[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51068-51075]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-20870]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 29752; File No. 812-13773]
Northern Trust Investments, N.A., et al.; Notice of Application
August 10, 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
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. The order would supersede a
prior order (the ``Prior Order'').\1\
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\1\ NETS Trust, et al., Investment Company Act Release Nos.
28166 (Feb. 25, 2008) (notice) and 28195 (Mar. 17, 2008) (order).
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Applicants: Northern Trust Investments, Inc. (the ``Adviser''),
FlexShares Trust (the ``Trust'') and Foreside Fund Services, LLC (the
``Distributor'').
DATES: Filing Dates: The application was filed on May 14, 2010, and
amended on November 3, 2010, and August 2, 2011. 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 September 2, 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,
[[Page 51069]]
NE., Washington, DC 20549-1090; Applicants, c/o Peter K. Ewing and
Craig R. Carberry, Esq., 50 S. LaSalle Street, Chicago, IL 60603.
FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel at
(202) 551-6817, or Janet M. Grossnickle, Assistant Director, at (202)
551-6821 (Division of Investment Management, Office of Investment
Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or an applicant
using the Company name box, at http://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicants' Representations
1. The Trust is a newly organized Maryland statutory trust and will
be registered under the Act as an open-end management investment
company. The Trust initially will offer five series (``Initial Funds'')
whose performance will correspond generally to the price and yield
performance of a specified securities index (``Underlying Index'').\2\
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\2\ Markit North America, Inc. (``Markit'') and Morningstar Inc.
(``Morningstar'') will serve as index providers for the Initial
Funds. The Markit Underlying Indexes for the Initial Funds are iBoxx
3-Year Target Duration TIPS Index, iBoxx 5-Year Target Duration TIPS
Index, and iBoxx 7-Year Target Duration TIPS Index. The Morningstar
Underlying Indexes for the Initial Funds are Morningside Global
Upstream Natural Resources Index and Morningstar US Market Factor
Tilt Index. Neither Markit nor Morningstar is affiliated with the
Trust, the Adviser or the Distributor.
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2. Applicants request that the order apply to the Initial Fund and
any future 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 index comprised solely of securities
(``Future Funds'' and collectively with the Initial Fund, the
``Funds'').\3\ Any 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 equity securities
(``Equity Funds''), Underlying Indexes comprised of fixed income
securities (``Fixed Income Funds'') or Underlying Indexes comprised of
equity securities or fixed income securities traded in foreign markets
(``International Funds''). The Funds may also invest in a combination
of equity, fixed income and U.S. money market securities and/or non-
U.S. money market securities.\4\ Funds may also invest in ``Depositary
Receipts''.\5\ A Fund will not invest in any Depositary Receipts that
the Adviser or Subadviser deems to be illiquid or for which pricing
information is not readily available.
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\3\ 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 Investing Fund (as defined below)
may rely on the order only to invest in Funds and not in any other
registered investment company.
\4\ 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.
\5\ Depositary Receipts are typically issued by a financial
institution, a ``depositary'', and evidence ownership in a security
or pool of securities that have been deposited with the depositary.
No affiliated persons of applicants will serve as the depositary
bank for any Depositary Receipts held by a Fund.
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3. The Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940 (the ``Advisers Act''), and subject to
approval by the Board of Trustees of the Trust or a Fund (the
``Board'') 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 Funds.
4. Each Fund will consist of a portfolio of securities and other
instruments (``Portfolio Securities'') selected to correspond generally
to the price and yield performance of a specified 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 price and yield
performance of its Underlying Index.\6\ Each Fund will sell and redeem
Creation Units on a ``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
hold some, but not necessarily all of the Component Securities of its
Underlying Index.\7\ 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.
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\6\ 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''), in the case of International
Funds, Component Securities and Depositary Receipts (defined below)
representing such Component Securities, or in the case of certain
Fixed Income Funds, in Component Securities and 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.
\7\ Securities are selected for inclusion in a Fund following a
representative sampling strategy to have aggregate investment
characteristics (based on market capitalization and industry
weightings), fundamental characteristics (such as return
variability, duration maturity, earnings valuation and yield) and
liquidity measures similar to those of the Fund's Underlying Index
taken in its entirety.
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6. Creation Units are expected to consist of at least 25,000 Shares
and to have an initial price in the range of $625,000 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 securities (the
``Deposit Securities''), designated by the Adviser, together with the
deposit or refund of a specified cash payment (``Cash Component'' and
collectively with the Deposit Securities, ``Fund Deposit''). The Cash
Component 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
[[Page 51070]]
Unit) of the Deposit Securities.\8\ Each Fund may permit a purchaser of
Creation Units to substitute cash in lieu of depositing some or all of
the Deposit Securities, under certain circumstances. To preserve
maximum efficiency and flexibility, a Fund reserves the right to accept
and deliver Creation Units entirely for cash (``All-Cash Payment''), if
doing so would reduce the Fund's transaction costs or enhance the
Fund's operating efficiency.
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\8\ On each Business Day, prior to the opening of trading on the
``Exchange'' (as defined below), a list of the names and the
required number of shares of each Deposit Security to be included in
the current Fund Deposit (based on the information at the end of the
previous Business Day) 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 Association, an amount per
individual Share representing the sum of the current value of the
Deposit Securities and the estimated Cash Component.
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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.\9\ 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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\9\ 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 Exchange
market makers (``Market Makers''), will be assigned to the Shares and
maintain a market for Shares trading on the Exchange. Prices of Shares
trading on an Exchange will be based on the current bid/offer 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. 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.\10\ 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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\10\ 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 (``Fund Securities'') on the date that the request for
redemption is submitted and (b) a ``Cash Redemption Amount,''
consisting of an amount calculated in the same manner as the Cash
Amount. 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.\11\ 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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\11\ Applicants state that a cash-in-lieu amount will replace
any ``to-be-announced'' (``TBA'') transaction that is listed as a
Deposit Security or Fund 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 Fund Security.
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11. Applicants state that in accepting Deposit Securities and
satisfying redemptions with Fund Securities, the relevant Funds will
comply with the Federal securities laws, including that the Deposit
Securities and Fund Securities are sold in transactions that would be
exempt from registration under the Securities Act of 1933 (``Securities
Act'').\12\ The specified Deposit Securities and Fund 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 Fund 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.\13\
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\12\ In accepting Deposit Securities and satisfying redemptions
with Fund Securities that are restricted securities eligible for
resale pursuant to rule 144A under the Securities Act, the relevant
Funds will comply with the conditions of rule 144A.
\13\ In either case, the Deposit Securities and Fund 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, (b) for temporary periods to effect changes in the
Portfolio Securities as a result of the rebalancing of an Underlying
Index; or (c) in the case of equity securities, when rounding is
necessary to eliminate fractional shares or lots that are not
tradeable round lots.
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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 ``exchange-
traded fund'' or an ``ETF.'' 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
[[Page 51071]]
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
International 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 14 calendar days. Applicants therefore request relief from section
22(e) in order to provide for payment or satisfaction of redemptions
within a longer number of calendar days as required for such payment or
satisfaction in the principal local markets where transactions in the
Portfolio Securities of each International Fund customarily clear and
settle, but in all cases no later than 14 calendar days following the
tender of a Creation Unit.\14\ With respect to Future Funds that are
International 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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\14\ 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 International
Fund. Applicants are not seeking relief from section 22(e) with respect
to International 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
[[Page 51072]]
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 (``Investing Management Companies'') and unit investment
trusts (``Investing 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,
``Investing 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 Investing Funds in excess of the limits
of section 12(d)(1)(B).
11. Each Investing Management Company will be advised by an
investment adviser within the meaning of section 2(a)(20)(A) of the Act
(the ``Investing 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 ``Investing Fund Subadviser''). Any investment adviser to
an Investing Fund will be registered under the Advisers Act. Each
Investing 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 Investing Funds nor an
Investing Fund Affiliate would be able to exert undue influence over
the Funds.\15\ To limit the control that an Investing Fund may have
over a Fund, applicants propose a condition prohibiting an Investing
Fund Adviser or a Sponsor, any person controlling, controlled by, or
under common control with the Investing 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 Investing Fund Adviser or Sponsor, or any person
controlling, controlled by, or under common control with the Investing
Fund Adviser or Sponsor (``Investing Fund's Advisory Group'') from
controlling (individually or in the aggregate) a Fund within the
meaning of section 2(a)(9) of the Act. The same prohibition would apply
to any Investing Fund Subadviser, any person controlling, controlled by
or under common control with the Investing 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 Investing
Fund Subadviser or any person controlling, controlled by or under
common control with the Investing Fund Subadviser (``Investing Fund's
Subadvisory Group''). Applicants propose other conditions to limit the
potential for undue influence over the Funds, including that no
Investing Fund or Investing Fund Affiliate (except to the extent it is
acting in its capacity as an investment adviser to a Fund) will cause a
Fund to purchase a security in 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, Investing Fund Adviser, Investing Fund
Subadviser, Sponsor, or employee of the Investing Fund, or a person of
which any such officer, director, member of an advisory board,
Investing Fund Adviser, Investing 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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\15\ An ``Investing Fund Affiliate'' is the Investing Fund
Adviser, Investing Fund Subadviser(s), any Sponsor, promoter, or
principal underwriter of an Investing 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 Investing Management Company, including a majority
of the disinterested directors or trustees, will find that the advisory
fees charged to the Investing 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 Investing Management Company may invest. In addition, under
condition B.5, an Investing Fund Adviser or a trustee (``Trustee'') or
Sponsor of an Investing Trust will, as applicable, waive fees otherwise
payable to it by the Investing Fund in an amount at least equal to any
compensation (including fees received pursuant to any plan adopted by a
Fund under rule 12b-1 under the Act) received by the Investing Fund
Adviser, Trustee or Sponsor or an affiliated person of the Investing
Fund Adviser, Trustee or Sponsor, from the Funds in connection with the
investment by the Investing Fund in the Fund. Applicants state that any
sales charges or service fees charged with respect to shares of an
Investing Fund will not exceed the limits applicable to a fund of funds
set forth in NASD Conduct Rule 2830.\16\
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\16\ Any references to NASD Conduct Rule 2830 include any
successor or replacement rule to NASD Conduct Rule 2830 that may be
adopted by Financial Industry Regulatory Authority.
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15. Applicants submit that the proposed arrangement will not create
an overly complex fund structure. Applicants note that 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 Investing Funds comply with the terms and
conditions of the requested relief from section 12(d)(1), any Investing
Fund that intends to invest in a Fund in reliance on the requested
order will enter into an agreement (``FOF Participation Agreement'')
between the Fund and the Investing Fund requiring the Investing Fund to
adhere to the terms and conditions of the requested order. The FOF
Participation Agreement also will include an acknowledgement from the
Investing 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
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Investing Fund. To the extent that an Investing 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 FOF Participation Agreement prior
to any investment by an Investing 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 the Trust or 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. The
composition of a Fund Deposit made by a purchaser or Fund Redemption
given to a redeeming investor (except for any cash in lieu amounts) on
any Business Day will be the same regardless of the investor's
identity, and Fund Deposits and Fund Redemptions 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 Investing Fund to sell its Shares to
and redeem its Shares from an Investing Fund, and to engage in the
accompanying in-kind transactions with the Investing Fund.\17\
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 Investing Fund for the purchase or redemption
of Shares directly from a Fund will be based on the NAV of the
Shares.\18\ Applicants believe that any proposed transactions directly
between the Funds and Investing Funds will be consistent with the
policies of each Investing Fund. The purchase of Creation Units by an
Investing Fund directly from a Fund will be accomplished in accordance
with the investment restrictions of any such Investing Fund and will be
consistent with the investment policies set forth in the Investing
Fund's registration statement. The FOF Participation Agreement will
require any Investing Fund that purchases Creation Units directly from
a Fund to represent that the purchase of Creation Units from a Fund by
an Investing Fund will be accomplished in compliance with the
investment restrictions of the Investing Fund and will be consistent
with the investment policies set forth in the Investing Fund's
registration statement.
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\17\ Applicants believe that an Investing 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 Investing Fund and redemptions of those
Shares. The requested relief is intended to cover the transactions
that would accompany such sales and redemptions.
\18\ Applicants acknowledge that receipt of compensation by (a)
an affiliated person of an Investing Fund, or an affiliated person
of such person, for the purchase by the Investing Fund of Shares or
(b) an affiliated person of a Fund, or an affiliated person of such
person, for the sale by the Fund of its Shares to an Investing Fund
may be prohibited by section 17(e)(1) of the Act. The FOF
Participation Agreement also will include this acknowledgment.
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Applicants' Conditions
Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
A. ETF Relief
1. As long as the Trust operates in reliance on the requested
order, the Shares of the Funds 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 the following information, 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 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.
B. Section 12(d)(1) Relief
1. The members of an Investing Fund's Advisory Group will not
control (individually or in the aggregate) a Fund within the meaning of
section 2(a)(9) of the Act. The members of an Investing 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 Shares of a Fund, the Investing Fund's
Advisory Group or the Investing Fund's Subadvisory Group, each in the
aggregate, becomes a holder of more than 25% of the outstanding Shares
of a Fund, it will vote its Shares in the same proportion as the vote
of all other holders of the Fund's Shares. This condition does not
apply to the Investing Fund's Subadvisory Group with respect to a Fund
for which the Investing Fund Subadviser or a person controlling,
controlled by, or under common control with the Investing Fund
Subadviser acts as the investment adviser within the meaning of section
2(a)(20)(A) of the Act.
2. No Investing Fund or Investing Fund Affiliate will cause any
existing or
[[Page 51074]]
potential investment by the Investing Fund in a Fund to influence the
terms of any services or transactions between the Investing Fund or an
Investing Fund Affiliate and the Fund or a Fund Affiliate.
3. The board of directors or trustees of an Investing Management
Company, including a majority of the disinterested directors or
trustees, will adopt procedures reasonably designed to ensure that the
Investing Fund Adviser and any Investing Fund Subadviser are conducting
the investment program of the Investing Management Company without
taking into account any consideration received by the Investing
Management Company or an Investing Fund Affiliate from a Fund or a Fund
Affiliate in connection with any services or transactions.
4. Once an investment by an Investing Fund in Fund Shares exceeds
the limit in section 12(d)(1)(A)(i) of the Act, the board of trustees
of the Fund (``Board''), including a majority of the disinterested
Board members, will determine that any consideration paid by the Fund
to an Investing Fund or an Investing Fund Affiliate in connection with
any services or transactions: (a) Is fair and reasonable in relation to
the nature and quality of the services and benefits received by the
Fund; (b) is within the range of consideration that the Fund would be
required to pay to another unaffiliated entity in connection with the
same services or transactions; and (c) does not involve overreaching on
the part of any person concerned. This condition does not apply with
respect to any services or transactions between a Fund and its
investment adviser(s), or any person controlling, controlled by, or
under common control with such investment adviser(s).
5. The Investing Fund Adviser, Trustee or Sponsor, as applicable,
will waive fees otherwise payable to it by the Investing Fund in an
amount at least equal to any compensation (including fees received
pursuant to any plan adopted by a Fund under rule 12b-1 under the Act)
received from a Fund by the Investing Fund Adviser, Trustee or Sponsor,
or an affiliated person of the Investing Fund Adviser, Trustee or
Sponsor, other than any advisory fees paid to the Investing Fund
Adviser, or Trustee or Sponsor, or its affiliated person by the Fund,
in connection with the investment by the Investing Fund in the Fund.
Any Investing Fund Subadviser will waive fees otherwise payable to the
Investing Fund Subadviser, directly or indirectly, by the Investing
Management Company in an amount at least equal to any compensation
received from a Fund by the Investing Fund Subadviser, or an affiliated
person of the Investing Fund Subadviser, other than any advisory fees
paid to the Investing Fund Subadviser or its affiliated person by the
Fund, in connection with any investment by the Investing Management
Company in the Fund made at the direction of the Investing Fund
Subadviser. In the event that the Investing Fund Subadviser waives
fees, the benefit of the waiver will be passed through to the Investing
Management Company.
6. No Investing Fund or Investing Fund Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Fund)
will cause the Fund to purchase a security in any Affiliated
Underwriting.
7. The Board of the Fund, including a majority of the disinterested
Board members, will adopt procedures reasonably designed to monitor any
purchases of securities by the Fund in an Affiliated Underwriting, once
an investment by an Investing Fund in Fund Shares exceeds the limit of
section 12(d)(1)(A)(i) of the Act, including any purchases made
directly from an Underwriting Affiliate. The Board will review these
purchases periodically, but no less frequently than annually, to
determine whether the purchases were influenced by the investment by
the Investing Fund in the Fund. The Board will consider, among other
things: (a) Whether the purchases were consistent with the investment
objectives and policies of the Fund; (b) how the performance of
securities purchased in an Affiliated Underwriting compares to the
performance of comparable securities purchased during a comparable
period of time in underwritings other than Affiliated Underwritings or
to a benchmark such as a comparable market index; and (c) whether the
amount of securities purchased by the Fund in Affiliated Underwritings
and the amount purchased directly from an Underwriting Affiliate have
changed significantly from prior years. The Board will take any
appropriate actions based on its review, including, if appropriate, the
institution of procedures designed to assure that purchases of
securities in Affiliated Underwritings are in the best interest of
shareholders of the Fund.
8. Each Fund will maintain and preserve permanently in an easily
accessible place a written copy of the procedures described in the
preceding condition, and any modifications to such procedures, and will
maintain and preserve for a period of not less than six years from the
end of the fiscal year in which any purchase in an Affiliated
Underwriting occurred, the first two years in an easily accessible
place, a written record of each purchase of securities in Affiliated
Underwritings, once an investment by an Investing Fund in the
securities of the Fund exceeds the limit of section 12(d)(1)(A)(i) of
the Act, setting forth from whom the securities were acquired, the
identity of the underwriting syndicate's members, the terms of the
purchase, and the information or materials upon which the Board's
determinations were made.
9. Before investing in Fund Shares in excess of the limits in
section 12(d)(1)(A), an Investing Fund will execute a FOF Participation
Agreement with the Fund stating, without limitation, that their
respective boards of directors or trustees and their investment
advisers or Trustee and Sponsor, as applicable, understand the terms
and conditions of the order, and agree to fulfill their
responsibilities under the order. At the time of its investment in Fund
Shares in excess of the limit in section 12(d)(1)(A)(i), an Investing
Fund will notify the Fund of the investment. At such time, the
Investing Fund will also transmit to the Fund a list of the names of
each Investing Fund Affiliate and Underwriting Affiliate. The Investing
Fund will notify the Fund of any changes to the list as soon as
reasonably practicable after a change occurs. The Fund and the
Investing Fund will maintain and preserve a copy of the order, the FOF
Participation Agreement, and the list with any updated information for
the duration of the investment and for a period of not less than six
years thereafter, the first two years in an easily accessible place.
10. Before approving any advisory contract under section 15 of the
Act, the board of directors or trustees of each Investing Management
Company, including a majority of the disinterested directors or
trustees, will find that the advisory fees charged under such 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 Investing Management Company may
invest. These findings and their basis will be recorded fully in the
minute books of the appropriate Investing Management Company.
11. Any sales charges and/or service fees charged with respect to
shares of an Investing Fund will not exceed the limits applicable to a
fund of funds as set forth in NASD Conduct Rule 2830.
12. No Fund will acquire securities of any investment company or
company
[[Page 51075]]
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.
For the Commission, by the Division of Investment Management,
under delegated authority.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20870 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P