[Federal Register Volume 76, Number 195 (Friday, October 7, 2011)]
[Notices]
[Pages 62475-62481]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-25928]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 29829; File No. 812-13830]
Global X Funds, et al.; Notice of Application
September 30, 2011.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order to supersede a prior
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 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.
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SUMMARY: 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 Creation Units 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.\1\
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\1\ Global X Funds and Global X Management Company LLC,
Investment Company Act Release Nos. 28378 (Sep. 10, 2008) (notice)
and 28433 (Oct. 3, 2008) (order).
Applicants: Global X Funds (the ``Trust''), Global X Management Company
LLC (the ``Adviser'') and SEI Investments Distribution Company (the
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``Distributor'').
DATES: Filing Dates: The application was filed on October 4, 2010, and
amended on March 11, 2011, July 29, 2011 and September 30, 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 October 27, 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: Global X Funds and Global X
Management Company LLC, 399 Park Avenue, 32nd Floor, New York, NY
10022; and SEI Investments Distribution Company, One Freedom Valley
Drive, Oaks, PA 19456.
FOR FURTHER INFORMATION CONTACT: Laura J. Riegel, Senior Counsel at
(202) 551-6873, 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
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, a statutory trust organized under the laws of
Delaware, is registered with the Commission as an open-end management
investment company. The Trust consists of 86 series (``Current Funds'')
whose performance correspond to the price and yield performance of a
specified securities index (each, an ``Underlying Index'').
2. Applicants request that the order apply to the Current Funds or
any future series of the Trust or any other open-end management
investment companies or series thereof advised by the Adviser or an
entity controlling, controlled by, or under common control with the
Adviser that comply with the terms and conditions of the application
and whose performance will closely correspond to the price and yield
performance of their Underlying Index (each such company or series, a
``Future Fund'' and together with the Current Funds, the ``Funds'').
3. The Current Funds are based on Underlying Indexes comprised
solely of equity securities. The Future Funds will invest primarily in
equity securities and seek investment returns that closely correspond
to the price and yield performance of Underlying Indexes comprised of
equity securities (``Equity Funds''), or invest primarily in Underlying
Indexes comprised of fixed income securities and seek investment
returns that closely correspond to the price and yield performance of
Underlying Indexes comprised of fixed income indices (``Fixed Income
Funds''). Certain of the Funds may invest in equity securities or fixed
income securities traded in foreign markets and seek investment results
that correspond closely to the price and yield performance of
Underlying Indexes whose component securities include such securities
(``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. The Funds may also invest in ``Depositary
Receipts.'' \2\ 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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\2\ 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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4. The Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940 (the ``Advisers Act''). The Adviser or
any entity controlling, controlled by or under common control with the
Adviser (also included in the term ``Adviser'') serves or will serve as
investment adviser to the Funds, subject to approval by the Board of
Trustees of the Trust
[[Page 62476]]
(the ``Board''). The Adviser and the Trust may hire one or more
subadvisers for the Funds (each, a ``Subadviser''). Any 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.
5. Each Fund will consist of a portfolio of securities and other
instruments (``Portfolio Securities'') selected to correspond 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 or a Fund, a promoter of a Fund, the Adviser, any
Subadviser, or a Distributor.
6. 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.\3\ 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
invests or 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 holds
or will hold some, but not necessarily all of the Component Securities
of its Underlying Index.\4\ 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 no more than 5
percent.
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\3\ 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, in Component Securities and Depositary Receipts 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 or Subadviser believes will assist
the Fund in tracking the performance of its Underlying Index.
\4\ Securities are selected for inclusion in a Fund following a
representative sampling strategy to have aggregate investment
characteristics, fundamental characteristics, and liquidity measures
similar to those of the Fund's Underlying Index taken in its
entirety.
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7. Creation Units are expected to consist of at least 25,000 Shares
and to have an initial price in the range of $375,000 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''). 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.
8. 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 Unit of the
Deposit Securities.\5\ 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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\5\ On each Business Day, prior to the opening of trading on the
Exchange, 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. The national securities
exchange (as defined in section 2(a)(26) of the Act) (``Exchange'')
on which Shares are listed will disseminate every 15 seconds
throughout the trading day through the facilities of the
Consolidated Tape Association, an amount representing on a per Share
basis, the sum of the current value of the Fund Deposit.
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9. 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.\6\
Variations in the Transaction Fees may be imposed from time to time in
accordance with rule 22d-1 under the Act. Transaction Fees will be
limited to amounts that have determined by the Adviser to be
appropriate and will take into account transaction costs associated
with the relevant Deposit Securities and Fund Securities (as defined
below) of the Funds. 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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\6\ 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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10. Purchasers of Shares in Creation Units may hold the Shares or
may sell the Shares into the secondary market. Shares will be listed
and traded on an Exchange.\7\ 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.
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\7\ Shares of the Current Funds are listed and traded on NYSE
Arca, Inc.
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11. 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.\8\
Applicants expect that the price at which Shares trade will be
disciplined by arbitrage opportunities created by the option to
continually purchase or redeem Creation Units at their NAV, which
should ensure that Shares will not trade
[[Page 62477]]
at a material discount or premium in relation to their NAV.
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\8\ Shares will be registered in book-entry form only. DTC or
its nominee will be the registered owner of all outstanding Shares.
DTC or DTC Participants will maintain records reflecting beneficial
owners of Shares.
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12. Shares will not be individually redeemable, and owners of
Shares may acquire those Shares from the Fund, or tender the 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 by the Adviser 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 Component. An investor may receive the cash equivalent of a
Redemption Security upon request because it is constrained from
effecting transactions in the security by regulation or policy.\9\ A
redeeming investor may pay a Transaction Fee, calculated in the same
manner as a Transaction Fee payable in connection with purchases of
Creation Units.
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\9\ Applicants state that Fixed Income Funds may substitute a
cash-in-lieu amount to 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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13. 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'').\10\ 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.\11\
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\10\ 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.
\11\ In either case, a basket of Deposit Securities and basket
of Fund 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 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.
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14. Neither the Trust nor any individual Fund will be advertised,
marketed or otherwise held out as an open-end fund 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 The Funds will provide copies of their annual and semi-annual
shareholder reports to DTC Participants for distribution to
shareholders.
Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the Act for an
exemption from sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of the Act
and rule 22c-1 under the Act, under sections 6(c) and 17(b) of the Act
for an exemption from sections 17(a)(1) and 17(a)(2) of the Act, and
under section 12(d)(1)(J) of the Act for an exemption from sections
12(d)(1)(A) and 12(d)(1)(B) of the Act.
2. Section 6(c) of the Act provides that the Commission may exempt
any person, security or transaction, or any class of persons,
securities or transactions, from any provision of the Act, if and to
the extent that such exemption is necessary or appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Act.
Section 17(b) of the Act authorizes the Commission to exempt a proposed
transaction from section 17(a) of the Act if evidence establishes that
the terms of the transaction, including the consideration to be paid or
received, are reasonable and fair and do not involve overreaching on
the part of any person concerned, and the proposed transaction is
consistent with the policies of the registered investment company and
the general provisions of the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may exempt any person, security, or
transaction, or any class or classes of persons, securities or
transactions, from any provisions of section 12(d)(1) if the exemption
is consistent with the public interest and the protection of investors.
Sections 5(a)(1) and 2(a)(32) of the Act
3. Section 5(a)(1) of the Act defines an ``open-end company'' as a
management investment company that is offering for sale or has
outstanding any redeemable security of which it is the issuer. Section
2(a)(32) of the Act defines a redeemable security as any security,
other than short-term paper, under the terms of which the owner, upon
its presentation to the issuer, is entitled to receive approximately
his proportionate share of the issuer's current net assets, or the cash
equivalent. Because Shares will not be individually redeemable,
applicants request an order that would permit the Funds to register as
open-end management investment companies and issue Shares that are
redeemable in Creation Units only. Applicants state that investors may
purchase Shares in Creation Units and redeem Creation Units from each
Fund. Applicants state that because the market price of Creation Units
will be disciplined by arbitrage opportunities, investors should be
able to sell Shares at market 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
[[Page 62478]]
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 Fund 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.\12\
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\12\ Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations applicants
may have under rule 15c6-1 under the Exchange Act. Rule 15c6-1
requires that most securities transactions be settled within three
business days of the trade.
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8. Applicants submit that section 22(e) was designed to prevent
unreasonable, undisclosed and unforeseen delays in the actual payment
of redemption proceeds. Applicants state that allowing redemption
payments for Creation Units of a Fund to be made within 14 calendar
days would not be inconsistent with the spirit and intent of section
22(e). Applicants state that an International Fund's statement of
additional information will disclose those local holidays, 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 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 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 an ``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
sections 12(d)(1)(A) and (B), which include concerns about undue
influence by a fund of funds over underlying funds, excessive layering
of fees and overly complex fund structures. Applicants believe that the
requested exemption is consistent with the public interest and the
protection of investors.
13. Applicants believe that neither the Investing Funds nor an
Investing Fund Affiliate would be able to exert undue influence over
the Funds.\13\ 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'')
[[Page 62479]]
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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\13\ 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.\14\
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\14\ Any references to NASD Conduct Rule 2830 include any
successor or replacement rule to NASD Conduct Rule 2830 that may be
adopted by 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. 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 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).
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. The Funds may be deemed to be controlled by the Adviser or
an entity controlling, controlled by or under common control with the
Adviser and hence affiliated persons of each other. In addition, the
Funds may be deemed to be under common control with any other
registered investment company (or series thereof) advised by the
Adviser or an entity controlling, controlled by or under common control
with the Adviser (an ``Affiliated Fund'').
18. Applicants request an exemption from section 17(a) of the Act
pursuant to sections 17(b) and 6(c) of the Act to permit persons to
effectuate in-kind purchases and redemptions with a Fund when they are
affiliated persons of the Fund or second-tier affiliates solely by
virtue of one or more of the following: (a) Holding 5% or more, or in
excess of 25%, of the outstanding Shares of one or more Funds; (b)
having an affiliation with a person with an ownership interest
described in (a); or (c) holding 5% or more, or more than 25%, of the
shares of one or more Affiliated Funds.
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
[[Page 62480]]
from an Investing Fund.\15\ 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.\16\ 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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\15\ Applicants believe that an Investing Fund generally 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. 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 an affiliated person of an affiliated person
of an Investing Fund because the Adviser or an entity controlling,
controlled by or under common control with the Adviser is also an
investment adviser to the Investing Fund.
\16\ Applicants acknowledge that the receipt of compensation by
(a) an affiliated person of an Investing Fund, or an affiliated
person of such person, for the purchase by the Investing Fund of
Shares 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. Exchange Traded Fund Relief
1. As long as the Funds operate 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 the Shares are
not individually redeemable and that owners of the Shares may acquire
those Shares from the Fund and tender those Shares for redemption to
the Fund in Creation Units only.
3. The Web site for the Funds, which is and will be publicly
accessible at no charge, will contain 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 calculation of such 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.
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 the Investing Fund's Advisory Group will not
control (individually or in the aggregate) a Fund within the meaning of
section 2(a)(9) of the Act. The members of the Investing Fund's
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 percent of the outstanding
Shares of a Fund, it will vote its Shares of the Fund in the same
proportion as the vote of all other holders of the Fund's Shares. This
condition does not apply to the Investing Fund's 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 potential investment by the Investing Fund in a Fund to
influence the terms of any services or transactions between the
Investing Fund or an Investing Fund Affiliate and the Fund or a Fund
Affiliate.
3. The board of directors or trustees of an Investing Management
Company, including a majority of the disinterested directors or
trustees, will adopt procedures reasonably designed to assure that the
Investing Fund Adviser and any 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 a Fund,
including a majority of the disinterested Board members, will determine
that any consideration paid by the Fund to the Investing Fund or an
Investing Fund Affiliate in connection with any services or
transactions: (a) Is fair and reasonable in relation to the nature and
quality of the services and benefits received by the Fund; (b) is
within the range of consideration that the Fund would be required to
pay to another unaffiliated entity in connection with the same services
or transactions; and (c) does not involve overreaching on the part of
any person concerned. This condition does not apply with respect to any
services or transactions between a Fund and its investment adviser(s),
or any person controlling, controlled by, or under common control with
such investment adviser(s).
5. The Investing Fund Adviser, 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, or Trustee or
Sponsor, or an affiliated person of the Investing Fund Adviser, or
Trustee or Sponsor, other than any advisory fees paid to the Investing
Fund Adviser, or Trustee or Sponsor, or its affiliated person by the
Fund, in connection with the investment by the Investing Fund in the
Fund. Any 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 the 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
[[Page 62481]]
will be passed through to the Investing Management Company.
6. No Investing Fund or Investing Fund Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Fund)
will cause a Fund to purchase a security in an Affiliated Underwriting.
7. The Board of the Fund, including a majority of the disinterested
Board members, will adopt procedures reasonably designed to monitor any
purchases of securities by the Fund in an Affiliated Underwriting, once
an investment by an Investing Fund in 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 ensure 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 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 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 relying on section 3(c)(1) or 3(c)(7) of the Act in excess of
the limits contained in section 12(d)(1)(A) of the Act.
For the Commission, by the Division of Investment Management,
under delegated authority.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25928 Filed 10-6-11; 8:45 am]
BILLING CODE 8011-01-P