[Federal Register Volume 76, Number 136 (Friday, July 15, 2011)]
[Notices]
[Pages 41831-41838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-17877]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 29720; File No. 812-13741]
FQF Trust, et al.; Notice of Application
July 11, 2011.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (the ``Act'') for an exemption from
sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of the Act and rule 22c-1
under the Act, under sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and (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 a securities
index 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: FQF Trust (the ``Trust''), FFCM, LLC (``FFCM,'' and
together with any entity controlling, controlled by or under common
control with FFCM, ``Adviser'') and Foreside Fund Services, LLC (the
``Distributor'').
DATES: Filing Dates: The application was filed on December 31, 2009 and
amended on January 28, 2010, March 9, 2010, March 29, 2011, June 22,
2011, and July 11, 2011.
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 August 5, 2011 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, 250 Congress Street, 5th
Floor, Boston, MA 02110.
FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Special Counsel at (202)
551-6813, or Dalia Osman Blass, Branch Chief, at (202) 551-6821
(Division of Investment Management, Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
[[Page 41832]]
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 seven
series (``Initial Funds'') whose performance will correspond to the
price and yield performance, before fees and expenses, of a specified
securities index (``Underlying Index'').\1\
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\1\ CME Group Index Services LLC (d/b/a Dow Jones Indexes) will
serve as the Index Providers for the Initial Funds. The Underlying
Indexes for the Initial Funds are the U.S. Market Neutral Momentum
Index, U.S. Market Neutral Value Index, U.S. Market Neutral Beta
Index, U.S. Market Neutral Size Index, U.S. Market Neutral Quality
Index, U.S. Market Neutral Anti-Momentum Index, and U.S. Market
Neutral Anti-Beta Index.
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2. Applicants request that the order apply to the Initial Funds and
any additional series of the Trust and any other existing or future
open-end management investment companies or series thereof that track a
specified Underlying Index (``Future Funds,'' and together with the
Initial Funds, the ``Funds'').\2\ Any Future Fund will be (a) Advised
by the Adviser, and (b) seek investment returns that correspond to the
price and yield performance, before fees and expenses, of a specified
securities index. Funds may be based on Underlying Indexes comprised of
domestic equity securities (``Domestic Funds''), foreign equity
securities (``Foreign Funds''), fixed income securities (``Fixed Income
Funds''), or some combination thereof. Underlying Indexes that include
both long and short positions in securities are referred to as ``Long/
Short Indexes.'' Funds based on Long/Short Indexes are ``Long/Short
Funds.'' Underlying Indexes that use a 130/30 investment strategy are
referred to as ``130/30 Indexes.'' Funds based on 130/30 Indexes are
``130/30 Funds.'' Underlying Indexes composed of fixed income
securities are referred to as ``Fixed Income Indexes.'' The Initial
Funds are Domestic Funds that are Long/Short Funds.
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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.
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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 Shares.\3\
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\3\ Applicants request that the order also apply to future
distributors that comply with the terms and conditions of the
application.
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4. Each Fund will consist of a portfolio of securities (``Portfolio
Securities'') and other instruments selected to correspond to the
performance of a specified Underlying Index.\4\ 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.
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\4\ Applicants represent that each Fund will invest at least 80%
of its total assets in the component securities that comprise its
Underlying Index (``Component Securities'') or, as applicable,
depositary receipts or TBA Transactions (as defined below)
representing Component Securities. In the case of the Long/Short
Funds, cash proceeds received from short sales are not included in
total assets for purposes of this calculation. Each Fund also may
invest up to 20% of its total assets (the ``Asset Basket'') in (1)
Securities other than Component Securities, (2) financial
instruments (including (i) futures contracts, (ii) options on
securities, indexes and futures contracts, (iii) equity caps,
collars and floors, (iv) swap agreements, and (v) forward
contracts), and (3) money market instruments. Funds may hold in
their Asset Basket the instruments described in (1) through (3) to
the extent that the Adviser believes such investments should help
the Fund's overall portfolio track the Underlying Index.
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.
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5. The value of each Underlying Index, other than a Fixed Income
Index, will be updated intra-day on a real time basis as its individual
Component Securities change in price. These intra-day values of each
Underlying Index will be disseminated every 15 seconds throughout the
trading day by the national securities exchange, as defined in section
2(a)(26) of the Act (``Exchange''), on which the Shares are primarily
listed (``Primary Listing Exchange'') or a third party organization
authorized by the relevant Index Provider. The value of the Fixed
Income Indexes will be calculated and published 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. 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. Applicants state that use of
the representative sampling strategy may prevent a Fund from tracking
the 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.
6. Each Fund will issue, on a continuous basis, Creation Units,
which will typically consist of 25,000 to 100,000 Shares and have an
initial price of at least $1,000,000. Shares of the Fund generally will
be sold in Creation Units in exchange for an in-kind deposit by the
purchaser of specified securities designated by the Adviser or
Subadviser (the ``Deposit Securities''), together with the deposit of a
specified cash payment (``Balancing Amount,'' and collectively with the
Deposit Securities, ``Deposit Basket''). The Balancing 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 or
Redemption Securities (as defined below).\5\ Authorized Participants
purchasing Creation Units must either: (1) Initiate instructions
pertaining to Deposit Baskets through the CNS System as such processes
have been enhanced to effect purchases and redemptions of Creation
Units (such process referred to as the ``Shares Clearing Process'') or
(2) deliver Deposit Baskets to the Trust outside the Shares
[[Page 41833]]
Clearing Process, through the facilities of DTC (``DTC Process''). Each
Fund reserves the right to permit the substitution of a cash-in-lieu
amount to be added to the Balancing Amount, if any, to replace any
Deposit Security that (1) May be unavailable or not available in
sufficient quantity for delivery to the applicable Fund upon the
purchase of Creation Units, (2) may not be eligible for transfer
through the Shares Clearing Process or DTC Process, or (3) may not be
eligible for trading by an Authorized Participant or the investor on
whose behalf the Authorized Participant is acting. In addition,
applicants expect that a cash-in-lieu amount would replace any TBA
Transaction that is listed as a Deposit Security or Redemption
Security.
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\5\ Each Fund will sell and redeem Creation Units only on a
Business Day. Each Business Day, prior to the opening of trading on
the NYSE, the Custodian, transfer agent or index receipt agent, as
applicable, will make available through the NSCC the list of
securities and the required number of shares of each Deposit
Security to be included in the Deposit Basket and the Balancing
Amount for each Fund.
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7. 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. The
Distributor also will be responsible for delivering the Fund's
prospectus to those persons acquiring Creation Units and for
maintaining records of both the orders placed with it and the
confirmations of acceptance furnished by it.\6\ In addition, the
Distributor will maintain a record of the instructions given to the
applicable Fund to implement the delivery of its Shares. An Authorized
Participant must be either (1) A ``Participating Party,'' (i.e., a
broker-dealer or other participant in the Continuous Net Settlement
System of the National Securities Clearing Corporation (``NSCC''), a
clearing house registered with the Commission, or (2) a participant in
the Depository Trust Company (``DTC'', and such participant, ``DTC
Participant''), which, in either case, has signed a ``Participant
Agreement'' with the Distributor.
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\6\ 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''). 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.
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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 specialist or 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, arbitrageurs, traders and other market
participants. Exchange specialists or market makers 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.\7\ 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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\7\ 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. To redeem, an
investor must 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 will receive (a) A
basket of Portfolio Securities designated by the Adviser or Subadviser
to be delivered for redemptions (``Redemption Securities'') and (b) a
Balancing Amount on the date that the request for redemption is
submitted. An investor may receive the cash equivalent of a Redemption
Security in certain circumstances, as described above with respect to
Deposit Securities.
11. 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.\8\ In all
cases, such Transaction Fees will be limited in accordance with
requirements of the Commission applicable to management investment
companies offering redeemable securities.
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\8\ 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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12. Because they cannot be transferred in kind, short positions and
financial instruments will not be included in the Deposit Securities
and Redemption Securities for a Fund. For the Long/Short Funds and 130/
30 Funds, the Adviser will provide full portfolio holdings disclosure
on a daily basis on the Funds' publicly available Web site (the
``Website'') and has developed an ``IIV File,'' which it will use to
disclose the Funds' full portfolio holdings, including financial
instruments and short positions. Before the opening of business on each
Business Day, the Trust, Adviser or index receipt agent, will make the
IIV File available by e-mail to Authorized Participants upon request.
Applicants state that given either the IIV File or the Web site
disclosure,\9\ anyone will be able to know in real time the intraday
value of the Long/Short Funds and 130/30 Funds.\10\ With respect to the
Long/Short Funds and 130/30 Funds, the investment characteristics of
any financial instruments and short positions used to achieve short and
long exposures will be described in sufficient detail for market
participants to understand the principal investment strategies of the
Funds and to permit informed trading of their Shares.
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\9\ The information on the Web site will be the same as that
disclosed to Authorized Participants in the IIV File, except that
(1) The information provided on the Web site will be formatted to be
reader-friendly and (2) the portfolio holdings data on the Web site
will be calculated and displayed on a per Fund basis, while the
information in the IIV File will be calculated and displayed on a
per Creation Unit basis.
\10\ The Primary Listing Exchange or another independent third
party will disseminate, every 15 seconds during its regular trading
hours, through the facilities of the Consolidated Tape Association,
the Indicative Intra-Day Value (``IIV'') for each Fund, on a per
Share basis.
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13. With respect to Funds that contain only long positions, 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 (1) Consist of the same
representative sample of Portfolio Securities designed to generate
performance that is highly correlated to the performance of the
Portfolio Securities, (2) consist only of securities that are already
included among the existing Portfolio Securities, and (3) are the same
for all Authorized Participants on a given Business Day. In either
case, a basket of Deposit Securities or Redemption Securities and a
true pro rata slice of the Portfolio Securities may differ solely to
the extent necessary (a) Because it is impossible to break up bonds
beyond certain minimum sizes needed for transfer and settlement, (b)
because, in the case of equity securities, rounding is necessary
[[Page 41834]]
to eliminate fractional shares or lots that are not tradable round
lots, or (c) for temporary periods, to effect changes in the Portfolio
Securities as a result of the rebalancing of an Underlying Index. A
tradable round lot for an equity security will be the standard unit of
trading in that particular type of security in its primary market.
14. With respect to the Long/Short Funds and 130/30 Funds, Deposit
Securities and Redemption Securities that represent Component
Securities from the long portion of the relevant Underlying Index
either (a) Will correspond pro rata to the long Portfolio Securities of
the relevant Long/Short Fund or 130/30 Fund, or (b) will not correspond
pro rata to the long Portfolio Securities, provided that the Deposit
Securities and Redemption Securities (1) Consist of the same
representative sample of the long Portfolio Securities designed to
generate performance that is highly correlated to the performance of
the long Portfolio Securities, (2) consist only of securities that are
already included among the existing long Portfolio Securities, and (3)
are the same for all Authorized Participants on a given Business Day.
In either case, a basket of Deposit Securities or Redemption Securities
and a true pro rata slice of the long Portfolio Securities may differ
solely to the extent necessary (a) Because it is impossible to break up
bonds beyond certain minimum sizes needed for transfer and settlement,
(b) because, in the case of equity securities, rounding is necessary to
eliminate fractional shares or lots that are not tradable round lots,
or (c) for temporary periods, to effect changes in the long Portfolio
Securities as a result of the rebalancing of an Underlying Index. A
tradable round lot for an equity security will be the standard unit of
trading in that particular type of security in its primary market.
15. Neither the Trust nor any Fund will be advertised, 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 refer to redeemability, will prominently
disclose that (1) Shares are not individually redeemable and that the
owners of Shares may purchase or redeem Shares from the Fund in
Creation Units only, and (2) the purchase and sale price of individual
Shares trading on an Exchange may be below, at, or above the most
recently calculated NAV for such Shares. The same approach will be
followed in the shareholder reports and other 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.
16. The Web site will include the prospectus, statement of
additional information (``SAI''), and quantitative information for all
Funds, updated on a daily basis, including the market closing price or
mid-point of the bid/ask spread at the time of calculation of the
relevant Fund's NAV (the ``Bid/Ask Price''), and a calculation of the
premium or discount of the market closing price or Bid/Ask Price
against such NAV.
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 further state that because the market price of Shares
will be disciplined by arbitrage opportunities, investors should be
able to buy and sell Shares in the secondary market at prices that do
not vary substantially from their NAV.
Section 22(d) of the Act and Rule 22c-1 under the Act
4. Section 22(d) of the Act, among other things, prohibits a dealer
from selling a redeemable security, which is currently being offered to
the public by or through a principal underwriter, except at a current
public offering price described in the prospectus. Rule 22c-1 under the
Act generally requires that a dealer selling, redeeming or repurchasing
a redeemable security do so only at a price based on its NAV.
Applicants state that secondary market trading in Shares will take
place at negotiated prices, not at a current offering price described
in 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
[[Page 41835]]
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
Foreign Funds is contingent not only on the settlement cycle of the
U.S. securities markets, but also on the delivery cycles present in
local markets for the underlying foreign securities held by the Foreign
Funds. Applicants believe 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 14 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 Foreign
Fund customarily clear and settle, but in all cases no later than 14
calendar days following the tender of a Creation Unit.\11\ With respect
to Future Funds that are Foreign 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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\11\ Applicants acknowledge that relief obtained from the
requirements of section 22(e) will not 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 date.
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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 Foreign Fund to be made within 14
calendar days 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, up to 14 calendar 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 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 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 beyond the limits of section 12(d)(1)(A). In
addition, applicants seek relief to permit the Funds, the Distributor,
and any broker-dealer that is registered under the Exchange Act 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 a ``Acquiring Fund SubAdviser''). Any Acquiring Fund Adviser
or Acquiring Fund SubAdviser 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 section
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 any
Acquiring Fund Affiliate would be able to exert undue influence over
the Funds or any Fund Affiliates.\12\ 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
[[Page 41836]]
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 (``Sub-adviser
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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\12\ An ``Acquiring Fund Affiliate'' is the Acquiring Fund
Adviser, Acquiring Fund SubAdviser, any Sponsor, promoter, or
principal underwriter of an Acquiring 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 those
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 of any Fund in which the
Acquiring Management Company may invest. In addition, except as
provided in condition 9, an Acquiring Fund Adviser or a trustee or
Sponsor of an Acquiring Trust 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 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
Adviser, trustee or Sponsor, from the Fund in connection with the
investment by the Acquiring Fund in the Fund. Applicants state that any
sales loads 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.\13\
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\13\ 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 condition 16 addresses concerns over
meaninglessly complex arrangements. Under condition 16, 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 be required to enter into an agreement (``Participation
Agreement'') between the Fund and the Acquiring Fund. The Participation
Agreement will require the Acquiring Fund to adhere to the terms and
conditions of the requested order and participate in the proposed
transactions in a manner that addresses concerns regarding the
requested relief from section 12(d)(1). The Participation 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 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
Participation 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 or
other property to or acquiring any security or other property 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 or second-tier affiliates of the Fund solely by
virtue of one or more of the following: (1) Holding 5% or more, or more
than 25%, of the outstanding Shares of one or more Funds; (2) having an
affiliation with a person with an ownership interest described in (1);
or (3) holding 5% or more, or more than 25%, of the shares of one or
more 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,
regardless of size or number. Deposit Securities and Redemption
Securities will be valued in the same manner as Portfolio Securities
are valued for purposes of calculating NAV. Applicants submit that, by
using the same standards for valuing Portfolio Securities as are used
for calculating the value of Deposit Securities and Redemption
Securities, the Fund will ensure that its NAV will not be adversely
affected by such transactions. 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 or second-tier affiliate 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.\14\ Applicants state
[[Page 41837]]
that the terms of the proposed transactions will be fair and reasonable
and will 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.\15\ 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 the Acquiring Fund and will be
consistent with the investment policies set forth in the Acquiring
Fund's registration statement. The Participation 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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\14\ To the extent that purchases and sales of Shares occur in
the secondary market and not through principal transactions directly
between an Acquiring Fund and a Fund, relief from section 17(a)
would not be necessary. Applicants are not seeking relief from
section 17(a) for, and the requested relief will not apply to,
transactions where a Fund could be deemed an affiliated person or
second-tier affiliate of an Acquiring Fund because the Adviser
provides investment advisory services to the Acquiring Fund.
\15\ 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 Participation
Agreement also will include this acknowledgment.
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Applicants' Conditions
Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
ETF Relief
1. As long as the Funds operate 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 fund 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, which 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 Bid/Ask Price, and a
calculation of the premium or discount of the market closing price or
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 the Sub-adviser 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, an Acquiring Fund's
Advisory Group or Sub-adviser 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 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 Sub-adviser Group with respect to a Fund for which the
Acquiring Fund Sub-adviser or a person controlling, controlled by, or
under common control with the Acquiring Fund Sub-adviser 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 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 assure that the
Acquiring Fund Adviser and any Acquiring Fund Sub-adviser 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 the Shares of a Fund
exceeds the limit in section 12(d)(1)(A)(i) of the Act, the Board,
including a majority of the disinterested Board members, will determine
that any consideration paid by a Fund to the Acquiring Fund or an
Acquiring Fund Affiliate in connection with any services or
transactions: (i) Is fair and reasonable in relation to the nature and
quality of the services and benefits received by the Fund; (ii) is
within the range of consideration that the Fund would be required to
pay to another unaffiliated entity in connection with the same services
or transactions; and (iii) does not involve overreaching on the part of
any person concerned. This condition does not apply with respect to any
services or transactions between a Fund and its investment adviser(s),
or any person controlling, controlled by, or under common control with
such investment adviser(s).
9. An Acquiring Fund Adviser or a trustee or Sponsor of an
Acquiring Trust will waive fees otherwise payable to it by the
Acquiring Management Company or Acquiring Trust in an amount at least
equal to any compensation (including fees received pursuant to any plan
adopted by a Fund under rule 12b-l under the Act) received from a Fund
by the Acquiring Fund Adviser or trustee or Sponsor to the Acquiring
Trust or an affiliated person of the Acquiring Fund Adviser, trustee or
Sponsor, other than any advisory fees paid to the Acquiring Fund
Adviser or trustee or Sponsor, or an affiliated person of the Acquiring
Fund Adviser, trustee or Sponsor by the Fund, in connection with the
investment by the Acquiring Management Company or Acquiring Trust in
the Fund. Any Acquiring Fund Sub-adviser will waive fees otherwise
payable to the Acquiring Fund Sub-adviser, directly or indirectly, by
the Acquiring Management Company in an amount at least equal to any
compensation received from a Fund by the Acquiring Fund Sub-adviser, 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 the investment by the Acquiring
Management Company in the Fund made at the direction of the Acquiring
Fund Sub-Adviser. In the event that the Acquiring Fund Sub-adviser
waives fees, the benefit of the waiver will be passed through to the
Acquiring Management Company.
10. 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 any Affiliated
Underwriting.
11. The Board, including a majority of the disinterested Board
members, will adopt procedures reasonably designed to monitor any
purchases of securities by a Fund in an Affiliated Underwriting once an
investment by the Acquiring Fund in the Shares of the Fund exceeds
[[Page 41838]]
the limit of section 12(d)(l)(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: (i) Whether the purchases were consistent with the investment
objectives and policies of the Fund; (ii) how the performance of
securities purchased in an Affiliated Underwriting compares to the
performance of comparable securities purchased during a comparable
period of time in underwritings other than Affiliated Underwritings or
to a benchmark such as a comparable market index; and (iii) whether the
amount of securities purchased by the Fund in Affiliated Underwritings
and the amount purchased directly from an Underwriting Affiliate have
changed significantly from prior years. The Board will take any
appropriate actions based on its review, including, if appropriate, the
institution of procedures designed to assure that purchases of
securities in Affiliated Underwritings are in the best interests of
shareholders.
12. 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 Shares of
the Fund exceeds the limits of section 12(d)(l)(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.
13. Before investing in a Fund in excess of the limits in section
12(d)(1)(A), the Acquiring Fund and the Fund will execute a
Participation Agreement stating, without limitation, that their boards
of directors or trustees and their investment advisers, or the trustee
and Sponsor of an Acquiring Trust, 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)(l)(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 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
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.
14. 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.
15. 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.
16. No Fund will acquire securities of any investment company or
company relying on sections 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 that allows
the Fund to purchase shares of a money market fund for short-term cash
management purposes.
For the Commission, by the Division of Investment Management,
under delegated authority.
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-17877 Filed 7-14-11; 8:45 am]
BILLING CODE 8011-01-P