[Federal Register Volume 75, Number 226 (Wednesday, November 24, 2010)]
[Notices]
[Pages 71746-71753]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29589]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 29501; File No. 812-13774]
ETSpreads, LLC, et al.; Notice of Application
November 18, 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 (the
[[Page 71747]]
``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) for an exemption from sections
12(d)(1)(A) and 12(d)(1)(B) of the Act.
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Summary of Application: Applicants request an order that would permit
(a) Series of certain open-end management investment companies whose
portfolios will consist of the component securities of certain
domestic, global or international fixed income securities indexes 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 after the
tender of Shares for redemption; (d) certain affiliated persons of the
series to deposit securities into, and receive securities from, the
series in connection with the purchase and redemption of Creation
Units; and (e) certain registered management investment companies and
unit investment trusts outside of the same group of investment
companies as the series to acquire Shares.
Applicants: ETSpreads, LLC (the ``Adviser''), Exchange Traded Spreads
Trust (the ``Trust'') and ALPS Distributors, Inc. (the
``Distributor'').
Filing Dates: The application was filed on May 18, 2010 and amended on
September 27, 2010. Applicants have agreed to file an amendment during
the notice period, the substance of which is reflected in this notice.
Hearing or Notification of Hearing: An order granting the application
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 13, 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, Securities and Exchange Commission, 100 F Street,
NE., Washington, DC 20549-1090; Applicants, 44 Montgomery Street, Suite
2100, San Francisco, California 94104.
FOR FURTHER INFORMATION CONTACT: Keith A. Gregory, Senior Counsel at
(202) 551-6815, or Mary Kay Frech, Branch Chief, at (202) 551-6820
(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 registered as an open-end management investment
company and is organized as a Delaware statutory trust that will offer
an unlimited number of series. The Trust initially will offer one
series (``Initial Fund'') whose performance will correspond generally
to the total return of a specified fixed income securities index
(``Underlying Index'').\1\
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\1\ The Underlying Index for the Initial Fund is the Markit
iBoxx TIPS Inflation-Linked 5-10 Index.
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2. Applicants request that the order apply to the Initial Fund and
any additional series of the Trust and any other open-end management
investment companies or series thereof, that may be created in the
future and that track a specified fixed income securities Underlying
Index (``Future Funds'').\2\ Any Future Fund will be (a) 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. Future Funds may be based on Underlying Indexes
comprised of domestic fixed income securities (``Domestic Funds'') or
Underlying Indexes comprised of global or international fixed income
securities (``Global Funds''). The Initial Fund and Future Funds,
together, are the ``Funds.'' \3\
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\2\ All entities that currently intend to rely on the order have
been named as applicants. Any other existing or future entity that
subsequently relies on the order will comply with the terms and
conditions of the application. An Acquiring Fund (as defined below)
may rely on the order only to invest in Funds and not in any other
registered investment company.
\3\ Each Fund will comply with the disclosure requirements
adopted by the Commission in Investment Company Act Release No.
28584 (Jan. 13, 2009) before offering Shares.
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3. The Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940 (the ``Advisers Act''), and will serve
as investment adviser to the Funds. The Adviser may enter into sub-
advisory agreements with one or more investment advisers each of which
will serve as a sub-adviser to a Fund (each, a ``Subadviser''). Each
Subadviser will be registered under the Advisers Act. The Distributor
is a broker-dealer registered under the Securities Exchange Act of 1934
(the ``Exchange Act'') and will act as the principal underwriter and
distributor for the Creation Units of Shares.
4. Each Fund will consist of a portfolio of securities (``Portfolio
Securities'') selected to correspond generally to the total return of a
specified fixed income Underlying Index. No entity that creates,
compiles, sponsors or maintains an Underlying Index (``Index
Provider'') is or will be an affiliated person, as defined in section
2(a)(3) of the Act, or an affiliated person of an affiliated person, of
the Trust, a Fund, the Adviser, any Subadviser, or promoter of a Fund,
or of the Distributor.
5. The investment objective of each Fund will be to provide
investment results that closely correspond to the total return of its
Underlying Index.\4\ The value of the Underlying Index will be
disseminated once each ``Business Day,'' which is defined as any day
that a Fund is required to be open under section 22(e) of the Act, at
the end of the Business Day. A Fund will utilize either a replication
or representative sampling strategy to track its Underlying Index. A
Fund using a replication strategy will invest in substantially all of
the Component Securities in its Underlying Index in the same
approximate proportions as in the Underlying Index. A Fund using a
representative sampling strategy will attempt to match the risk and
return characteristics of a Fund's portfolio to the risk and return
characteristics of its Underlying Index.\5\ Applicants state that use
of the representative sampling strategy may prevent a Fund from
tracking the
[[Page 71748]]
performance of its Underlying Index with the same degree of accuracy as
would a Fund that invests in every Component Security of the Underlying
Index. Applicants expect that each Fund will have a tracking error
relative to the performance of its Underlying Index of less than 5
percent.
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\4\ Applicants represent that each Fund will invest at least 80%
of its total assets (exclusive of collateral held from securities
lending) in the component securities that comprise its Underlying
Index (``Component Securities'') or TBAs (as defined below)
representing Component Securities. Each Fund also may invest up to
20% of its total assets in futures contracts, options on future
contracts, options and swaps, cash, cash equivalents, other
investment companies, and securities that are not Component
Securities but which the Adviser believes will assist the Fund in
tracking the performance of its Underlying Index.
\5\ Under the representative sampling strategy, the Adviser will
seek to construct a Fund's portfolio so that its duration, sector,
credit rating, coupon and option characteristics closely correlate
to those characteristics of the Underlying Index.
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6. Creation Units are expected to consist of 100,000 Shares and to
have an initial price in the range of $1,000,000 to $10,000,000. 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
Distributor (``Authorized Participant''). The Distributor will be
responsible for transmitting the orders to the Funds. An Authorized
Participant must be a participant in the Depository Trust Company
(``DTC'', and such participant, ``DTC Participant''). Shares of the
Fund generally will be sold in Creation Units in exchange for an in-
kind deposit by the purchaser of a portfolio of fixed-income securities
designated by the Adviser to correspond generally to the total return
of the relevant Underlying Index (the ``Deposit Securities''), together
with the deposit of a specified cash payment (``Cash Amount'' and
collectively with the Deposit Securities, ``Creation Deposit''). The
Cash Amount is an amount equal to the difference between (a) the net
asset value (``NAV'') (per Creation Unit) of a Fund and (b) the total
aggregate market value (per Creation Unit) of the Deposit
Securities.\6\ Each Fund may permit a purchaser of Creation Units to
substitute cash in lieu of depositing some or all of the Deposit
Securities if the method would reduce the Fund's transaction costs or
enhance the Fund's operating efficiency. To preserve maximum efficiency
and flexibility, a Fund reserves the right to accept and deliver
Creation Units entirely for cash (``All-Cash Payment'').
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\6\ Each Fund will sell and redeem Creation Units only on a
Business Day. Each Business Day, prior to the opening of trading on
the ``Primary Listing Exchange'' (as defined below), a list of
securities and the required number of shares of each Deposit
Security to be included in the Creation Deposit for each Fund or
cash information for each Fund, including when the purchase of
Creation Units from the Fund is an All-Cash Payment (as defined
below), will be made available. In addition, the All-Cash Payment
will be disclosed, if applicable. Any national securities exchange
(as defined in section 2(a)(26) of the Act) (``Exchange'') on which
Shares are listed will disseminate, every 15 seconds during its
regular trading hours, through the facilities of the Consolidated
Tape, an amount per individual Share representing the sum of the
estimated Cash Amount and the current value of the Deposit
Securities. The Primary Listing Exchange is the Exchange on which
the Shares of a Fund are primarily listed.
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7. An investor acquiring 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 redemption of Creation Units.\7\ The
Distributor also will be responsible for delivering the Fund's
prospectus to those persons acquiring Shares in Creation Units and for
maintaining records of both the orders placed with it and the
confirmations of acceptance furnished by it. In addition, the
Distributor will maintain a record of the instructions given to the
applicable Fund to implement the delivery of its Shares.
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\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 cover the cost
of purchasing such Deposit Securities.
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8. 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 on an Exchange. It is expected that one or more member firms
of an Exchange will be designated to act as a market maker (each, a
``Market Maker'') and maintain a market for Shares trading on the
Exchange. Prices of Shares trading on an Exchange will be based on the
current bid/ask market. Shares sold in the secondary market will be
subject to customary brokerage commissions and charges.
9. Applicants expect that purchasers of Creation Units will include
institutional investors and arbitrageurs (which could include
institutional investors). Authorized Participants also may purchase
Creation Units for use in market-making activities. Applicants expect
that secondary market purchasers of Shares will include both
institutional investors and retail investors.\8\ Applicants expect that
the price at which Shares trade will be disciplined by arbitrage
opportunities created by the option to continually purchase or redeem
Creation Units at their NAV, which should ensure that 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.
DTC or DTC Participants will maintain records reflecting beneficial
owners of Shares.
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10. Shares will not be individually redeemable, and owners of
Shares may acquire those Shares from the Fund, or tender such Shares
for redemption to the Fund, in Creation Units only. To redeem, an
investor will have to accumulate enough Shares to constitute a Creation
Unit. Redemption orders must be placed by or through an Authorized
Participant. An investor redeeming a Creation Unit generally will
receive (a) Portfolio Securities designated to be delivered for
redemptions (``Redemption Securities'') on the date that the request
for redemption is submitted and (b) a ``Cash Redemption Payment,''
consisting of an amount calculated in the same manner as the Cash
Amount, although the actual amount of the Cash Redemption Payment may
differ if the Redemption Securities are not identical to the Deposit
Securities on that day. An investor may receive the cash equivalent of
a Redemption Security in certain circumstances, such as if the investor
is constrained from effecting transactions in the security by
regulation or policy.\9\ A redeeming investor may pay a Transaction
Fee, calculated in the same manner as a Transaction Fee payable in
connection with purchases of Creation Units.
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\9\ Applicants state that a cash-in-lieu amount will replace any
``to-be-announced'' (``TBA'') transaction that is listed as a
Deposit Security or Redemption Security of any Fund. A TBA
transaction is a method of trading mortgage-backed securities where
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 a Redemption Security.
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11. Applicants state that in accepting Deposit Securities and
satisfying redemptions with Redemption Securities, the relevant Funds
will comply with the federal securities laws, including that the
Deposit Securities and Redemption Securities are sold in transactions
that would be exempt from registration under the Securities Act of 1933
(``Securities Act'').\10\ The specified Deposit Securities and
Redemption Securities either (a) will correspond pro rata to the
Portfolio Securities of a Fund, or (b) will not correspond pro rata to
the Portfolio Securities, provided that the Deposit Securities and
Redemption Securities (i) Consist of the same representative sample of
Portfolio Securities designed to generate performance that is highly
correlated to the performance of the Portfolio Securities, (ii) consist
only of securities that are already included among the existing
Portfolio Securities, and (iii) are the same for all Authorized
Participants on a given Business Day.\11\
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\10\ 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, the
relevant Funds will comply with the conditions of rule 144A.
\11\ The Deposit Securities and Redemption Securities may differ
from each other (and from the Portfolio Securities) (a) to reflect
minor differences when it is not possible to break up bonds beyond
certain minimum sizes needed for transfer and settlement, or (b) for
temporary periods to effect changes in the Portfolio Securities as a
result of the rebalancing of an Underlying Index.
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[[Page 71749]]
12. Neither the Trust nor any individual Fund will be marketed or
otherwise held out as a traditional open-end investment company or a
mutual fund. Instead, each Fund will be marketed as an ``ETF,'' an
``investment company,'' a ``fund,'' or a ``trust.'' All marketing
materials that describe the features or method of obtaining, buying or
selling Creation Units or Shares traded on an Exchange, or refer to
redeemability, will prominently disclose that Shares are not
individually redeemable and that the owners of Shares may purchase or
redeem Shares from the Fund in Creation Units only. The same approach
will be followed in the shareholder reports and investor educational
materials issued or circulated in connection with the Shares. The Funds
will provide copies of their annual and semi-annual shareholder reports
to DTC Participants for distribution to shareholders.
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 provisions of section 12(d)(1) if the exemption
is consistent with the public interest and the protection of investors.
Sections 5(a)(1) and 2(a)(32) of the Act
3. Section 5(a)(1) of the Act defines an ``open-end company'' as a
management investment company that is offering for sale or has
outstanding any redeemable security of which it is the issuer. Section
2(a)(32) of the Act defines a redeemable security as any security,
other than short-term paper, under the terms of which the owner, upon
its presentation to the issuer, is entitled to receive approximately
his proportionate share of the issuer's current net assets, or the cash
equivalent. Because Shares will not be individually redeemable,
applicants request an order that would permit the Funds to register as
open-end management investment companies and issue Shares that are
redeemable in Creation Units only. Applicants state that investors may
purchase Shares in Creation Units and redeem Creation Units from each
Fund. Applicants state that because Creation Units may always be
purchased and redeemed at NAV, the market price of the Shares should
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 a Fund's prospectus, and not at a price based on NAV. Thus,
purchases and sales of Shares in the secondary market will not comply
with section 22(d) of the Act and rule 22c-1 under the Act. Applicants
request an exemption under section 6(c) from these provisions.
5. Applicants assert that the concerns sought to be addressed by
section 22(d) of the Act and rule 22c-1 under the Act with respect to
pricing are equally satisfied by the proposed method of pricing Shares.
Applicants maintain that while there is little legislative history
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to (a) Prevent dilution caused by
certain riskless trading schemes by principal underwriters and contract
dealers, (b) prevent unjust discrimination or preferential treatment
among buyers, and (c) ensure an orderly distribution of investment
company shares by eliminating price competition from dealers offering
shares at less than the published sales price and repurchasing shares
at more than the published redemption price.
6. Applicants believe that none of these purposes will be thwarted
by permitting Shares to trade in the secondary market at negotiated
prices. Applicants state that (a) secondary market trading in Shares
does not involve a Fund as a party and will not result in dilution of
an investment in Shares, and (b) to the extent different prices exist
during a given trading day, or from day to day, such variances occur as
a result of third party market forces, such as supply and demand.
Therefore, applicants assert that secondary market transactions in
Shares will not lead to discrimination or preferential treatment among
purchasers. Finally, applicants contend that the proposed distribution
system will be orderly because competitive forces will ensure that the
difference between the market price of Shares and their NAV remains
narrow.
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
Global Funds is contingent not only on the settlement cycle of the U.S.
securities markets, but also on the delivery cycles present in
international markets in which those Funds invest. Applicants have been
advised that, under certain circumstances, the delivery cycles for
transferring Portfolio Securities to redeeming investors, coupled with
local market holiday schedules, will require a delivery process of up
to 12 calendar days. Applicants therefore request relief from section
22(e) in order to provide for 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
Portfolio Securities of each Global Fund customarily clear and settle,
but in all cases no later than 12 calendar days following the tender of
a Creation Unit.\12\ With respect to Future Funds
[[Page 71750]]
that are Global Funds, applicants seek the same relief from section
22(e) only to the extent that circumstances exist similar to those
described in the application.
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\12\ Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations applicants
may 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.
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8. Applicants submit that section 22(e) was designed to prevent
unreasonable, undisclosed and unforeseen delays in the actual payment
of redemption proceeds. Applicants state that allowing redemption
payments for Creation Units of a Fund to be made within the number of
days indicated above would not be inconsistent with the spirit and
intent of section 22(e). 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 needed to deliver the proceeds for each affected Global Fund.
Applicants are not seeking relief from section 22(e) with respect to
Global Funds that do not effect creations and redemptions of Creation
Units in-kind.
Section 12(d)(1)
9. Section 12(d)(1)(A) of the Act, in relevant part, prohibits a
registered investment company from acquiring securities of an
investment company if such securities represent more than 3% of the
total outstanding voting stock of the acquired company, more than 5% of
the total assets of the acquiring company, or, together with the
securities of any other investment companies, more than 10% of the
total assets of the acquiring company. Section 12(d)(1)(B) of the Act
prohibits a registered open-end investment company, its principal
underwriter and any other broker-dealer from selling the investment
company's shares to another investment company if the sale will cause
the acquiring company to own more than 3% of the acquired company's
voting stock, or if the sale will cause more than 10% of the acquired
company's voting stock to be owned by investment companies generally.
10. Applicants request an exemption to permit management investment
companies (``Acquiring Management Companies'') and unit investment
trusts (``Acquiring 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 Funds (collectively,
``Acquiring Funds'') to acquire shares of a Fund beyond the limits of
section 12(d)(1)(A). In addition, applicants seek relief to permit a
Fund or broker-dealer that is registered under the Exchange Act
(``Broker'') to sell Shares to Acquiring Funds in excess of the limits
of section 12(d)(1)(B).
11. Each Acquiring Management Company will be advised by an
investment adviser within the meaning of section 2(a)(20)(A) of the Act
(the ``Acquiring Fund Adviser'') and may be sub-advised by one or more
investment advisers within the meaning of section 2(a)(20)(B) of the
Act (each an ``Acquiring Fund SubAdviser''). Any investment adviser to
an Acquiring Fund will be registered under the Advisers Act. Each
Acquiring Trust will be sponsored by a sponsor (``Sponsor'').
12. Applicants submit that the proposed conditions to the requested
relief adequately address the concerns underlying the limits in
sections 12(d)(1)(A) and (B), which include concerns about undue
influence by a fund of funds over underlying funds, excessive layering
of fees and overly complex fund structures. Applicants believe that the
requested exemption is consistent with the public interest and the
protection of investors.
13. Applicants believe that neither the Acquiring Funds nor an
Acquiring Fund Affiliate would be able to exert undue influence over
the Funds.\13\ To limit the control that an Acquiring Fund may have
over a Fund, applicants propose a condition prohibiting an Acquiring
Fund Adviser or a Sponsor, any person controlling, controlled by, or
under common control with the Acquiring 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 Acquiring Fund Adviser or Sponsor, or any person
controlling, controlled by, or under common control with the Acquiring
Fund Adviser or Sponsor (``Acquiring 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 Acquiring Fund SubAdviser, any person controlling, controlled by
or under common control with the Acquiring Fund SubAdviser, 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 Acquiring
Fund SubAdviser or any person controlling, controlled by or under
common control with the Acquiring Fund SubAdviser (``Acquiring Fund's
SubAdvisory Group''). Applicants propose other conditions to limit the
potential for undue influence over the Funds, including that no
Acquiring Fund or Acquiring 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 offering of securities during the
existence of an underwriting or selling syndicate of which a principal
underwriter is an Underwriting Affiliate (``Affiliated Underwriting'').
An ``Underwriting Affiliate'' is a principal underwriter in any
underwriting or selling syndicate that is an officer, director, member
of an advisory board, Acquiring Fund Adviser, Acquiring Fund
SubAdviser, Sponsor, or employee of the Acquiring Fund, or a person of
which any such officer, director, member of an advisory board,
Acquiring Fund Adviser, Acquiring Fund SubAdviser, Sponsor, or employee
is an affiliated person (except that any person whose relationship to
the Fund is covered by section 10(f) of the Act is not an Underwriting
Affiliate).
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\13\ An ``Acquiring Fund Affiliate'' is the Acquiring Fund
Adviser, Acquiring Fund SubAdviser(s), any Sponsor, promoter, or
principal underwriter of a Fund, and any person controlling,
controlled by, or under common control with any of those entities. A
``Fund Affiliate'' is the investment adviser, promoter, or principal
underwriter of a Fund and any person controlling, controlled by or
under common control with any of these entities.
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14. Applicants assert that the proposed conditions address any
concerns regarding excessive layering of fees. The board of directors
or trustees of any Acquiring Management Company, including a majority
of the disinterested directors or trustees, will find that the advisory
fees charged to the Acquiring Management Company are based on services
provided that will be in addition to, rather than duplicative of,
services provided under the advisory contract(s) of any Fund in which
the Acquiring Management Company may invest. In addition, except as
provided in condition 13, an Acquiring Fund Adviser or a trustee
(``Trustee'') or Sponsor of an Acquiring Trust will, as applicable,
waive fees otherwise payable to it by the Acquiring 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 by
the Acquiring Fund Adviser, Trustee or Sponsor or an affiliated person
of the Acquiring Fund
[[Page 71751]]
Adviser, Trustee or Sponsor, from the Funds in connection with the
investment by the Acquiring Fund in the Fund. Applicants state that any
sales charges or service fees charged with respect to shares of an
Acquiring Fund will not exceed the limits applicable to a fund of funds
set forth in NASD Conduct Rule 2830.\14\
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\14\ Any references to NASD Conduct Rule 2830 include any
successor or replacement rule to NASD Conduct Rule 2830 that may be
adopted by FINRA.
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15. Applicants submit that the proposed arrangement will not create
an overly complex fund structure. Applicants note that no Fund may
acquire securities of any investment company or company relying on
section 3(c)(1) or 3(c)(7) of the Act in excess of the limits contained
in section 12(d)(1)(A) of the Act, except to the extent permitted by
exemptive relief from the Commission permitting the Fund to purchase
shares of other investment companies for short-term cash management
purposes. To ensure that Acquiring Funds comply with the terms and
conditions of the requested relief from section 12(d)(1), any Acquiring
Fund that intends to invest in a Fund in reliance on the requested
order will enter into an agreement (``Acquiring Fund Agreement'')
between the Fund and the Acquiring Fund requiring the Acquiring Fund to
adhere to the terms and conditions of the requested order. The
Acquiring Fund Agreement also will include an acknowledgement from the
Acquiring Fund that it may rely on the requested order only to invest
in Funds and not in any other investment company.
16. Applicants also note that a Fund may choose to reject a direct
purchase of Shares in Creation Units by an Acquiring Fund. To the
extent that an Acquiring Fund purchases Shares in the secondary market,
a Fund would still retain its ability to reject initial purchases of
Shares made in reliance on the requested order by declining to enter
into the Acquiring Fund Agreement prior to any investment by an
Acquiring Fund in excess of the limits of section 12(d)(1)(A).
Sections 17(a)(1) and (2) 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 a person (``second-tier affiliate''), from selling any security to
or acquiring any security from the company. Section 2(a)(3) of the Act
defines ``affiliated person'' to include (a) any person directly or
indirectly owning, controlling or holding with power to vote 5% or more
of the outstanding voting securities of the other person, (b) any
person 5% or more of whose outstanding voting securities are directly
or indirectly owned, controlled or held with the power to vote by the
other person, and (c) any person directly or indirectly controlling,
controlled by or under common control with the other person. Section
2(a)(9) of the Act provides that a control relationship will be
presumed where one person owns more than 25% of another person's voting
securities.
18. Applicants request an exemption from section 17(a) of the Act
pursuant to sections 17(b) and 6(c) of the Act to permit persons to
effectuate in-kind purchases and redemptions with a Fund when they are
affiliated persons of the Fund or second-tier affiliates solely by
virtue of one or more of the following: (a) Holding 5% or more, or in
excess of 25%, of the outstanding Shares of one or more Funds; (b)
having an affiliation with a person with an ownership interest
described in (a); or (c) holding 5% or more, or more than 25%, of the
shares of one or more other registered investment companies (or series
thereof) advised by the Adviser.
19. Applicants assert that no useful purpose would be served by
prohibiting these types of affiliated persons from acquiring or
redeeming Creation Units through ``in-kind'' transactions. The deposit
procedures for both in kind purchases and in-kind redemptions of
Creation Units will be the same for all purchases and redemptions.
Deposit Securities and Redemption Securities will be valued in the same
manner as Portfolio Securities. Therefore, applicants state that in-
kind purchases and redemptions will afford no opportunity for the
specified affiliated persons, or second-tier affiliates, of a Fund to
effect a transaction detrimental to other holders of Shares. Applicants
also believe that in-kind purchases and redemptions will not result in
self-dealing or overreaching of the Fund.
20. Applicants also seek relief from section 17(a) to permit a Fund
that is an affiliated person of an Acquiring Fund to sell its Shares to
and redeem its Shares from an Acquiring Fund, and to engage in the
accompanying in-kind transactions with the Acquiring Fund.\15\
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\15\ Applicants believe that an Acquiring Fund likely will
purchase Shares of the Funds in the secondary market and will not
purchase or redeem Creation Units directly from a Fund. However, the
requested relief would apply to direct sales of Shares in Creation
Units by a Fund to an Acquiring Fund and redemptions of those
Shares. The requested relief is intended to cover the in-kind
transactions that would accompany such sales and redemptions.
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Applicants state that the terms of the transactions are fair and
reasonable and do not involve overreaching. Applicants note that any
consideration paid by an Acquiring Fund for the purchase or redemption
of Shares directly from a Fund will be based on the NAV of the
Fund.\16\ Applicants believe that any proposed transactions directly
between the Funds and Acquiring Funds will be consistent with the
policies of each Acquiring Fund. The purchase of Creation Units by an
Acquiring Fund directly from a Fund will be accomplished in accordance
with the investment restrictions of any such Acquiring Fund and will be
consistent with the investment policies set forth in the Acquiring
Fund's registration statement. The Acquiring Fund Agreement will
require any Acquiring Fund that purchases Creation Units directly from
a Fund to represent that the purchase of Creation Units from a Fund by
an Acquiring Fund will be accomplished in compliance with the
investment restrictions of the Acquiring Fund and will be consistent
with the investment policies set forth in the Acquiring Fund's
registration statement.
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\16\ Applicants acknowledge that receipt of compensation by (a)
an affiliated person of an Acquiring Fund, or an affiliated person
of such person, for the purchase by the Acquiring 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 an Acquiring Fund
may be prohibited by section 17(e)(1) of the Act. The Acquiring Fund
Agreement also will include this acknowledgment.
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Applicants' Conditions:
Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
ETF Relief
1. As long as the Trust operates in reliance on the requested
order, the Shares will be listed on an 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 Shares are not
individually redeemable and that owners of Shares may acquire those
Shares from a Fund and tender those Shares for redemption to a 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 the
midpoint of the bid/ask spread at the time of the calculation of such
NAV (``Bid/Ask Price''), and a calculation of the premium or discount
of the market
[[Page 71752]]
closing price or the Bid/Ask Price against such NAV.
4. 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 index-based exchange-traded funds.
Section 12(d)(1) Relief
5. The members of an Acquiring 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 an Acquiring Fund's
SubAdvisory 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
Acquiring Fund's Advisory Group or the Acquiring Fund's SubAdvisory
Group, each in the aggregate, becomes a holder of more than 25% of the
outstanding voting securities of a Fund, it will vote its Shares in the
same proportion as the vote of all other holders of the Shares. This
condition does not apply to the Acquiring Fund's SubAdvisory Group with
respect to a Fund for which the Acquiring Fund SubAdviser or a person
controlling, controlled by, or under common control with the Acquiring
Fund SubAdviser acts as the investment adviser within the meaning of
section 2(a)(20)(A) of the Act.
6. No Acquiring Fund or Acquiring Fund Affiliate will cause any
existing or potential investment by the Acquiring Fund in a Fund to
influence the terms of any services or transactions between the
Acquiring Fund or an Acquiring Fund Affiliate and the Fund or a Fund
Affiliate.
7. The board of directors or trustees of an Acquiring Management
Company, including a majority of the disinterested directors or
trustees, will adopt procedures reasonably designed to ensure that the
Acquiring Fund Adviser and any Acquiring Fund SubAdviser are conducting
the investment program of the Acquiring Management Company without
taking into account any consideration received by the Acquiring
Management Company or an Acquiring Fund Affiliate from a Fund or a Fund
Affiliate in connection with any services or transactions.
8. Once an investment by an Acquiring Fund in Shares exceeds the
limits in section 12(d)(1)(A)(i) of the Act, the board of trustees of
the Trust (``Board''), including a majority of the disinterested
trustees, will determine that any consideration paid by the Fund to an
Acquiring Fund or an Acquiring 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).
9. No Acquiring Fund or Acquiring Fund Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Fund)
will cause the Fund to purchase a security in any Affiliated
Underwriting.
10. The Board, including a majority of the disinterested trustees,
will adopt procedures reasonably designed to monitor any purchases of
securities by the Fund in an Affiliated Underwriting, once an
investment by an Acquiring 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 Acquiring 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 of the Fund.
11. 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 Acquiring 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
determinations of the Board were made.
12. Before investing in Shares in excess of the limits in section
12(d)(1)(A), each Acquiring Fund and the Fund will execute an Acquiring
Fund Agreement stating, without limitation, that their boards of
directors or trustees and their investment adviser(s) or their Sponsors
or Trustees, 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 in excess of the limit in section
12(d)(1)(A)(i), an Acquiring Fund will notify the Fund of the
investment. At such time, the Acquiring Fund will also transmit to the
Fund a list of the names of each Acquiring Fund Affiliate and
Underwriting Affiliate. The Acquiring Fund will notify the Fund of any
changes to the list of names as soon as reasonably practicable after a
change occurs. The Fund and the Acquiring Fund will maintain and
preserve a copy of the order, the Acquiring Fund 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.
13. The Acquiring Fund Adviser, Trustee or Sponsor, as applicable,
will waive fees otherwise payable to it by the Acquiring Fund in an
amount at least equal to any compensation (including fees received
pursuant to any plan adopted under rule 12b-1 under the Act) received
from the Fund by the Acquiring Fund Adviser, Trustee or Sponsor, or an
affiliated person of the Acquiring Fund Adviser, Trustee or Sponsor,
other than any advisory fees paid to the Acquiring Fund Adviser,
Trustee, or Sponsor, or its affiliated person by the Fund, in
connection with the investment by the Acquiring Fund in the Fund. Any
Acquiring Fund SubAdviser will waive fees otherwise payable to the
Acquiring Fund SubAdviser, directly or indirectly, by the Acquiring
Management Company in
[[Page 71753]]
an amount at least equal to any compensation received from a Fund by
the Acquiring Fund SubAdviser, or an affiliated person of the Acquiring
Fund Sub-Adviser, other than any advisory fees paid to the Acquiring
Fund Sub-Adviser or its affiliated person by the Fund, in connection
with any investment by the Acquiring Management Company in the Fund
made at the direction of the Acquiring Fund SubAdviser. In the event
that the Acquiring Fund SubAdviser waives fees, the benefit of the
waiver will be passed through to the Acquiring Management Company.
14. Any sales charges and/or service fees charged with respect to
shares of an Acquiring Fund will not exceed the limits applicable to a
fund of funds as set forth in NASD Conduct Rule 2830.
15. No Fund will acquire securities of any other investment company
or company relying on section 3(c)(1) or 3(c)(7) of the Act in excess
of the limits contained in section 12(d)(1)(A) of the Act, except to
the extent permitted by exemptive relief from the Commission permitting
the Fund to purchase shares of other investment companies for short-
term cash management purposes.
16. Before approving any advisory contract under section 15 of the
Act, the board of directors or trustees of each Acquiring Management
Company, including a majority of the disinterested directors or
trustees, will find that the advisory fees charged under such advisory
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 Acquiring Management Company may
invest. These findings and their basis will be recorded fully in the
minute books of the appropriate Acquiring Management Company.
For the Commission, by the Division of Investment Management,
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29589 Filed 11-23-10; 8:45 am]
BILLING CODE 8011-01-P