Securities'') designated by the Adviser, together
with the deposit of a specified cash payment (``Cash Component,''
collectively with the Deposit Securities, ``Fund Deposit''). The Cash
Component is an amount equal to the difference between the NAV of a
Creation Unit and the total aggregate market value per Creation Unit of
the Deposit Securities.\6\ A Fund may also 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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\6\ On each day that a Fund is open, including as required by
section 22(e) of the Act (``Business Day''), the Adviser will make
available prior to the opening of trading on the Stock Exchange a
list of the names and the required number of shares of each Deposit
Security to be included in the Fund Deposit for each Fund, along
with the prior day's Cash Component. The Stock Exchange will
disseminate, every 15 seconds during its regular trading hours,
through the facilities of the Consolidated Tape Association, the
estimated NAV of the Funds, which is an amount per Share
representing the sum of the estimated Cash Component effective
through and including the previous Business Day, plus the current
value of the Deposit Securities, on a per Share basis.
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11. Each Fund may impose a purchase or redemption transaction fee
(``Transaction Fee'') to protect existing shareholders from the
dilutive costs associated with the purchase or redemption of Creation
Units.\7\ The Distributor will deliver a confirmation and prospectus
(``Prospectus'') to the purchaser.
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\7\ Where a Fund permits a purchaser to substitute cash in lieu
of depositing a portion of the requisite Deposit Securities, the
purchaser may be assessed a higher Transaction Fee to offset the
cost to the Fund of purchasing such Deposit Securities.
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12. Purchasers of Shares in Creation Units may hold such Shares or
may sell such Shares into the secondary market. Shares will be listed
on the Stock Exchange and traded in the secondary market in the same
manner as other equity securities. One or more Market Makers (as
defined below) will be assigned to make continuous markets in Shares.
The price of Shares trading on a Stock Exchange will be based on a
current bid/offer market. Transactions involving the sale of Shares on
a Stock Exchange will be subject to customary brokerage commissions and
charges.
13. Applicants expect that purchasers of Creation Units will
include arbitrageurs and the lead market makers (``LMMs'') and/or
designated liquidity providers (together with LMMs, ``Market Makers'').
Applicants expect that secondary market purchasers of Shares will
include both institutional and retail investors.\8\ Applicants state
that arbitrage opportunities created by the ability to continually
purchase or redeem Creation Units at their NAV should ensure that the
Shares will not trade at a material discount or premium in relation to
their NAV.
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\8\ Shares will be registered in book-entry form only. DTC or
its nominee will be the registered owner of all outstanding Shares.
Beneficial ownership of Shares will be shown on the records of DTC
or DTC participants (``DTC Participants'').
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14. Beneficial owners of Shares may sell their Shares in the
secondary market, but must accumulate enough Shares to constitute a
Creation Unit in order to redeem through a Fund. Creation Units will be
redeemed in exchange for a portfolio of securities (``Redemption
Securities'') and specified cash amount \9\ as published in the
redemption basket. While Shares generally will be redeemed in Creation
Units in exchange for Redemption Securities, each Fund will have the
right to make redemption payments in cash, in kind or a combination of
each, provided the value of its redemption payments equals the NAV.\10\
To the extent that the Redemption Securities have a value greater than
the NAV of the Shares being redeemed, a cash payment equal to the
differential will be paid by the redeeming shareholder to the Trust.
Redemption of Shares in Creation Units will be subject to a Transaction
Fee.
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\9\ In the case of a Fund that is part of a master-feeder
structure, the Fund will redeem shares from the appropriate master
portfolio and then deliver to the redeeming shareholder a portfolio
of Redemption Securities and specified cash amount as published in
the redemption basket.
\10\ The Funds may substitute a cash-in-lieu amount to replace
any Deposit Security or Redemption Security that is a to-be-
announced transaction (``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 TBA Transactions
will be equivalent to the value of the TBA Transaction listed as a
Deposit Security or Redemption Security.
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15. Applicants state that each Fund must comply with the federal
securities laws in accepting Deposit Securities and satisfying
redemptions with Redemption Securities, including that the Redemption
Securities are sold in transactions that would be exempt from
registration under the Securities Act.\11\ The Deposit Securities and
Redemption Securities will consist of a pro rata basket of the
portfolio securities held by a Fund (``Fund Securities''), except for
certain minor differences that may exist for certain Fixed Income Funds
because it is impossible to break up bonds beyond certain minimum sizes
needed for transfer and settlement.
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\11\ In accepting Deposit Securities and satisfying redemptions
with Redemption Securities that are restricted securities eligible
for resale pursuant to rule 144A under the Securities Act, each Fund
will comply with the conditions of rule 144A, including in
satisfying redemptions with such rule 144A eligible restricted
Redemption Securities.
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16. Neither the Trust nor any Fund will be advertised or marketed
or otherwise held out as a traditional open-end investment company or a
mutual fund. Instead, each Fund will be marketed as an ``actively-
managed exchange-traded fund.'' \12\ All marketing materials that
describe the features or method of obtaining, buying or selling
Creation Units, or Shares traded on the Stock Exchange, or refer to
redeemability, will prominently disclose that Shares are not
individually redeemable shares and will disclose that the owners of
Shares may acquire those Shares from the Fund, or tender those Shares
for redemption to the Fund in Creation Units only. The same approach
will be followed in connection with shareholder reports and investor
educational materials issued or circulated in connection with the
Shares. The Funds will provide copies of its semi-annual and annual
shareholder reports to DTC Participants for distribution to beneficial
owners of Shares.
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\12\ As noted above, the Funds may operate in a master-feeder
structure. Under such circumstances, the Funds would operate, and
would be marketed, as ETFs. The respective Master Funds would
operate as mutual funds, but would not be publicly offered or
marketed. Applicants do not believe the master-feeder structure
would be confusing to investors because any additional feeder fund
that is a traditional mutual fund or other pooled investment vehicle
would be marketed separately. Applicants state that they will take
steps to ensure that investors will understand the differences
between the Funds and any feeder funds.
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17. The Trust will maintain a Web site that will include each
Fund's Prospectus and other information about each Fund that is updated
on a daily basis, including the prior Business Day's NAV, closing
market price, reported midpoint of ``bid and ask'' at the time of
calculation of such NAV (``Bid/Ask Price''), and a calculation of the
premium or discount of such price against such NAV. Prior to the
opening of the Stock Exchange on each Business Day, a Trust will
disclose on its Web site the identities and quantities of the
securities and other assets held by each Fund, or its respective Master
Fund,\13\
[[Page 71756]]
that will form the basis of each Fund's NAV at the end of such Business
Day.\14\
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\13\ For Funds that are part of a master-feeder structure, the
Fund will disclose information about the securities and other assets
held by the Master Fund.
\14\ 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 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.
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.
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 to permit the Trust to register as an open-
end management investment company and redeem Shares in Creation Units
only.\15\ Applicants state that investors may purchase Shares in
Creation Units and redeem Creation Units from each Fund. Applicants
further state that because the market price of Creation Units will be
disciplined by arbitrage opportunities, investors should be able to
sell Shares in the secondary market at prices that do vary
substantially from their NAV.
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\15\ The Master Funds will not require relief from sections
2(a)(32) and 5(a)(1) because the Master Funds will issue
individually redeemable securities.
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Section 22(d) of the Act and Rule 22c-1 Under the Act
4. Section 22(d) of the Act, among other things, prohibits a dealer
from selling a redeemable security, 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, rather than at the 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 Brokers offering shares at less than the
published sales price and repurchasing shares at more than the
published redemption price.
6. Applicants believe that none of these purposes will be thwarted
by permitting Shares to trade in the secondary market at negotiated
prices. Applicants state that (a) secondary market trading in Shares
would not cause dilution of an investment in Shares because such
transactions do not involve the Funds as parties, and (b) to the extent
different prices exist during a given trading day, or from day to day,
such variances occur as a result of third-party market forces, such as
supply and demand. Therefore, applicants assert that secondary market
transactions in Shares will not lead to discrimination or preferential
treatment among purchasers. Finally, applicants contend that the
proposed distribution system will be orderly because arbitrage activity
should ensure that the difference between NAV and the market price of
Shares remains low.
Section 22(e)
7. Section 22(e) of the Act generally prohibits a registered
investment company from suspending the right of redemption or
postponing the date of payment of redemption proceeds for more than
seven days after the tender of a security for redemption. Applicants
observe that the settlement of redemptions of Creation Units of the
Foreign Funds is contingent not only on the settlement cycle of the
U.S. securities markets but also on the delivery cycles present in
foreign markets in which Foreign Funds, or their respective Master
Funds, may invest. Applicants have been advised that, under certain
circumstances, the delivery cycles for transferring Redemption
Securities to redeeming investors, coupled with local market holiday
schedules, will require a delivery process of up to 14 calendar days.
Applicants therefore request relief from section 22(e) in order to
provide payment or satisfaction of redemptions within the maximum
number of calendar days required for such payment or satisfaction in
the principal local markets where transactions in the Fund Securities
of each Foreign Fund, and any respective Master Fund, customarily clear
and settle, but in all cases no later than 14 days following the tender
of a Creation Unit.\16\
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\16\ Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations that
applicants may otherwise have under rule 15c6-1 under the Exchange
Act. Rule 15c6-1 requires that most securities transactions be
settled within three business days of the trade date.
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8. Applicants submit that Congress adopted section 22(e) to prevent
unreasonable, undisclosed or unforeseen delays in the actual payment of
redemption proceeds. Applicants state that allowing in-kind redemption
payments for Creation Units of a Foreign Fund, and any respective
Master Fund, to be made within the number of days
[[Page 71757]]
indicated above would not be inconsistent with the spirit and intent of
section 22(e). Applicants state that each Foreign Fund's 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 in-kind redemption proceeds in seven calendar days and
the maximum number of days needed to deliver the proceeds for each
affected Foreign Fund. Applicants are not seeking relief from section
22(e) with respect to Foreign Funds effecting redemptions on a cash
basis.
9. If using a master-feeder structure, applicants will operate in
substantially the same manner. In the case of an in-kind redemption
from a Fund, the Fund would make a corresponding redemption from the
Master Fund. Applicants do not believe the master-feeder structure
would have any impact on the delivery cycle.
Section 12(d)(1)
10. 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.
11. Applicants request relief to permit Purchasing Management
Companies and Purchasing Trusts registered under the Act that are not
sponsored or advised by the Adviser or any entity controlling,
controlled by, or under common control with the Adviser and are not
part of the same ``group of investment companies,'' as defined in
section 12(d)(1)(G)(ii) of the Act, as the Trusts, to acquire Shares of
a Fund beyond the limits of section 12(d)(1)(A) of the Act. Applicants
also seek an exemption to permit the Funds and/or a Broker to sell
Shares to Purchasing Funds beyond the limits of section 12(d)(1)(B).
Pursuant to the terms and conditions of the requested order, each
Purchasing Fund will enter into a FOF Participation Agreement (as
defined below) with the relevant Fund.
12. Each Purchasing Management Company will be advised by an
investment adviser within the meaning of section 2(a)(20)(A) of the Act
(``Purchasing Fund Adviser'') and may be sub-advised by investment
adviser(s) within the meaning of section 2(a)(20)(B) of the Act
(``Purchasing Fund Sub-Adviser''). Any investment adviser to a
Purchasing Management Company will be registered as an investment
adviser or exempt from registration under the Advisers Act. Each
Purchasing Trust will have a sponsor (``Sponsor'').
13. 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.
14. Applicants submit that their proposed conditions address any
concerns regarding the potential for undue influence. A Purchasing Fund
or Purchasing Fund Affiliate \17\ will not cause an investment in a
Fund to influence the terms of services or transactions between a
Purchasing Fund or a Purchasing Fund Affiliate and the Fund or Fund
Affiliate.\18\ A Purchasing Fund's Advisory Group or a Purchasing
Fund's Sub-Advisory Group will not control a Fund within the meaning of
section 2(a)(9) of the Act. A ``Purchasing Fund's Advisory Group'' is
the Purchasing Fund Adviser, or Sponsor, any person controlling,
controlled by or under common control with the Purchasing Fund Adviser
or Sponsor, 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, that
is advised or sponsored by the Purchasing Fund Adviser, the Sponsor, or
any person controlling, controlled by or under common control with the
Purchasing Fund Adviser or Sponsor. A ``Purchasing Fund's Sub-Advisory
Group'' is any Purchasing Fund Sub-Adviser, any person controlling,
controlled by, or under common control with the Purchasing Fund 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 Purchasing Fund Sub-Adviser or any person controlling, controlled
by or under common control with the Purchasing Fund Sub-Adviser.
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\17\ A ``Purchasing Fund Affiliate'' is defined as the
Purchasing Fund Adviser, Purchasing Fund Sub-Adviser, Sponsor,
promoter and principal underwriter of a Purchasing Fund and any
person controlling, controlled by or under common control with any
of these entities.
\18\ A ``Fund Affiliate'' is defined as an investment adviser,
promoter or principal underwriter of a Fund, or its respective
Master Fund, and any person controlling, controlled by or under
common control with any of these entities.
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15. Applicants also propose a condition to ensure that no
Purchasing Fund or Purchasing Fund Affiliate will cause a Fund to
purchase a security from an Affiliated Underwriting. An ``Affiliated
Underwriting'' is an offering of securities during the existence of an
underwriting or selling syndicate of which a principal underwriter is
an Underwriting Affiliate. An ``Underwriting Affiliate'' is a principal
underwriter in any underwriting or selling syndicate that is an
officer, director, member of an advisory board, Purchasing Fund
Adviser, Purchasing Fund Sub-Adviser, employee or Sponsor of the
Purchasing Fund, or a person of which any such officer, director,
member of an advisory board, Purchasing Fund Adviser, Purchasing Fund
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.
16. Applicants propose several conditions to address the potential
for layering of fees. Applicants note that the board of directors or
trustees of a Purchasing 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 Purchasing Management
Company may invest. Applicants state that any sales charges and/or
service fees charged with respect to shares of a Purchasing Fund will
not exceed the limits applicable to a fund of funds set forth in NASD
Conduct Rule 2830.\19\
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\19\ Any references to NASD Conduct Rule 2830 include any
successor or replacement rule that may be adopted by the Financial
Industry Regulatory Authority.
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17. Applicants submit that the proposed arrangement will not create
an overly complex fund structure. Applicants note that a Fund (and its
respective Master Fund) will be prohibited from acquiring securities of
[[Page 71758]]
any investment company or company relying on section 3(c)(1) or 3(c)(7)
of the Act in excess of the limits contained in section 12(d)(1)(A) of
the Act, except to the extent that (i) the Fund (or its respective
Master Fund) acquires securities of another investment company pursuant
to certain exemptive relief from the Commission, or (ii) the Fund
acquires shares of its respective Master Fund.
18. To ensure that a Purchasing Fund is aware of the terms and
conditions of the requested order, the Purchasing Fund must enter into
an agreement with the respective Fund (``FOF Participation
Agreement''). The FOF Participation Agreement will include an
acknowledgment from the Purchasing Fund that it may rely on the order
only to invest in the Funds (or other series of the Trusts) and not in
any other investment company.
19. Applicants also are seeking relief from sections 12(d)(1)(A)
and (B) of the Act to permit the Funds to perform creations and
redemptions of Shares in-kind in a master-feeder structure. Applicants
assert that this structure is substantially identical to traditional
master-feeder structures permitted pursuant to the exception provided
in section 12(d)(1)(E) of the Act. Section 12(d)(1)(E) provides that
the percentage limitations of sections 12(d)(1)(A) and (B) will not
apply to a security issued by an investment company (in this case, the
shares of the applicable master portfolio) if, among other things, that
security is the only investment security held by the Fund. Applicants
believe the proposed master-feeder structure complies with section
12(d)(1)(E) because each Fund will hold only investment securities
issued by its corresponding Master Fund; however, the Funds may receive
securities other than securities of its corresponding Master Fund if a
Fund accepts an in-kind creation. To the extent that a Fund may be
deemed to be holding both shares of the master portfolio and other
securities, applicants request relief from sections 12(d)(1)(A) and
(B). The Funds would operate in compliance with all other provisions of
section 12(d)(1)(E).
Sections 17(a)(1) and (2) of the Act
20. Sections 17(a)(1) and (2) of the Act generally prohibit an
affiliated person of a registered investment company, or an affiliated
person of such a person (``second tier affiliate''), from selling any
security to or purchasing any security from the company. Section
2(a)(3) of the Act defines ``affiliated person'' to include any person
directly or indirectly owning, controlling, or holding with power to
vote 5% or more of the outstanding voting securities of the other
person and any person directly or indirectly controlling, controlled
by, or under common control with, the other person. Section 2(a)(9) of
the Act 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 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'').
21. Applicants request an exemption from section 17(a) under
sections 6(c) and 17(b) to permit in-kind purchases and redemptions by
persons that are affiliated persons or second tier affiliates of the
Funds solely by virtue of one or more of the following: (i) Holding 5%
or more, or more than 25%, of the Shares of the Trust or one or more
Funds; (ii) an affiliation with a person with an ownership interest
described in (i); or (iii) 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 Purchasing Fund of which
the Fund is an affiliated person or a second tier affiliate.\20\
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\20\ Applicants state that although they believe that a
Purchasing Fund generally will purchase Shares in the secondary
market, a Purchasing Fund might seek to transact in Creation Units
directly with a Fund.
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22. Applicants contend that no useful purpose would be served by
prohibiting the affiliated persons described above from making in-kind
purchases or in-kind redemptions of Shares of a Fund in Creation Units.
The value of a Fund Deposit made by a purchaser or Redemption
Securities and corresponding Cash Component given to a redeeming
investor will be the same regardless of the investor's identity, and
will be valued under the same objective standards applied to valuing
the Fund Securities. The method of valuing Fund Securities held by a
Fund is the same as that used for calculating in-kind purchase or
redemption values. Therefore, applicants state that the in-kind
purchases and redemptions will afford no opportunity for the specified
affiliated persons of a Fund to effect a transaction detrimental to
other holders of Shares. Applicants do not believe that in-kind
purchases and redemptions will result in abusive self-dealing or
overreaching of the Fund.
23. Applicants also submit that the sale of Shares to and
redemption of Shares from a Purchasing Fund satisfies the standards for
relief under sections 17(b) and 6(c) of the Act. Any consideration paid
for the purchase or redemption of Shares directly from a Fund will be
based on the NAV of the Fund.\21\ The FOF Participation Agreement will
require any Purchasing Fund that purchases Shares directly from a Fund
to represent that its purchases are permitted under its investment
restrictions and consistent with the investment policies described in
its registration statement.
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\21\ Applicants acknowledge that the receipt of compensation by
(a) an affiliated person of a Purchasing Fund, or an affiliated
person of such person, for the purchase by the Purchasing Fund of
Shares or (b) an affiliated person of a Fund, or an affiliated
person of such person, for the sale by the Fund of its Shares to a
Purchasing 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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24. To the extent that a Fund operates in a master-feeder
structure, applicants also request relief permitting the Funds to
engage in in-kind creations and redemptions with the applicable master
portfolio. Applicants state that the customary section 17(a)(1) and
17(a)(2) relief would not be sufficient to permit such transactions
because the Funds and the applicable master portfolio could also be
affiliated by virtue of having the same investment adviser. However,
applicants believe that in-kind creations and redemptions between a
Fund and a master portfolio advised by the same investment adviser do
not involve ``overreaching'' by an affiliated person. Such transactions
will occur only at the Fund's proportionate share of the master
portfolio's net assets, and the distributed securities will be valued
in the same manner as they are valued for the purposes of calculating
the applicable master portfolio's NAV. Further, all such transactions
will be effected with respect to pre-determined securities and on the
same terms with respect to all investors. Finally, such transactions
would only occur as a result of, and to effectuate, a creation or
redemption transaction between the Fund and a third-party investor.
Applicants believe that the terms of the proposed transactions are
reasonable and fair and do not involve overreaching on the part of any
person concerned and that the transactions are consistent with the
general purposes of the Act.
Applicants' Conditions:
[[Page 71759]]
Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
ETF Relief
1. As long as the Funds operate in reliance on the requested order,
the Shares of the Funds will be listed on a Stock Exchange.
2. Neither the Trust nor any Fund will be advertised or marketed as
an open-end investment company or a mutual fund. Any advertising
material that describes the purchase or sale of Creation Units or
refers to redeemability will prominently disclose that the Shares are
not individually redeemable and that owners of the Shares may acquire
those Shares from the Fund and tender those Shares for redemption to
the Fund in Creation Units only.
3. The Web site for the Funds, which is and will be publicly
accessible at no charge, will contain, on a per Share basis for each
Fund the prior Business Day's NAV and the market closing price or Bid/
Ask Price of the Shares, and a calculation of the premium or discount
of the market closing price or Bid/Ask Price of the Shares against such
NAV.
4. On each Business Day, before commencement of trading in Shares
on the Stock Exchange, the Fund (or its respective Master Fund) will
disclose on its Web site the identities and quantities of the Fund
Securities and other assets held by each Fund that will form the basis
for each Fund's calculation of NAV at the end of such Business Day.
5. The Adviser or 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.
6. The requested relief, other than the section 12(d)(1) relief and
the section 17 relief related to a master-feeder structure, 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.
Fund of Funds Relief
7. The members of the Purchasing Fund's Advisory Group will not
control (individually or in the aggregate) a Fund (or its respective
Master Fund) within the meaning of section 2(a)(9) of the Act. The
members of the Purchasing Fund's Sub-Advisory Group will not control
(individually or in the aggregate) a Fund (or its respective Master
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
Purchasing Fund's Advisory Group or the Purchasing 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 Purchasing
Fund's Sub-Advisory Group with respect to a Fund (or its respective
Master Fund) for which the Purchasing Fund Sub-Adviser or a person
controlling, controlled by or under common control with the Purchasing
Fund Sub-Adviser acts as the investment adviser within the meaning of
section 2(a)(20)(A) of the Act.
8. No Purchasing Fund or Purchasing Fund Affiliate will cause any
existing or potential investment by the Purchasing Fund in a Fund to
influence the terms of any services or transactions between the
Purchasing Fund or a Purchasing Fund Affiliate and the Fund (or its
respective Master Fund) or a Fund Affiliate.
9. The board of directors or trustees of a Purchasing Management
Company, including a majority of the disinterested directors or
trustees, will adopt procedures reasonably designed to assure that the
Purchasing Fund Adviser and any Purchasing Fund Sub-Adviser are
conducting the investment program of the Purchasing Management Company
without taking into account any consideration received by the
Purchasing Management Company or a Purchasing Fund Affiliate from a
Fund (or its respective Master Fund) or a Fund Affiliate in connection
with any services or transactions.
10. Once an investment by a Purchasing Fund in the securities of a
Fund exceeds the limit in section 12(d)(1)(A)(i) of the Act, the board
of trustees of a Fund (``Board'') (or of its respective Master Fund),
including a majority of the disinterested Board members, will determine
that any consideration paid by the Fund (or its respective Master Fund)
to the Purchasing Fund or a Purchasing 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 (or its respective Master Fund); (ii) is within
the range of consideration that the Fund (or its respective Master
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 (or its respective Master Fund) and its investment
adviser(s), or any person controlling, controlled by or under common
control with such investment adviser(s).
11. The Purchasing Fund Adviser, or trustee (``Trustee'') or
Sponsor, as applicable, will waive fees otherwise payable to it by the
Purchasing Fund in an amount at least equal to any compensation
(including fees received pursuant to any plan adopted by a Fund (or its
respective Master Fund) under rule 12b-1 under the Act) received from a
Fund (or its respective Master Fund) by the Purchasing Fund Adviser, or
Trustee or Sponsor, or an affiliated person of the Purchasing Fund
Adviser, or Trustee or Sponsor, other than any advisory fees paid to
the Purchasing Fund Adviser, or Trustee, or Sponsor, or its affiliated
person by the Fund (or its respective Master Fund), in connection with
the investment by the Purchasing Fund in the Fund. Any Purchasing Fund
Sub-Adviser will waive fees otherwise payable to the Purchasing Fund
Sub-Adviser, directly or indirectly, by the Purchasing Management
Company in an amount at least equal to any compensation received from a
Fund (or its respective Master Fund) by the Purchasing Fund Sub-
Adviser, or an affiliated person of the Purchasing Fund Sub-Adviser,
other than any advisory fees paid to the Purchasing Fund Sub-Adviser or
its affiliated person by the Fund (or its respective Master Fund), in
connection with any investment by the Purchasing Management Company in
the Fund made at the direction of the Purchasing Fund Sub-Adviser. In
the event that the Purchasing Fund Sub-Adviser waives fees, the benefit
of the waiver will be passed through to the Purchasing Management
Company.
12. No Purchasing Fund or Purchasing Fund Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Fund
(or its respective Master Fund)) will cause a Fund (or its respective
Master Fund) to purchase a security in an Affiliated Underwriting.
13. The Board of the Fund (or of its respective Master Fund),
including a majority of the disinterested Board members, will adopt
procedures reasonably designed to monitor any purchases of securities
by the Fund (or its respective Master Fund) in an Affiliated
Underwriting, once an investment by a Purchasing 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
[[Page 71760]]
periodically, but no less frequently than annually, to determine
whether the purchases were influenced by the investment by the
Purchasing 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 (or its respective Master 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 (or its respective Master 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.
14. Each Fund (or its respective Master Fund) will maintain and
preserve permanently in an easily accessible place a written copy of
the procedures described in the preceding condition, and any
modifications to such procedures, and will maintain and preserve for a
period of not less than six years from the end of the fiscal year in
which any purchase in an Affiliated Underwriting occurred, the first
two years in an easily accessible place, a written record of each
purchase of securities in Affiliated Underwritings, once an investment
by a Purchasing 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.
15. Before investing in a Fund in excess of the limit in section
12(d)(1)(A), a Purchasing 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), a Purchasing Fund will notify the Fund of
the investment. At such time, the Purchasing Fund will also transmit to
the Fund a list of the names of each Purchasing Fund Affiliate and
Underwriting Affiliate. The Purchasing Fund will notify the Fund of any
changes to the list of the names as soon as reasonably practicable
after a change occurs. The Fund and the Purchasing 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.
16. Before approving any advisory contract under section 15 of the
Act, the board of directors or trustees of each Purchasing 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 (or its respective Master Fund) in which the Purchasing
Management Company may invest. These findings and their basis will be
recorded fully in the minute books of the appropriate Purchasing
Management Company.
17. Any sales charges and/or service fees charged with respect to
shares of a Purchasing Fund will not exceed the limits applicable to a
fund of funds as set forth in NASD Conduct Rule 2830.
18. No Fund (or its respective Master Fund) will acquire securities
of any investment company or company relying on section 3(c)(1) or
3(c)(7) of the Act in excess of the limits contained in section
12(d)(1)(A) of the Act, except to the extent that (i) the Fund (or its
respective Master Fund) acquires securities of another investment
company pursuant to exemptive relief from the Commission permitting the
Fund (or its respective Master Fund) to acquire securities of one or
more investment companies for short-term cash management purposes, or
(ii) the Fund acquires securities of the Master Fund pursuant to the
Master-Feeder Relief.
For the Commission, by the Division of Investment Management,
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29588 Filed 11-23-10; 8:45 am]
BILLING CODE 8011-01-P