[Federal Register Volume 77, Number 73 (Monday, April 16, 2012)]
[Notices]
[Pages 22616-22622]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-9013]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30032; 812-13785]
Huntington Asset Advisors, Inc., et al.; Notice of Application
April 10, 2012.
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, and under sections 6(c) and 17(b) of the Act for 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.
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Applicants: Huntington Asset Advisors, Inc. (``Adviser''),
Huntington Strategy Shares (``Trust''), and SEI Investments
Distribution Co.
Summary of Application: Applicants request an order that permits:
(a) Actively-managed series of the Trust to issue shares (``Shares'')
redeemable in large aggregations only (``Creation Units''); (b)
secondary market transactions in Shares to occur at negotiated market
prices; (c) certain series to pay redemption proceeds, under certain
circumstances, more than seven days after the tender of Shares for
redemption; (d) certain affiliated persons of the series to deposit
securities into, and receive securities from, the series in connection
with the purchase and redemption of Creation Units; and (e) certain
registered management investment companies and unit investment trusts
outside of the same group of investment companies as the series to
acquire Shares.
Filing Dates: The application was filed on June 17, 2010, and
amended on October 10, 2010, June 10, 2011, February 24, 2012, and
April 3, 2012. Applicants have agreed to file an amendment during the
notice period, the substance of which is reflected in this notice.
Hearing or Notification of Hearing: An order granting the 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 May 7, 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, c/o Leslie K. Klenk,
Bernstein Shur, 100 Middle Street, P.O. Box 9729, Portland, ME 04104-
5029.
FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at
(202) 551-6876 or Dalia Osman Blass, 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 is organized as a Delaware statutory trust.
The Trust will initially offer two series, Huntington U.S. Equity
Rotation Strategy ETF and Huntington EcoLogical Strategy ETF (together,
the ``Initial Funds''). The investment objective of both Initial Funds
will be to seek capital appreciation.
2. The Adviser, an Ohio corporation, is registered as an investment
adviser under the Investment Advisers Act of 1940 (``Advisers Act''),
and will serve as investment adviser to the Initial Funds. A Fund may
engage one or more sub-advisers (``Sub-Advisers'') to manage specific
strategies suited to their expertise. Any Sub-Adviser will be
registered under the Advisers Act. SEI Investments Distribution Co., a
Pennsylvania corporation, is registered as a broker-dealer (``Broker'')
under the Securities Exchange Act of 1934 (``Exchange Act'') and will
serve as the principal underwriter and distributor for each of the
Funds (``Distributor'').
3. Applicants request that the order apply to the Initial Funds,
any future series of the Trust and to any other open-end investment
company or series thereof that is an actively managed exchange-traded
fund (``ETF'') and (a) is advised by the Adviser or any entity
controlling, controlled by, or under common control with the Adviser
\1\ and (b) complies with the terms and conditions of the application
(collectively, ``Future Funds,'' and together with the Initial Funds,
the ``Funds'').\2\ The Funds may invest in equity securities (``Equity
Funds'') or fixed income securities (``Fixed Income Funds'') traded in
the U.S. or non-U.S. markets. The Equity Funds that invest in equity
securities traded in the U.S. market (``Domestic Equity Funds''), Fixed
Income Funds that invest in fixed income securities traded in the U.S.
market (``Domestic Fixed Income Funds'') and Funds that invest in
equity and fixed income securities traded in the U.S. market
(``Domestic Blend Funds'') together are ``Domestic Funds.'' Funds that
invest in foreign and domestic equity securities are ``Global Equity
Funds.'' Funds that invest in foreign and domestic fixed income
securities are ``Global Fixed Income Funds.'' Funds that invest in
equity securities and fixed income securities traded in the U.S. or
non-U.S. markets are ``Global Blend Funds'' (and collectively with the
Global Equity Funds and Global Fixed Income Funds, ``Global Funds'').
Funds that invest solely in foreign equity securities are ``Foreign
Equity Funds'', Funds that invest solely in foreign fixed income
securities are ``Foreign Fixed Income Funds'' and Funds that invest
solely in foreign equity and foreign fixed income securities are
``Foreign Blend Funds'' (and collectively with Foreign Equity Funds and
Foreign Fixed Income Funds, ``Foreign Funds''). The Funds may also
invest in ``Depositary Receipts.'' \3\ No
[[Page 22617]]
Fund relying on the order will invest in options contracts, futures
contracts or swap agreements. Each Fund will consist of a portfolio of
securities (including equity and fixed income securities), currencies
traded in the U.S. or in non-U.S. markets, and other assets
(``Portfolio Instruments'').
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\1\ Any such advisory entity will be registered as an investment
adviser under the Advisers Act.
\2\ All entities that currently intend to rely on the order are
named as applicants. Any entity that relies on the order in the
future will comply with the terms and conditions of the application.
\3\ 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 by the Depositary. A
Fund will not invest in any Depositary Receipts that the Adviser
deems to be illiquid or for which pricing information is not readily
available. No affiliated persons of applicants or any Sub-Adviser
will serve as the Depositary for any Depositary Receipts held by a
Fund.
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4. Applicants also request that any exemption under section
12(d)(1)(J) of the Act from sections 12(d)(1)(A) and (B) apply to: (i)
Any Fund that is currently or subsequently part of the same ``group of
investment companies'' as an Initial Fund within the meaning of section
12(d)(1)(G)(ii) of the Act; (ii) any principal underwriter for the
Fund; (iii) any Brokers selling Shares of a Fund to an Investing Fund
(defined below); and (iv) each management investment company or unit
investment trust registered under the Act that is not part of the same
``group of investment companies'' as the Fund within the meaning of
section 12(d)(1)(G)(ii) of the Act and that enters into a FOF
Participation Agreement (defined below) with the Fund (such management
investment companies, ``Investing Management Companies,'' such unit
investment trusts, ``Investing Trusts,'' and Investing Management
Companies and Investing Trusts together are ``Investing Funds'').
Investing Funds do not include the Funds.\4\
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\4\ An Investing Fund may rely on the order only to invest in a
Fund and not in any other registered investment company.
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5. Applicants anticipate that a Creation Unit will consist of at
least 25,000 Shares and that the trading price of a Share will range
from $20 to $200. All orders to purchase Creation Units must be placed
with the Distributor by or through an ``Authorized Participant,'' which
is either (a) a Broker or other participant in the Continuous Net
Settlement System of the National Securities Clearing Corporation
(``NSCC,'' and such process the ``NSCC Process''), or (b) a participant
in the Depository Trust Company (``DTC,'' such participant ``DTC
Participant'' and such process the ``DTC Process''), which, in either
case, has executed an agreement with the Distributor with respect to
the purchase and redemption of Creation Units.
6. Shares will be purchased and redeemed in Creation Units and
generally on an in-kind basis. Except where the purchase or redemption
will include cash under the limited circumstances specified below,
purchasers will be required to purchase Creation Units by making an in-
kind deposit of specified instruments (``Deposit Instruments''), and
shareholders redeeming their Shares will receive an in-kind transfer of
specified instruments (``Redemption Instruments'').\5\ On any given
Business Day \6\ the names and quantities of the instruments that
constitute the Deposit Instruments and the names and quantities of the
instruments that constitute the Redemption Instruments will be
identical, and these instruments may be referred to, in the case of
either a purchase or a redemption, as the ``Creation Basket.'' In
addition, the Creation Basket will correspond pro rata to the positions
in a Fund's portfolio (including cash positions),\7\ except: (a) In the
case of bonds, for minor differences when it is impossible to break up
bonds beyond certain minimum sizes needed for transfer and settlement;
(b) for minor differences when rounding is necessary to eliminate
fractional shares or lots that are not tradeable round lots; \8\ or (c)
TBA Transactions \9\ and other positions that cannot be transferred in
kind \10\ will be excluded from the Creation Basket.\11\ If there is a
difference between the net asset value (``NAV'') attributable to a
Creation Unit and the aggregate market value of the Creation Basket
exchanged for the Creation Unit, the party conveying instruments with
the lower value will also pay to the other an amount in cash equal to
that difference (the ``Cash Amount'').
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\5\ The Funds must comply with the federal securities laws in
accepting Deposit Instruments and satisfying redemptions with
Redemption Instruments, including that the Deposit Instruments and
Redemption Instruments are sold in transactions that would be exempt
from registration under the Securities Act of 1933 (``Securities
Act''). In accepting Deposit Instruments and satisfying redemptions
with Redemption Instruments that are restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act, the Funds
will comply with the conditions of Rule 144A.
\6\ Each Fund will sell and redeem Creation Units on any day the
Fund is open, including as required by section 22(e) of the Act
(each, a ``Business Day'').
\7\ The portfolio used for this purpose will be the same
portfolio used to calculate the Fund's NAV for that Business Day.
\8\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
\9\ A TBA Transaction is a method of trading mortgage-backed
securities. In a TBA Transaction, the buyer and seller agree on
general trade parameters such as agency, settlement date, par amount
and price.
\10\ This includes instruments that can be transferred in kind
only with the consent of the original counterparty to the extent the
Fund does not intend to seek such consents.
\11\ Because these instruments will be excluded from the
Creation Basket, their value will be reflected in the determination
of the Cash Amount (defined below).
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7. Purchases and redemptions of Creation Units may be made in whole
or in part on a cash basis, rather than in kind, solely under the
following circumstances: (a) To the extent there is a Cash Amount, as
described above; (b) if, on a given Business Day, a Fund announces
before the open of trading that all purchases, all redemptions or all
purchases and redemptions on that day will be made entirely in cash;
(c) if, upon receiving a purchase or redemption order from an
Authorized Participant, a Fund determines to require the purchase or
redemption, as applicable, to be made entirely in cash; (d) if, on a
given Business Day, a Fund requires all Authorized Participants
purchasing or redeeming Shares on that day to deposit or receive (as
applicable) cash in lieu of some or all of the Deposit Instruments or
Redemption Instruments, respectively, solely because: (i) Such
instruments are not eligible for transfer through either the NSCC
Process or DTC Process; or (ii) in the case of Global Funds and Foreign
Funds, such instruments are not eligible for trading due to local
trading restrictions, local restrictions on securities transfers or
other similar circumstances; or (e) if a Fund permits an Authorized
Participant to deposit or receive (as applicable) cash in lieu of some
or all of the Deposit Instruments or Redemption Instruments,
respectively, solely because: (i) Such instruments are, in the case of
the purchase of a Creation Unit, not available in sufficient quantity;
(ii) such instruments are not eligible for trading by an Authorized
Participant or the investor on whose behalf the Authorized Participant
is acting; or (iii) a holder of Shares of a Global Fund or Foreign Fund
would be subject to unfavorable income tax treatment if the holder
receives redemption proceeds in kind.\12\
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\12\ A ``custom order'' is any purchase or redemption of Shares
made in whole or in part on a cash basis in reliance on clause
(e)(i) or (e)(ii).
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8. Each Business Day, before the open of trading on a national
securities exchange, as defined in section 2(a)(26) of the Act
(``Listing Market''), on which Shares are listed and traded, each Fund
will cause to be published through the NSCC the names and quantities of
the instruments comprising the Creation Basket, as well as the
estimated Cash Amount (if any), for that day. The published Creation
Basket will apply until a new Creation Basket is announced on the
following Business Day, and there will be no intra-day changes to the
Creation Basket except to
[[Page 22618]]
correct errors in the published Creation Basket. A Listing Market will
disseminate every 15 seconds throughout the trading day an amount
representing, on a per Share basis, the sum of the current value of the
Deposit Instruments and the estimated Cash Amount.
9. An investor purchasing 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 sale of Creation Units.\13\ All orders
to purchase Creation Units must be placed with the Distributor by or
through an Authorized Participant and the Distributor will transmit
such orders to the Funds. The Distributor will be responsible for
maintaining records of both the orders placed with it and the
confirmations of acceptance furnished by it.
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\13\ Cash purchases and redemptions of Shares may involve a
higher Transaction Fee to cover the costs of purchasing and selling
the applicable Deposit and Redemption Instruments. In all cases, the
Transaction Fee will be limited in accordance with requirements of
the Commission applicable to management investment companies
offering redeemable securities.
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10. Purchasers of Shares in Creation Units may hold such Shares or
may sell such Shares into the secondary market. Shares will be listed
and traded at negotiated prices on a Listing Market. The principal
secondary market for Shares will be the Listing Market on which the
Shares are listed and traded (the ``Primary Listing Exchange''). When
the NYSE Arca, Inc. (``NYSE Arca'') is the Primary Listing Exchange, it
is expected that one or more NYSE Arca member firms will be designated
by the Listing Market to act as a market maker (a ``Market
Maker'').\14\ The price of Shares trading on a Listing Market will be
based on a current bid-offer in the secondary market. Purchases and
sales of Shares in the secondary market will not involve a Fund and
will be subject to customary brokerage commissions and charges.
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\14\ If Shares are listed on The NASDAQ Stock Market LLC
(``Nasdaq'') or a similar electronic Listing Market (including NYSE
Arca), one or more member firms of that Listing Market will act as
Market Maker and maintain a market for Shares trading on that
Listing Market. On Nasdaq, no particular Market Maker would be
contractually obligated to make a market in Shares. However, the
listing requirements on Nasdaq stipulate that at least two Market
Makers must be registered in Shares to maintain a listing.
Registered Market Makers are required to make a continuous two-sided
market or subject themselves to regulatory sanctions. No Market
Maker will be an affiliated person, or an affiliated person of an
affiliated person, of the Funds, except within the meaning of
section 2(a)(3)(A) or (C) of the Act due solely to ownership of
Shares.
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11. Applicants expect that purchasers of Creation Units will
include institutional investors and arbitrageurs. Market Makers, in
providing a fair and orderly secondary market for Shares, also may
purchase Creation Units for use in their own market making activities.
Applicants expect that secondary market purchasers of Shares will
include both institutional and retail investors.\15\ Applicants believe
that the structure and operation of the Funds will be designed to
enable efficient arbitrage and, thereby, minimize the probability that
Shares will trade at a material premium or discount to a Fund's NAV.
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\15\ Shares will be registered in book-entry form only. DTC or
its nominee will be the 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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12. 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 Units only. To redeem, an investor
must accumulate enough Shares to constitute a Creation Unit. Redemption
requests must be placed by or through an Authorized Participant. As
discussed above, redemptions of Creation Units will generally be made
on an in-kind basis, subject to certain specified exceptions under
which redemptions may be made in whole or in part on a cash basis, and
will be subject to a Transaction Fee.\16\
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\16\ See supra note 11.
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13. Neither the Trust nor any Fund will be advertised or marketed
or otherwise held out as a traditional open-end investment company or
mutual fund. Instead, each Fund will be marketed as an ``actively
managed exchange-traded fund.'' All marketing materials that describe
the features or method of obtaining, buying, or selling Creation Units,
or Shares traded on a Listing Market, or refer to redeemability, will
prominently disclose that Shares are not individually redeemable and
that the owners of Shares may acquire those Shares from a Fund or
tender those Shares for redemption to the Fund in Creation Units only.
14. The Trust's Web site (``Web site''), which will be publicly
available prior to the public offering of Shares, will include each
Fund's prospectus (``Prospectus'') and/or Summary Prospectus, and
Statement of Additional Information (``SAI''). The Web site will
contain, on a per Share basis for each Fund, the prior Business Day's
NAV and the market closing price or mid-point of the bid/ask spread at
the time of 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. On each Business Day, prior to the
commencement of trading in Shares on a Listing Market, the Adviser
shall post on the Web site the identities and quantities of the
Portfolio Instruments held by each Fund that will form the basis for
the calculation of the NAV at the end of that Business Day.\17\
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\17\ Under accounting procedures followed by each Fund, trades
made on the prior Business Day (``T'') will be booked and reflected
in NAV on the current Business Day (T+1). Accordingly, the Funds
will be able to disclose at the beginning of the Business Day the
portfolio that will form the basis for the NAV calculation at the
end of the Business Day.
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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 provision 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.
[[Page 22619]]
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 Trust and
each Fund to redeem Shares in Creation Units only. Applicants state
that investors may purchase Shares in Creation Units from each Fund and
that Creation Units will always be redeemable in accordance with the
provisions of the Act. Applicants further state that because the market
price of Shares will be disciplined by arbitrage opportunities,
investors should be able to sell Shares in the secondary market at
prices that do not vary substantially from their NAV.
Section 22(d) of the Act and Rule 22c-1 Under the Act
4. Section 22(d) of the Act, among other things, prohibits a dealer
from selling a redeemable security that 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 the 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 resulting from sales at different prices, and (c) assure
an orderly distribution of investment company shares by eliminating
price competition from brokers 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 arbitrage activity 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) generally prohibits a registered investment
company from suspending the right of redemption or postponing the date
of payment of redemption proceeds for more than seven days after the
tender of a security for redemption. Applicants observe that the
settlement of redemptions of Creation Units of the Foreign and Global
Funds is contingent not only on the settlement cycle of the U.S.
securities markets but also on the delivery cycles present in foreign
markets for underlying foreign Portfolio Instruments in which those
Funds invest. Applicants have been advised that, under certain
circumstances, the delivery cycles for transferring Portfolio
Instruments to redeeming investors, coupled with local market holiday
schedules, will require a delivery process of up to fourteen (14)
calendar days. Applicants therefore request relief from section 22(e)
in order to provide 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 Instruments of each Foreign and Global Fund customarily clear
and settle, but in all cases no later than fourteen (14) days following
the tender of a Creation Unit.\18\
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\18\ Rule 15c6-1 under the Exchange Act requires that most
securities transactions be settled within three business days of the
trade. Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations applicants
may have under rule 15c6-1.
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8. Applicants state that section 22(e) was designed to prevent
unreasonable, undisclosed and unforeseen delays in the actual payment
of redemption proceeds. Applicants assert that the requested relief
will not lead to the problems that section 22(e) was designed to
prevent. Applicants state that the Prospectus and/or SAI will identify
those instances in a given year where, due to local holidays, more than
seven calendar days, up to a maximum of fourteen calendar days, will be
needed to deliver redemption proceeds and will list such holidays.
Applicants are not seeking relief from section 22(e) for Foreign and
Global Funds that do not effect redemptions of Creation Units 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 relief to permit Investing Funds to acquire
Shares in excess of the limits in section 12(d)(1)(A) of the Act and to
permit the Funds, their principal underwriters and any Broker to sell
Shares to Investing Funds in excess of the limits in section
12(d)(l)(B) of the Act.
11. Applicants assert that the proposed transactions will not lead
to any of the abuses that section 12(d)(1) was designed to prevent.
Applicants submit that the proposed conditions to the requested relief
address the concerns underlying the limits in section 12(d)(1), which
include concerns about undue influence, excessive layering of fees and
overly complex structures.
12. Applicants submit that their proposed conditions address any
concerns regarding the potential for undue influence. To limit the
control that an Investing Fund may have over a Fund, applicants propose
a condition prohibiting the adviser of an Investing
[[Page 22620]]
Management Company (``Investing Fund Adviser''), sponsor of an
Investing Trust (``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 sections 3(c)(1) or 3(c)(7) of the Act that is advised or
sponsored by the Investing Fund Adviser, the Sponsor, or any person
controlling, controlled by, or under common control with the Investing
Fund Adviser or Sponsor (``Investing Fund's Advisory Group'') from
controlling (individually or in the aggregate) a Fund within the
meaning of section 2(a)(9) of the Act. The same prohibition would apply
to any sub-adviser to an Investing Fund (``Investing Fund Sub-
Adviser''), any person controlling, controlled by or under common
control with the Investing Fund Sub-Adviser, and any investment company
or issuer that would be an investment company but for sections 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 Sub-Adviser or any person
controlling, controlled by or under common control with the Investing
Fund Sub-Adviser (``Investing Fund's Sub-Advisory Group'').
13. Applicants propose a condition to ensure that no Investing Fund
or Investing Fund Affiliate \19\ (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 Sub-
Adviser, employee or Sponsor of the Investing Fund, or a person of
which any such officer, director, member of an advisory board,
Investing Fund Adviser, Investing 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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\19\ An ``Investing Fund Affiliate'' is any Investing Fund
Adviser, Investing Fund Sub-Adviser, Sponsor, promoter and principal
underwriter of an Investing Fund, and any person controlling,
controlled by or under common control with any of these entities.
``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 propose several conditions to address the potential
for layering of fees. Applicants note that the board of directors or
trustees (``Board'') of any Investing Management Company, including a
majority of the directors or trustees who are not ``interested
persons'' within the meaning of section 2(a)(19) of the Act
(``disinterested directors or trustees''), will be required to 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
Investing Management Company may invest. Applicants also state that 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.\20\
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\20\ Any reference to NASD Conduct Rule 2830 includes 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.
16. To ensure that an Investing Fund is aware of the terms and
conditions of the requested order, the Investing Funds must enter into
an agreement with the respective Funds (``FOF Participation
Agreement''). The FOF Participation Agreement will include an
acknowledgement from the Investing Fund that it may rely on the order
only to invest in a Fund and not in any other investment company.
Section 17(a) 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 person (``Second Tier Affiliates''), from selling any security to
or purchasing any security from the company. Section 2(a)(3) of the Act
defines ``affiliated person'' to include 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 and 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 under sections 6(c) and 17(b)
of the Act from sections 17(a)(1) and 17(a)(2) of the Act to permit in-
kind purchases and redemptions of Creation Units 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 the Trust 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 the transactions that would accompany such
sales and redemptions with, any Investing Fund of which the Fund is an
affiliated person or Second-Tier Affiliate.\21\
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\21\ Applicants anticipate that most Investing Funds will
purchase Shares in the secondary market and will not purchase or
redeem Creation Units directly from a Fund. Relief from section
17(a) is not required when an Investing Fund that is an affiliate or
Second Tier Affiliate of a Fund purchases or sells Shares in the
secondary market as such transactions are not principal transactions
with the 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 in Creation Units. The requested relief
is intended to cover 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 that
Investing Fund.
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19. Applicants contend that no useful purpose would be served by
prohibiting such affiliated persons or Second Tier Affiliates from
acquiring or redeeming Creation Units through in-kind transactions.
Both the deposit procedures for in-kind purchases of
[[Page 22621]]
Creation Units and the redemption procedures for in-kind redemptions
will be the same for all purchases and redemptions. Deposit Instruments
and Redemptions Instruments will be valued in the same manner as the
Portfolio Instruments held by the relevant Fund. Applicants thus
believe that in-kind purchases and redemptions will not result in self-
dealing or overreaching of the Fund.
20. Applicants also submit that the sale of Shares to and
redemption of Shares from an Investing Fund satisfies the standards for
relief under sections 17(b) and 6(c) of the Act. Applicants note that
any consideration paid for the purchase or redemption of Creation Units
directly from a Fund will be based on the NAV of the Fund.\22\ The FOF
Participation Agreement will require any Investing Fund that purchases
Creation Units directly from a Fund to represent that the purchase will
be in compliance with its investment restrictions and consistent with
the investment policies set forth in its registration statement.
Applicants also state that the proposed transactions are consistent
with the general purposes of the Act and appropriate in the public
interest.
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\22\ 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 of a Fund 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. Actively Managed Exchange-Traded Fund Relief
1. As long as a Fund operates in reliance on the requested Order,
the Shares of the Fund will be listed on a Listing Market.
2. Neither the Trust nor any Fund will be advertised or marketed as
an open-end investment company or a mutual fund. Any advertising
material that describes the purchase or sale of Creation Units or
refers to redeemability will prominently disclose that Shares are not
individually redeemable and that owners of the Shares may acquire
Shares from a Fund and tender Shares for redemption to the Fund in
Creation Units only.
3. The Web site, 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, the market closing price or the Bid/Ask Price, and
a calculation of the premium or discount of the market closing price or
Bid/Ask Price against such NAV.
4. On each Business Day, before commencement of trading in Shares
on a Listing Market, each Fund will disclose on the Web site the
identities and quantities of the Portfolio Instruments held by the Fund
that will form the basis for the Fund's calculation of NAV at the end
of that Business Day.
5. No Adviser or any Sub-Adviser, directly or indirectly, will
cause any Authorized Participant (or any investor on whose behalf an
Authorized Participant may transact with the Fund) to acquire any
Deposit Instrument for a Fund through a transaction in which the Fund
could not engage directly.
6. The requested order will expire on the effective date of any
Commission rule under the Act that provides relief permitting the
operation of actively managed ETFs.
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 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
Investing Fund's Advisory Group or the Investing Fund's Sub-Advisory
Group, each in the aggregate, becomes a holder of more than 25 percent
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's
Shares. This condition does not apply to the Investing Fund's Sub-
Advisory Group with respect to a Fund for which the Investing Fund Sub-
Adviser or a person controlling, controlled by or under common control
with the Investing Fund Sub-Adviser 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 an Investing Management Company, including a
majority of the disinterested directors or trustees, will adopt
procedures reasonably designed to ensure that the Investing Fund
Adviser and any Investing Fund Sub-Adviser 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 the Shares of a Fund
exceeds the limit in section l2(d)(1)(A)(i) of the Act, the board,
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: (i) Is fair and reasonable in relation to the nature and
quality of the services and benefits received by the Fund; (ii) is
within the range of consideration that the Fund would be required to
pay to another unaffiliated entity in connection with the same services
or transactions; and (iii) does not involve overreaching on the part of
any person concerned. This condition does not apply with respect to any
services or transactions between a Fund and its investment adviser(s),
or any person controlling, controlled by or under common control with
such investment adviser(s).
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 under rule 12b-l under the Act) received
from a Fund by the Investing Fund Adviser, trustee or Sponsor, or an
affiliated person of the Investing Fund Adviser, trustee or Sponsor,
other than any advisory fees paid to the Investing Fund Adviser,
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 Sub-Adviser will waive fees otherwise payable to the Investing
Fund Sub-Adviser, directly or indirectly, by the Investing Fund in an
amount at least equal to any compensation received from a Fund by the
Investing Fund Sub-Adviser, or an affiliated person of the Investing
Fund Sub-Adviser, other than any advisory fees paid to the Investing
Fund Sub-Adviser or its affiliated person by the Fund, in connection
with any investment by the Investing Fund in the Fund made at the
direction of the Investing Fund Sub-Adviser. In the event that the
Investing Fund Sub-Adviser waives fees, the benefit of the waiver will
be passed through to the Investing Fund.
[[Page 22622]]
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 any Affiliated
Underwriting.
7. The Board, including a majority of the disinterested directors
or trustees, will adopt procedures reasonably designed to monitor any
purchases of securities by a Fund in an Affiliated Underwriting, once
an investment by an Investing Fund in the Shares 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 Investing Fund in the Fund. The Board will consider, among other
things: (i) Whether the purchases were consistent with the investment
objectives and policies of the Fund; (ii) how the performance of
securities purchased in an Affiliated Underwriting compares to the
performance of comparable securities purchased during a comparable
period of time in underwritings other than Affiliated Underwritings or
to a benchmark such as a comparable market index; and (iii) whether the
amount of securities purchased by the Fund in Affiliated Underwritings
and the amount purchased directly from an Underwriting Affiliate have
changed significantly from prior years. The Board will take any
appropriate actions based on its review, including, if appropriate, the
institution of procedures designed to assure that purchases of
securities in Affiliated Underwritings are in the best interest of
shareholders of a 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 determinations of the Board
were made.
9. Before investing in Shares in excess of the limits in section
12(d)(1)(A), each Investing Fund and a Fund will execute a FOF
Participation Agreement stating, without limitation, that their boards
of directors or trustees and their investment adviser(s), their
Sponsors or trustees, as applicable, understand the terms and
conditions of the order, and agree to fulfill their responsibilities
under the order. At the time of its investment in Shares in excess of
the limit in section 12(d)(1)(A)(i), an Investing Fund will notify the
Fund of the investment. At such time, the Investing Fund will also
transmit to the Fund a list of each Investing Fund Affiliate and
Underwriting Affiliate. The Investing 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 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 each Investing Management Company, including a
majority of the disinterested directors or trustees, will find that the
advisory fees charged under such advisory contract are based on
services provided that will be in addition to, rather than duplicative
of, the services provided under the advisory contract(s) of any Fund in
which the Investing Management Company may invest. These findings and
their basis will be recorded fully in the minute books of the
appropriate Investing Management Company.
11. Any sales charges and/or service fees charged with respect to
shares of an Investing Fund will not exceed the limits applicable to a
fund of funds as set forth in NASD Conduct Rule 2830.
12. No Fund will acquire securities of any investment company or
company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of
the limits contained in section 12(d)(1)(A) of the Act, except to the
extent permitted by exemptive relief from the Commission permitting the
Fund to purchase shares of other investment companies for short-term
cash management purposes.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-9013 Filed 4-13-12; 8:45 am]
BILLING CODE 8011-01-P