[Federal Register Volume 76, Number 247 (Friday, December 23, 2011)]
[Notices]
[Pages 80424-80430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-32935]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 29890; 812-13478]
Highland Capital Management, L.P., et al.; Notice of Application
December 19, 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 (``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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Applicants: Highland Capital Management, L.P. (``Adviser''), Highland
Funds I (``Trust'') and Nexbank Securities, Inc. (``Nexbank'').
SUMMARY: Summary of Application: Applicants request an order that
permits: (a) Certain open-end management investment companies or series
thereof to issue shares (``Shares'') redeemable in large aggregations
only (``Creation Unit Aggregations''); (b) secondary market
transactions in Shares to occur at negotiated market prices; (c)
certain series to pay redemption proceeds, under certain circumstances,
more than seven days from the tender of Shares for redemption; (d)
certain affiliated persons of the series to deposit securities into,
and receive securities from, the series in connection with the purchase
and redemption of Creation Unit Aggregations; 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.
DATES: Filing Dates: The application was filed on January 17, 2008, and
amended on November 21, 2008, July 1, 2011, May 12, 2011, and November
15, 2011.
Hearing or Notification of Hearing: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on January 13, 2012, and should be accompanied by proof of
service on applicants, in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street NE., Washington, DC 20549-1090. Applicants, 13455 Noel Road,
Suite 800, Dallas, TX 75240.
FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Senior Counsel, at
(202) 551-6868 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 registered as an open-end management investment
company under the Act and organized as a Delaware statutory trust. The
Trust will initially offer one series, the Highland Senior Loan
Portfolio, (``Initial Fund'') whose performance will correspond
generally to the price and yield performance of a specified securities
index (``Underlying Index'').\1\
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\1\ The Underlying Index for the Initial Fund is the Highland/
Markit Liquid Loan Index.\TM\
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2. Applicants request that the order apply to the Initial Fund and
any future series of the Trust and any future open-end management
investment companies or series thereof that may track specified
domestic and/or foreign securities indexes (``Future Funds'').\2\ 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 only of domestic equity
securities, fixed income securities or a blend of equity and fixed
income securities or international equity securities, fixed income
securities or a blend of international equity and fixed income
securities (``International Funds'') or Underlying Indexes comprised
only of a combination of domestic and international foreign securities
(``Global Funds''). The Initial Fund and all Future Funds, together,
are the ``Funds.'' \3\
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\2\ All existing entities that currently intend to rely on the
order are named as applicants. Any other existing or future entity
that relies on the order will comply with the terms and conditions
of the application. An Acquiring Fund (as defined below) may rely on
the order only to invest in the Funds and not in any other
registered investment company.
\3\ Each Fund will comply with the disclosure requirements
adopted by the Commission in Investment Company Act Release No.
28584 (Jan. 13, 2009) before offering Shares.
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3. The Adviser will be registered as an investment adviser under
the Investment Advisers Act of 1940 (``Advisers Act'') and will serve
as investment adviser to the Funds. The Adviser may enter into sub-
advisory agreements with one or more investment advisers as sub-
advisers to act as subadvisers to a Fund (each, a ``Sub-Adviser'').
Each Sub-Adviser will be registered under the Advisers Act. Nexbank is
a broker-dealer registered under the Securities Exchange Act of 1934
(``Exchange Act''). Nexbank will serve as the distributor and principal
underwriter of the Shares of Funds (``Distributor''). In the future
another broker-dealer registered under the Exchange Act may act as
Distributor. No Distributor may be an affiliated person with any
Exchange or any Index Provider.
4. Each Fund will consist of a portfolio of securities (``Portfolio
Securities'') selected to correspond generally to the price and yield
performance of an 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, any Fund,
the Adviser, any Sub-Adviser, or promoter, or of a Distributor.
5. The investment objective of each Fund will be to provide
investment returns that closely correspond to the price and performance
of its Underlying Index.\4\ A Fund will utilize either a
[[Page 80425]]
replication or representative sampling strategy to track its Underlying
Index. A Fund using a replication strategy will invest in substantially
all the Component Securities in its Underlying Index in the same
approximate proportions as in such Underlying Index. A Fund using a
representative sampling strategy will hold a significant number, but
not all of the Component Securities of its Underlying Index.\5\
Applicants state that in using the representative sampling strategy, a
Fund is not expected to track its Underlying Index with the same degree
of accuracy as a Fund would employing the replication strategy.
Applicants expect that each Fund will have a tracking error relative to
the performance of its Underlying Index of less than 5 percent.
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\4\ Applicants represent that at least 80% of each Fund's total
assets (``80% Basket'') will be invested in component securities
that comprised of its Underlying Index (``Component Securities'') or
TBA Transactions (as defined below) representing Component
Securities, or in the case of Global and International Funds,
Depositary Receipts (defined below) representing such Component
Securities. Each Fund may also invest up to 20% of its assets in
securities not included in its Underlying Index and other assets,
which the Adviser and/or Sub-Adviser believes will assist the Fund
in tracking the performance of its Underlying Index.
\5\ Using the sampling strategy, the Adviser or Subadviser will
select each security for inclusion in the Fund's portfolio 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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6. The Trust will sell and redeem Creation Units Aggregations on a
``Business Day,'' which is defined to include any day that the Trust is
required to be open under section 22(e) of the Act. Fund Shares will
range from $25 to $250 per Share and the price of Creation Unit
Aggregations will range from $1 million to $10 million. All orders to
purchase Creation Unit Aggregations 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 relevant Fund. An
Authorized Participant must be either: (a) A broker-dealer or other
participant in the continuous net settlement system of the National
Securities Clearing Corporation, a clearing agency registered with the
Commission, or (b) a participant in the Depository Trust Company
(``DTC,'' and such participant, ``DTC Participant''). Shares of each
Fund generally will be purchased in Creation Units Aggregations 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 of a specified cash payment (``Cash Amount''
and together with the Deposit Securities, the ``Creation Deposit'').
The Cash Amount will be an amount equal to the difference between: (a)
The net asset value (``NAV'') per Creation Unit Aggregation of a Fund;
and (b) the total aggregate market value per Creation Unit Aggregation
of the Deposit Securities.\6\ The Trust may permit an in-kind purchase
to substitute cash in lieu of some or all of the requisite Deposit
Securities under certain circumstances. To preserve maximum efficiency
and flexibility, the Trust reserves the right to accept and deliver
Creation Unit Aggregations entirely for cash if the Trust and the
Adviser believe that doing so would substantially minimize
transactional costs or enhance operational efficiencies of the Trust.
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\6\ On each Business Day, prior to the opening of trading on
each Fund's Listing Exchange (as defined below), a list of the names
and the required number of shares of each Deposit Security, included
in the current Creation Deposit (based on information at the end of
the previous Business Day) for the relevant Fund, along with the
Cash Amount will be made available. Any national securities exchange
(as defined in section 2(a)(26) of the Act) (``Listing 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 Deposit Securities and
the estimated Cash Amount.
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7. An investor purchasing or redeeming a Creation Unit Aggregation
from a Fund will be charged a fee (``Transaction Fee'') to protect
shareholders from the dilutive costs associated with the purchase or
redemption of Creation Unit Aggregations.\7\ All orders to purchase
Creation Unit Aggregations will be placed with the Distributor by or
through an Authorized Participant, and it will be the Distributor's
responsibility to transmit such orders to the Funds. The Distributor
will then furnish the purchaser with a confirmation and a prospectus.
In addition, the Distributor will maintain a record of the instructions
given to a Fund to implement the delivery of its Shares.
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\7\ Where a Fund permits an in-kind purchaser to substitute
cash-in-lieu of depositing one or more 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 Unit Aggregations may hold such
Shares or may sell such Shares into the secondary market. Shares will
be listed and traded at negotiated prices on one or more national
securities exchanges as defined in section 2(a)(26) of the Act (each an
``Exchange''). It is expected that one or more Exchange market maker
will be designated to act as a specialist or market maker (``Market
Makers'') and maintain a market for Shares trading on the Listing
Exchange or another Exchange. Price of Shares trading on an Exchange
will be based on a current bid-offer market. The sale of Shares on an
Exchange will be subject to customary brokerage commissions and
charges.
9. Applicants expect that purchasers of Creation Unit Aggregations
will include institutional investors and arbitrageurs. Authorized
Participants also may purchase or redeem Creation Unit Aggregations in
connection with their market making activities. Applicants expect that
secondary market purchasers of Shares will include both institutional
investors and retail investors.\8\ The price at which Shares trade will
be disciplined by arbitrage opportunities created by the ability to
purchase or redeem Creation Unit Aggregations at NAV, which should help
to ensure that Shares will not trade at a material discount or premium
in relation to their NAV.
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\8\ Shares will be registered in book-entry form only. DTC or
its nominee will be the record or registered owner of all
outstanding Shares. Beneficial ownership of Shares will be shown on
the records of DTC or DTC Participants.
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10. Shares will not be individually redeemable and owners of Shares
may acquire those Shares from a Fund or tender such shares for
redemption to the Fund, in Creation Unit Aggregations only. To redeem,
an investor must accumulate enough Shares to constitute a Creation Unit
Aggregation. Redemption requests must be placed by or through an
Authorized Participant. An investor redeeming a Creation Unit
Aggregation generally will receive (a) Portfolio Securities designated
to be delivered for redemptions (``Redemption Securities'') on the date
that the request for redemption is submitted and (b) a ``Cash
Redemption Payment,'' consisting of an amount calculated in the same
manner as the Cash Amount, although the actual amount of the Cash
Redemption Payment may differ if the Redemption Securities are not
identical to the Deposit Securities on that day. An investor may
receive the cash equivalent of a Redemption Security in certain
circumstances, such as when the redeeming investor is unable to own a
particular Redemption Security.
11. Applicants state that in accepting Deposit Securities and
satisfying redemptions with Redemption Securities, Funds will comply
with the federal securities laws, including that the Deposit Securities
and Redemption Securities are sold in transactions that would be exempt
from registration under the Securities Act of 1933 (``Securities
Act'').\9\ Deposit Securities and Redemption Securities either (a) will
correspond pro rata to the Portfolio
[[Page 80426]]
Securities of a Fund, or (b) will not correspond pro rata to the
Portfolio Securities, provided that the Deposit Securities and
Redemption Securities (i) consist of the same representative sample of
Portfolio Securities designed to generate performance that is highly
correlated to the performance of the Portfolio Securities, (ii) consist
only of securities that are already included among the existing
Portfolio Securities, and (iii) are the same for all Authorized
Participants on a given Business Day.\10\
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\9\ In accepting Deposit Securities and satisfying redemptions
with Redemption Securities that are restricted securities eligible
for resale pursuant to rule 144A under the Securities Act, the
relevant Funds will comply with the conditions of rule 144A.
\10\ In either case, a basket of Deposit Securities and
Redemption Securities (and a true pro rata slice of the Portfolio)
may differ solely to the extent necessary (1) because it is
impossible to break up bonds beyond certain minimum sizes needed for
transfer and settlement, (2) because, in the case of equity
securities, rounding is necessary to eliminate fractional shares or
lots, that are not tradeable round lots or (3) for temporary
periods, to effect changes in the Portfolio Securities as a result
of the rebalancing of an Underlying Index. A tradable round lot will
be the standard unit of trading in that particular type of security
in its primary market.
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12. Neither the Trust nor any Fund will be marketed or otherwise
held out as a traditional open-end investment company or ``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 Unit
Aggregations, 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 acquire or
tender such Shares for redemption to the Fund in Creation Unit
Aggregations only. The same approach will be followed in 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
granting 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; and under sections 6(c) and
17(b) of the Act granting an exemption from sections 17(a)(1) and (2)
of the Act, and under section 12(d)(1)(J) for an exemption from
sections 12(d)(1)(A) and (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 holder, upon
its presentation to the issuer, is entitled to receive approximately a
proportionate share of the issuer's current net assets, or the cash
equivalent. Because Shares will not be individually redeemable,
applicants request an order that would permit the Funds to redeem
Shares in Creation Unit Aggregations only. Applicants state that
Creation Unit Aggregations will be redeemable in accordance with the
provisions of the Act. Applicants state that because Creation Unit
Aggregations 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 an 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 system of shares
by eliminating price competition from non-contract 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 the Funds as parties and cannot 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) of the Act
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
state that settlement of redemptions of Creation Unit Aggregations for
International Funds and Global Funds will be contingent not only on the
settlement cycle of the U.S. securities markets but also on the
delivery cycles in foreign markets in which those Funds invests.
Applicants state that delivery cycles for transferring Portfolio
Securities to redeeming investors,
[[Page 80427]]
coupled with local market holiday schedules, will cause a delivery
process of up to twelve (12) 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
required for such payment or satisfaction in the principal local
markets where transactions in the Portfolio Securities of each Global
and International Fund customarily clear and settle, but in all cases
no later than 12 calendar days following the tender of a Creation Unit
Aggregation.\11\ With respect to Future Funds based on a global or an
international Underlying Index, applicants seek the same relief from
section 22(e) only to the extent that circumstances exist similar to
those described in the application.
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\11\ Applicants acknowledge that 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 state that Congress adopted section 22(e) to prevent
unreasonable, undisclosed and unforeseen delays in the actual payment
of redemption proceeds. Applicants state that allowing redemption
payments for Creation Unit Aggregations of a Fund to be made within the
number of days indicated above would not be inconsistent with the
spirit and intent of section 22(e). Applicants state that the SAI will
disclose those local holidays (over the period of at least one year
following the date of the SAI), if any, that are expected to prevent
the delivery of redemption proceeds in seven calendar days, and the
maximum number of days needed to deliver the proceeds for each affected
Global Fund and International Fund. Applicants are not seeking relief
from section 22(e) with respect to Global Funds or International Funds
that do not effect redemptions of Creation Unit Aggregations in-kind.
Section 12(d)(1) of the Act
9. Section 12(d)(1)(A) of the Act prohibits a registered investment
company from acquiring shares of an investment company if the
securities represent more than 3% of the total outstanding voting stock
of the acquired company, more than 5% of the total assets of the
acquiring company, or, together with the securities of any other
investment companies, more than 10% of the total assets of the
acquiring company. Section 12(d)(1)(B) of the Act prohibits a
registered open-end investment company, its principal underwriter, or
any other broker or dealer from selling its shares to another
investment company if the sale will cause the acquiring company to own
more than 3% of the acquired company's voting stock, or if the sale
will cause more than 10% of the acquired company's voting stock to be
owned by investment companies generally.
10. Applicants request an exemption to permit management investment
companies (``Acquiring Management Companies'') and unit investment
trusts (``Acquiring Trusts'') registered under the Act that are not
sponsored or advised by the Adviser or an entity controlling,
controlled by, or under common control with the Adviser and are not
part of the same ``group of investment companies,'' as defined in
section 12(d)(1)(G)(ii) of the Act, as the Funds (collectively,
``Acquiring Funds'') to acquire shares of a Fund beyond the limits of
section 12(d)(1)(A). In addition, applicants seek relief to permit each
Fund and/or Broker to sell Shares to Acquiring Funds in excess of the
limits of section 12(d)(1)(B).
11. Each Acquiring Management Company will be advised by an
investment adviser within the meaning of section 2(a)(20)(A) of the Act
(the ``Acquiring Fund Adviser'') and may be sub-advised by one or more
investment advisers within the meaning of section 2(a)(20)(B) of the
Act (each an ``Acquiring Fund Sub-Adviser''). Any investment adviser to
an Acquiring Management Company will be registered under the Advisers
Act. Each Acquiring Trust will be sponsored by a sponsor (``Sponsor'').
12. Applicants submit that the proposed conditions to the requested
relief adequately address the concerns underlying the limits in section
12(d)(1)(A) and (B), which include concerns about undue influence by a
fund of funds over underlying funds, excessive layering of fees and
overly complex fund structures. Applicants believe that the requested
exemption is consistent with the public interest and the protection of
investors.
13. Applicants believe that neither an Acquiring Fund nor an
Acquiring Funds Affiliate would be able to exert undue influence over a
Fund.\12\ To limit the control that an Acquiring Fund may have over a
Fund, applicants propose a condition prohibiting the Acquiring Fund
Adviser, Sponsor, any person controlling, controlled by, or under
common control with the Acquiring Fund Adviser or Sponsor, and any
investment company and any issuer that would be an investment company
but for sections 3(c)(1) or 3(c)(7) of the Act that is advised or
sponsored by the Acquiring Fund Adviser, the Sponsor, or any person
controlling, controlled by, or under common control with the Acquiring
Fund Adviser or Sponsor (``Acquiring Funds' Advisory Group'') from
controlling (individually or in the aggregate) a Fund within the
meaning of section 2(a)(9) of the Act. The same prohibition would apply
to any Acquiring Fund Sub-Adviser, any person controlling, controlled
by or under common control with the Acquiring Fund Sub-Adviser, and any
investment company or issuer that would be an investment company but
for section 3(c)(1) or 3(c)(7) of the Act (or portion of such
investment company or issuer) advised or sponsored by the Acquiring
Fund Sub-Adviser or any person controlling, controlled by or under
common control with the Acquiring Fund Sub-Adviser (``Acquiring Funds'
Sub-Advisory Group''). Applicants propose other conditions to limit the
potential for undue influence over the Funds, including that no
Acquiring Fund or Acquiring Funds Affiliate (except to the extent it is
acting in its capacity as an investment adviser to a Fund) will cause a
Fund to purchase a security in an offering of securities during the
existence of an underwriting or selling syndicate of which a principal
underwriter is an Underwriting Affiliate (``Affiliated Underwriting'').
An ``Underwriting Affiliate'' is a principal underwriter in any
underwriting or selling syndicate that is an officer, director, member
of an advisory board, Acquiring Fund Adviser, Acquiring Fund Sub-
Adviser, Sponsor, employee or Sponsor of the Acquiring Fund, or a
person of which any such officer, director, member of an advisory
board, Acquiring Fund Adviser, Acquiring Fund Sub-Adviser, employee or
Sponsor is an affiliated person (except any person whose relationship
to the Fund is covered by section 10(f) of the Act is not an
Underwriting Affiliate).
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\12\ An ``Acquiring Funds Affiliate'' is any Acquiring Fund
Adviser, Acquiring Fund Sub-Adviser(s), Sponsor, promoter and
principal underwriter of an Acquiring Fund, and any person
controlling, controlled by or under common control with any of these
entities. A ``Fund Affiliate'' is an investment adviser, promoter,
or principal underwriter of a Fund or any person controlling,
controlled by or under common control with any of these entities.
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14. Applicants do not believe that the proposed arrangement will
involve excessive layering of fees. The board of directors or trustees
of any Acquiring Management Company, including a majority of the
directors or trustees who are not interested directors or trustees
within the meaning of section 2(a)(19) of
[[Page 80428]]
the Act (``disinterested directors or trustees''), will find that the
advisory fees charged under the contract are based on services provided
that will be in addition to, rather than duplicative of, services
provided under the advisory contract of any Fund in which the Acquiring
Management Company may invest. In addition, under condition 13, an
Acquiring Fund Adviser, or an Acquiring Trust's trustee (``Trustee'')
or Sponsor, will waive fees otherwise payable to it by the Acquiring
Fund in an amount at least equal to any compensation (including fees
received pursuant to any plan adopted by a Fund under rule 12b-1 under
the Act) received from a Fund by the Acquiring Fund Adviser, Trustee or
Sponsor or an affiliated person of the Acquiring Fund Adviser, Trustee
or Sponsor, in connection with the investment by the Acquiring Fund in
the Fund. Applicants also state that any sales charges and/or service
fees charged with respect to shares of an Acquiring Fund will not
exceed the limits applicable to a fund of funds as set forth in NASD
Conduct Rule 2830.\13\
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\13\ All references to NASD Conduct Rule 2830 include any
successor or replacement rule that may be adopted by the Financial
Industry Regulatory Authority.
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15. Applicants submit that the proposed arrangement will not create
an overly complex fund structure. Applicants note that a Fund will be
prohibited from acquiring securities of any investment company or
company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of
the limits 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 an Acquiring Fund understands
and will comply with the terms and conditions of the requested order,
the Acquiring Funds must enter into an agreement with the respective
Funds (``Acquiring Fund Agreement''). The Acquiring Fund Agreement will
include an acknowledgement from the Acquiring Fund that it may rely on
the order only to invest in the 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 Unit Aggregations by an Acquiring Fund.
A Fund would also retain its right to reject any initial investment by
an Acquiring Fund in excess of the limits in Section 12(d)(l)(A) of the
Act by declining to execute an Acquiring Fund Agreement with an
Acquiring Fund.
Section 17 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 under sections 6(c) and 17(b)
of the Act from sections 17(a)(1) and 17(a)(2) of the Act in order to
permit in-kind purchases and redemptions of Creation Unit Aggregations
from the Funds by persons that are affiliated persons or second-tier
affiliates of the Funds solely by virtue of one or more of the
following: (a) Holding 5% or more, or more than 25%, of the 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. Applicants
also request an exemption in order to permit each Fund to sell Shares
to and redeem Shares from, and engage in any in-kind transactions that
would accompany such sales and redemptions with, any Acquiring Fund of
which the Fund is an affiliated person or second-tier affiliate.
19. Applicants contend that no useful purpose would be served by
prohibiting such affiliated persons from making in-kind purchases or
in-kind redemptions of Shares of a Fund in Creation Unit Aggregations.
The deposit procedures for both in-kind purchases and in-kind
redemptions of Creation Unit Aggregations will be the same for all
purchases and redemptions. Deposit Securities, Redemption Securities,
and the balancing Cash Amounts (except for any permitted cash-in-lieu
amounts) will be the same regardless of the identity of the purchaser
or redeemer. Deposit Securities and Redemption Securities for each Fund
will be valued in the same manner as the Portfolio Securities currently
held by such Fund, and will be valued in this same manner, regardless
of the identity of the purchaser or redeemer. Therefore, applicants
state that in-kind purchases and redemptions will afford no opportunity
for the affiliated persons of a Fund to effect a transaction
detrimental to the 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 seek an exemption from Section 17(a) pursuant to
Section 17(b) and Section 6(c) of the Act to permit a Fund, to the
extent that the Fund is an affiliated person (as defined in Section
2(a)(3)(B) of the Act) of an Acquiring Fund, to sell Shares to, and
purchase Shares from, an Acquiring Fund, and to engage in any
accompanying in-kind Creation Unit Aggregation transactions.\14\
Applicants state that the terms of the transactions are fair and
reasonable and do not involve overreaching. Applicants note that any
consideration paid for the purchase or redemption of Shares directly
from a Fund will be based on the NAV of the Shares.\15\ Deposit
Securities, Redemption Securities, and the balancing cash amounts
(except for any permitted cash-in-lieu amounts) will be the same
regardless of the identity of the purchaser or redeemer. Applicants
believe that any proposed transactions directly between the Funds and
Acquiring Funds will be consistent with the policies of each Acquiring
Fund. The purchase of Creation Unit Aggregations by an Acquiring Fund
directly from a Fund will be accomplished in accordance with the
policies and procedures set forth in the Fund's registration statement.
The Acquiring Fund Agreement will require any Acquiring Fund that
purchases Creation Unit Aggregations directly from a Fund to represent
that the purchase of Creation Unit Aggregations from a Fund by an
Acquiring Fund will be accomplished in compliance with the
[[Page 80429]]
investment restrictions of the Acquiring Fund and will be consistent
with the investment policies set forth in the Acquiring Fund's
registration statement.
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\14\ To the extent that purchases of Shares of a Fund occur in
the secondary market and through principal transactions directly
between an Acquiring Fund and a Fund, relief from section 17(a)
would not be necessary. However, the requested relief would apply to
direct sales of Shares in Creation Unit Aggregations by a Fund to an
Acquiring Fund and redemptions of those Shares. The requested relief
is also intended to cover the in-kind transactions that would
accompany such sales and redemptions.
\15\ Applicants acknowledge that receipt of compensation by (a)
an affiliated person of an Acquiring Fund, or an affiliated person
of such person, for the purchase by the Acquiring Fund of Shares or
(b) an affiliated person of a Fund, or an affiliated person of such
person, for the sale by the Fund of its Shares to an Acquiring Fund
may be prohibited by section 17(e)(1) of the Act. The Acquiring Fund
Agreement also will include this acknowledgment.
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Applicants' Conditions
Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
ETF Relief
1. As long as each Fund operates in reliance on the requested
order, its Shares will be listed on an Exchange.
2. Neither the Trust nor any Fund will be advertised or marketed as
an open-end investment company or a mutual fund. Any advertising
material that describes the purchase or sale of Creation Unit
Aggregations 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 Unit Aggregations only.
3. The Web site for the Funds, which is and will be publicly
accessible at no charge, will contain, on a per Share basis for each
Fund, the prior Business Day's NAV and the market closing price or the
midpoint of the bid/ask spread at the time of the calculation of such
NAV (``Bid/Ask Price''), and a calculation of the premium or discount
of the market closing price or the Bid/Ask Price against such NAV.
4. The requested relief to permit ETF operations will expire on the
effective date of any Commission rule under the Act that provides
relief permitting the operation of index-based exchange-traded funds.
Section 12(d)(1) Relief
Applicants agree that any order granting the requested 12(d)(1)
relief will be subject to the following conditions:
5. The members of an Acquiring Funds' Advisory Group will not
control (individually or in the aggregate) a Fund within the meaning of
section 2(a)(9) of the Act. The members of an Acquiring Funds' Sub-
Advisory Group will not control (individually or in the aggregate) a
Fund within the meaning of section 2(a)(9) of the Act. If, as a result
of a decrease in the outstanding voting securities of a Fund, the
Acquiring Funds' Advisory Group or the Acquiring Funds' Sub-Advisory
Group, each in the aggregate, becomes a holder of more than 25% of the
outstanding voting securities of a Fund, it will vote its Shares in the
same proportion as the vote of all other holders of the Fund Shares.
This condition does not apply to the Acquiring Funds' Sub-Advisory
Group with respect to a Fund for which the Acquiring Fund Sub-Adviser
or a person controlling, controlled by, or under common control with
the Acquiring Fund Sub-Adviser acts as the investment adviser within
the meaning of section 2(a)(20)(A) of the Act.
6. No Acquiring Fund or Acquiring Funds Affiliate will cause any
existing or potential investment by the Acquiring Fund in a Fund to
influence the terms of any services or transactions between the
Acquiring Fund or an Acquiring Funds Affiliate and the Fund or a Fund
Affiliate.
7. The board of directors or trustees of an Acquiring Management
Company, including a majority of the disinterested directors or
trustees, will adopt procedures reasonably designed to ensure that the
Acquiring Fund Adviser and any Acquiring Fund Sub-Adviser are
conducting the investment program of the Acquiring Management Company
without taking into account any consideration received by the Acquiring
Management Company or an Acquiring Funds Affiliate from a Fund or a
Fund Affiliate in connection with any services or transactions.
8. Once an investment by an Acquiring Fund in Shares exceeds the
limit in section 12(d)(1)(A)(i) of the Act, the board of trustees of
the Trust (``Board''), including a majority of the disinterested
directors/trustees, will determine that any consideration paid by the
Fund to the Acquiring Fund or an Acquiring Funds Affiliate in
connection with any services or transactions: (a) Is fair and
reasonable in relation to the nature and quality of the services and
benefits received by the Fund; (b) is within the range of consideration
that the Fund would be required to pay to another unaffiliated entity
in connection with the same services or transactions; and (c) does not
involve overreaching on the part of any person concerned. This
condition does not apply with respect to any services or transactions
between a Fund and its investment adviser(s), or any person
controlling, controlled by, or under common control with such
investment adviser(s).
9. No Acquiring Fund or Acquiring Funds Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Fund)
will cause the Fund to purchase a security in any Affiliated
Underwriting.
10. The Board, including a majority of the disinterested trustees,
will adopt procedures reasonably designed to monitor any purchases of
securities by a Fund in an Affiliated Underwriting, once an investment
by an Acquiring Fund in the securities of the Fund exceeds the limit of
section 12(d)(1)(A)(i) of the Act, including any purchases made
directly from an Underwriting Affiliate. The Board will review these
purchases periodically, but no less frequently than annually, to
determine whether the purchases were influenced by the investment by
the Acquiring Fund in the Fund. The Board will consider, among other
things: (a) Whether the purchases were consistent with the investment
objectives and policies of the Fund; (b) how the performance of
securities purchased in an Affiliated Underwriting compares to the
performance of comparable securities purchased during a comparable
period of time in underwritings other than Affiliated Underwritings or
to a benchmark such as a comparable market index; and (c) whether the
amount of securities purchased by the Fund in Affiliated Underwritings
and the amount purchased directly from an Underwriting Affiliate have
changed significantly from prior years. The Board will take any
appropriate actions based on its review, including, if appropriate, the
institution of procedures designed to assure that purchases of
securities in Affiliated Underwritings are in the best interest of
shareholders of the Fund.
11. Each Fund will maintain and preserve permanently in an easily
accessible place a written copy of the procedures described in the
preceding condition, and any modifications to such procedures, and will
maintain and preserve for a period of not less than six years from the
end of the fiscal year in which any purchase in an Affiliated
Underwriting occurred, the first two years in an easily accessible
place, a written record of each purchase of securities in Affiliated
Underwritings, once an investment by an Acquiring Fund in the
securities of the Fund exceeds the limit of section 12(d)(1)(A)(i) of
the Act, setting forth from whom the securities were acquired, the
identity of the underwriting syndicate's members, the terms of the
purchase, and the information or materials upon which the Board's
determinations were made.
12. Before investing in Shares in excess of the limits in section
12(d)(1)(A), each Acquiring Fund and the Fund will execute an Acquiring
Fund Participation Agreement stating, without limitation, that their
respective boards of directors or trustees and their investment
adviser(s) or their Sponsors or Trustees, as applicable, understand the
terms and conditions of the order,
[[Page 80430]]
and agree to fulfill their responsibilities under the order. At the
time of its investment in Shares of a Fund in excess of the limit in
section 12(d)(1)(A)(i), an Acquiring Fund will notify the Fund of the
investment. At such time, the Acquiring Fund will also transmit to the
Fund a list of the names of each Acquiring Funds Affiliate and
Underwriting Affiliate. The Acquiring Fund will notify the Fund of any
changes to the list of names as soon as reasonably practicable after a
change occurs. The Fund and the Acquiring Fund will maintain and
preserve a copy of the order, the Acquiring Fund 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.
13. The Acquiring Fund Adviser, Trustee or Sponsor, as applicable,
will waive fees otherwise payable to it by the Acquiring Fund in an
amount at least equal to any compensation (including fees received
pursuant to any plan adopted by a Fund under rule 12b-1 under the Act)
received from the Fund by the Acquiring Fund Adviser, Trustee or
Sponsor, or an affiliated person of the Acquiring Fund Adviser, Trustee
or Sponsor, other than any advisory fees paid to the Acquiring Fund
Adviser, Trustee, or Sponsor, or its affiliated person by the Fund, in
connection with the investment by the Acquiring Fund in the Fund. Any
Acquiring Fund Sub-Adviser will waive fees otherwise payable to the
Acquiring Fund Sub-Adviser, directly or indirectly, by the Acquiring
Management Company in an amount at least equal to any compensation
received from a Fund by the Acquiring Fund Sub-Adviser, or an
affiliated person of the Acquiring Fund Sub-Adviser, other than any
advisory fees paid to the Acquiring Fund Sub-Adviser or its affiliated
person by the Fund, in connection with any investment by the Acquiring
Management Company in the Fund made at the direction of the Acquiring
Fund Sub-Adviser. In the event that the Acquiring Fund Sub-Adviser
waives fees, the benefit of the waiver will be passed through to the
Acquiring Management Company.
14. Any sales charges and/or service fees charged with respect to
shares of an Acquiring Fund will not exceed the limits applicable to a
fund of funds as set forth in NASD Conduct Rule 2830.
15. No Fund will acquire securities of an 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 ct, except to the
extent permitted by exemptive relief from the Commission permitting the
Fund to purchase shares of other investment companies for short-term
cash management purposes.
16. Before approving any advisory contract under section 15 of the
Act, the board of directors or trustees of each Acquiring Management
Company, including a majority of the disinterested directors or
trustees, will find that the advisory fees charged under such advisory
contract are based on services provided that will be in addition to,
rather than duplicative of, the services provided under the advisory
contract(s) of any Fund in which the Acquiring Management Company may
invest. These findings and their basis will be recorded fully in the
minute books of the appropriate Acquiring Management Company.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32935 Filed 12-22-11; 8:45 am]
BILLING CODE 8011-01-P