[Federal Register Volume 77, Number 184 (Friday, September 21, 2012)]
[Notices]
[Pages 58593-58600]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-23317]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30204; File No. 812-13934]
Factor Advisors, LLC, et al.; Notice of Application
September 17, 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 (the ``Act'') for an exemption from
sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of the Act and rule 22c-1
under the Act, under sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and (a)(2) of the Act, and under
section 12(d)(1)(J) for an exemption from sections 12(d)(1)(A) and
12(d)(1)(B) of the Act.
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Summary of Application: Applicants request an order that would permit
(a) Certain open-end management investment companies or series thereof
to issue shares (``Shares'') redeemable in large aggregations only
(``Creation Units''); (b) secondary market transactions in Shares to
occur at negotiated market prices; (c) certain series to pay redemption
proceeds, under certain circumstances, more than seven days after the
tender of Shares for redemption; (d) certain affiliated persons of the
series to deposit securities into, and receive securities from, the
series in connection with the purchase and redemption of Creation
Units; and (e) certain registered management investment companies and
unit investment trusts outside of the same group of investment
companies as the series to acquire Shares.
Applicants: FactorShares Trust (the ``Trust''), Factor Advisors, LLC
(``Factor Advisors''), and Quasar Distributors, LLC (the
``Distributor'').
DATES: Filing Dates: The application was filed on August 3, 2011, and
amended on January 27, 2012, June 26, 2012, and September 11, 2012.
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 October 9, 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, Securities and Exchange Commission, 100 F Street
NE., Washington, DC 20549-1090; Applicants, Factor Advisor and the
Trust, One Penn Plaza, 36th Floor, New York, NY 10019. Distributor, 615
East Michigan Street, 4th Floor, Milwaukee, Wisconsin 53202.
FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Sr., Senior Counsel
at (202) 551-6868, or Daniele Marchesani, Branch Chief, at (202) 551-
6821 (Division of Investment Management, Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or an applicant
using the Company name box, at http://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicants' Representations
1. The Trust is registered under the Act as an open-end management
investment company and is organized as a Delaware statutory trust. The
Trust initially will offer three series identified in the application
(``Initial Funds'') whose performance will correspond to the price and
yield performance, before fees and expenses, of a specified securities
index (``Underlying Index'').
2. Applicants request that the order apply to the Initial Funds and
any additional series of the Trust and any other existing or future
open-end
[[Page 58594]]
management investment companies or series thereof that seeks to track
an Underlying Index (``Future Funds,'' and together with the Initial
Funds, the ``Funds'').\1\ Any Fund will be (a) advised by Factor
Advisors or an entity controlling, controlled by or under common
control with Factor Advisors (each, an ``Adviser''), and (b) seek
investment returns that correspond to the price and yield performance,
before fees and expenses, of a specified securities index.
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\1\ All entities that currently intend to rely on the order have
been named as applicants. Any other existing or future entity that
subsequently relies on the order will comply with the terms and
conditions of the application. An Acquiring Fund (as defined below)
my rely on the order only to invest in Funds and not in any other
registered investment company.
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3. Underlying Indexes may include: any domestic equity, foreign
equity or fixed income index (respectively, a ``Domestic Index,''
``Foreign Index'' or ``Fixed Income Index'') or combination thereof
that is comprised solely of securities. Each Domestic Index is an index
comprised of equity securities issued by one or more of the following
categories of issuers: (i) Domestic issuers and (ii) non-domestic
issuers meeting the requirements for trading in U.S. markets. Each
Foreign Index is comprised of foreign equity securities. Each Fixed
Income Index is comprised of domestic or foreign fixed income
securities. Funds tracking Domestic, Foreign and Fixed Income Indexes
are, respectively, ``Domestic Funds,'' ``Foreign Funds'' and ``Fixed
Income Funds.'' Certain Funds may invest in both domestics and foreign
securities (``Global Funds''). Underlying Indexes that include both
long and short positions in securities are referred to as ``Long/Short
Indexes.'' Funds based on Long/Short Indexes are ``Long/Short Funds.''
Underlying Indexes that use a 130/30 investment strategy are referred
to as ``130/30 Indexes.'' Funds based on 130/30 Indexes are ``130/30
Funds.''
4. An Adviser registered as an investment adviser under the
Investment Advisers Act of 1940 (the ``Advisers Act'') will serve as
investment adviser to the Funds. The Adviser may enter into sub-
advisory agreements with one or more investment advisers each of which
will serve as a sub-adviser to a Fund (each, a ``Sub-adviser''). Each
Sub-adviser will be registered under the Advisers Act. The Distributor
is a broker-dealer registered under the Securities Exchange Act of 1934
(the ``Exchange Act'') and will act as the principal underwriter and
distributor for the Initial Funds.\2\
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\2\ Applicants request that the order also apply to future
distributors that comply with the terms and conditions of the
application.
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5. Each Fund will consist of a portfolio of securities and other
instruments including cash (``Portfolio Investments'') selected to
correspond to the performance of a specified Underlying Index.\3\ No
entity that creates, compiles, sponsors or maintains an Underlying
Index will be an affiliated person, as defined in section 2(a)(3) of
the Act, or an affiliated person of an affiliated person, of the Trust,
a Fund, the Adviser, any Sub-adviser, or promoter of a Fund, or of the
Distributor.
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\3\ Applicants represent that each Fund will invest at least 80%
of its total assets in the component securities that comprise its
Underlying Index (``Component Securities'') or, as applicable,
depositary receipts or TBA Transactions (as defined below)
representing Component Securities. Each Fund also may invest up to
20% of its total assets (the ``Asset Basket``) in a broad variety of
other instruments, including securities not included in its
Underlying Index, which the Adviser believes will help the Fund in
tracking the performance of the Underlying Index.
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6. A Fund will utilize either a replication or representative
sampling strategy to track its Underlying Index. A Fund using a
replication strategy will invest in substantially all of the Component
Securities in its Underlying Index in the same approximate proportions
as in the Underlying Index. A Fund using a representative sampling
strategy will hold some, but may not hold all, of the Component
Securities of its Underlying Index. Applicants state that use of the
representative sampling strategy may prevent a Fund from tracking the
performance of its Underlying Index with the same degree of accuracy as
would a Fund that invests in every Component Security of the Underlying
Index. Applicants expect that each Fund will have a tracking error
relative to the performance of its Underlying Index of less than 5
percent.
7. Each Fund will issue, on a continuous basis, Creation Units,
which will typically consist of 25,000 to 100,000 Shares and have an
initial price of at least $1,000,000. All orders to purchase Creation
Units must be placed with the Distributor by or through a party that
has entered into an agreement with the Distributor (``Authorized
Participant''). The Distributor will be responsible for delivering the
Fund's prospectus to those persons acquiring Creation Units and for
maintaining records of both the orders placed with it and the
confirmations of acceptance furnished by it. In addition, the
Distributor will maintain a record of the instructions given to the
applicable Fund to implement the delivery of its Shares. An Authorized
Participant must be either (1) a ``Participating Party,'' (i.e., a
broker-dealer or other participant in the Continuous Net Settlement
System of the National Securities Clearing Corporation (``NSCC''), a
clearing house registered with the Commission, or (2) a participant in
the Depository Trust Company (``DTC,'' and such participant, ``DTC
Participant''), which, in either case, has signed a ``Participant
Agreement'' with the Distributor.
8. The 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'').\4\ On any given
Business Day 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, unless the Fund is Rebalancing (as defined below). In
addition, the Deposit Instruments and the Redemption Instruments will
each correspond pro rata to the positions in a Fund's portfolio
(including cash positions),\5\ 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; \6\ (c) ``to be announced''
transactions (``TBA Transactions''),\7\ short positions,
[[Page 58595]]
derivatives and other positions that cannot be transferred in kind \8\
will be excluded from the Deposit Instruments and the Redemption
Instruments; \9\ (d) to the extent the Fund determines, on a given
Business Day, to use a representative sampling of the Fund's portfolio;
\10\ or (e) for temporary periods, to effect changes in the Fund's
portfolio as a result of the rebalancing of its Underlying Index (any
such change, a ``Rebalancing''). If there is a difference between the
net asset value (``NAV'') attributable to a Creation Unit and the
aggregate market value of the Deposit Instruments or Redemption
Instruments 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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\4\ 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.
\5\ The portfolio used for this purpose will be the same
portfolio used to calculate the Fund's NAV for that Business Day.
\6\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
\7\ 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. The actual pools delivered generally are determined two
days prior to the settlement date.
\8\ 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.
\9\ Because these instruments will be excluded from the Deposit
Instruments and the Redemption Instruments, their value will be
reflected in the determination of the Cash Amount (defined below).
\10\ A Fund may only use sampling for this purpose if the
sample: (i) Is designed to generate performance that is highly
correlated to the performance of the Fund's portfolio; (ii) consists
entirely of instruments that are already included in the Fund's
portfolio; and (iii) is the same for all Authorized Participants on
a given Business Day.
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9. 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; \11\ (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 or
DTC; or (ii) in the case of Foreign Funds and Global 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 Foreign Fund or Global Fund
would be subject to unfavorable income tax treatment if the holder
receives redemption proceeds in kind.\12\
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\11\ In determining whether a particular Fund will sell or
redeem Creation Units entirely on a cash or in kind basis (whether
for a given day or a given order), the key consideration will be the
benefit that would accrue to the Fund and its investors. For
instance, in bond transactions, the Adviser may be able to obtain
better execution than Share purchasers because of the Adviser's or
Sub-adviser's size, experience and potentially stronger
relationships in the fixed income markets. Purchases of Creation
Units either on an all cash basis or in kind are expected to be
neutral to the Funds from a tax perspective. In contrast, cash
redemptions typically require selling portfolio holdings, which may
result in adverse tax consequences for the remaining Fund
shareholders that would not occur with an in kind redemption. As a
result, tax considerations may warrant in kind redemptions.
\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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10. Each Business Day, before the open of trading on a the primary
listing Exchange, each Fund will cause to be published through the NSCC
the names and quantities of the instruments comprising the Deposit
Instruments and the Redemption Instruments, as well as the estimated
Cash Amount (if any), for that day. The list of Deposit Instruments and
the list of Redemption Instruments will apply until new lists are
announced on the following Business Day, and there will be no intra-day
changes to the lists except to correct errors in the published lists.
11. Shares will be listed and traded on an Exchange. It is expected
that one or more member firms of an Exchange will be designated to act
as a market maker and maintain a market for Shares trading on the
Exchange. Prices of Shares trading on an Exchange will be based on the
current bid/ask market. Shares sold in the secondary market will be
subject to customary brokerage commissions and charges.
12. Applicants expect that purchasers of Creation Units will
include institutional investors, arbitrageurs, traders and other market
participants. Exchange specialists or market makers also may purchase
Creation Units for use in market-making activities. Applicants expect
that secondary market purchasers of Shares will include both
institutional investors and retail investors.\13\Applicants expect that
the price at which Shares trade will be disciplined by arbitrage
opportunities created by the option to continually purchase or redeem
Creation Units at their NAV, which should ensure that Shares will not
trade at a material discount or premium in relation to their NAV.
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\13\ Shares will be registered in book-entry form only. DTC or
its nominee will be the registered owner of all outstanding Shares.
DTC or DTC Participants will maintain records reflecting beneficial
owners of Shares.
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13. Shares will not be individually redeemable. To redeem, an
investor must accumulate enough Shares to constitute a Creation Unit.
Redemption orders must be placed by or through an Authorized
Participant.
14. For the Long/Short Funds and 130/30 Funds, the Adviser will
provide full portfolio holdings disclosure on a daily basis on the
Funds publicly available website (the ``Website'') and has developed an
``IIV File,'' which it will use to disclose the Funds'' full portfolio
holdings, including short positions. Before the opening of business on
each Business Day, the Trust, Adviser or index receipt agent, will make
the IIV File available by email upon request. Applicants state that
given either the IIV File or the Website disclosure,\14\ anyone will be
able to know in real time the intraday value of the Long/Short Funds
and 130/30 Funds.\15\ With respect to the Long/Short Funds and 130/30
Funds, the investment characteristics of any financial instruments and
short positions used to achieve short and long exposures will be
described in sufficient detail for market participants to understand
the principal investment strategies of the Funds and to permit informed
trading of their Shares.
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\14\ The information on the Website will be the same as that
disclosed to Authorized Participants in the IIV File, except that
(1) the information provided on the Website will be formatted to be
reader-friendly and (2) the portfolio holdings data on the Website
will be calculated and displayed on a per Fund basis, while the
information in the IIV File will be calculated and displayed on a
per Creation Unit basis.
\15\ The primary listing Exchange or another independent third
party will disseminate, every 15 seconds during its regular trading
hours, through the facilities of the Consolidated Tape Association,
the Indicative Intra-Day Value (``IIV'') for each Fund, on a per
Share basis.
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15. Neither the Trust nor any Fund will be advertised, marketed or
otherwise held out as a traditional open-end investment company or a
mutual fund. Instead, each Fund will be
[[Page 58596]]
marketed as an ``ETF,'' an ``investment company,'' a ``fund,'' or a
``trust.'' All marketing materials that describe the features or method
of obtaining, buying or selling Creation Units or refer to
redeemability, will prominently disclose that (1) Shares are not
individually redeemable and that the owners of Shares may purchase or
redeem Shares from the Fund in Creation Units only, and (2) the
purchase and sale price of individual Shares trading on an Exchange may
be below, at, or above the most recently calculated NAV for such
Shares. The same approach will be followed in the shareholder reports
and other investor educational materials issued or circulated in
connection with the Shares. The Funds will provide copies of their
annual and semi-annual shareholder reports to DTC Participants for
distribution to shareholders.
Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the Act for an
exemption from sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of the Act
and rule 22c-1 under the Act, under sections 6(c) and 17(b) of the Act
for an exemption from sections 17(a)(1) and 17(a)(2) of the Act, and
under section 12(d)(1)(J) of the Act for an exemption from sections
12(d)(1)(A) and 12(d)(1)(B) of the Act.
2. Section 6(c) of the Act provides that the Commission may exempt
any person, security or transaction, or any class of persons,
securities or transactions, from any provision of the Act, if and to
the extent that such exemption is necessary or appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Act.
Section 17(b) of the Act authorizes the Commission to exempt a proposed
transaction from section 17(a) of the Act if evidence establishes that
the terms of the transaction, including the consideration to be paid or
received, are reasonable and fair and do not involve overreaching on
the part of any person concerned, and the proposed transaction is
consistent with the policies of the registered investment company and
the general provisions of the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may exempt any person, security, or
transaction, or any class or classes of persons, securities or
transactions, from any provisions of section 12(d)(1) if the exemption
is consistent with the public interest and the protection of investors.
Sections 5(a)(1) and 2(a)(32) of the Act
3. Section 5(a)(1) of the Act defines an ``open-end company'' as a
management investment company that is offering for sale or has
outstanding any redeemable security of which it is the issuer. Section
2(a)(32) of the Act defines a redeemable security as any security,
other than short-term paper, under the terms of which the owner, upon
its presentation to the issuer, is entitled to receive approximately
his proportionate share of the issuer's current net assets, or the cash
equivalent. Because Shares will not be individually redeemable,
applicants request an order that would permit the Funds to register as
open-end management investment companies and issue Shares that are
redeemable in Creation Units only. Applicants state that investors may
purchase Shares in Creation Units and redeem Creation Units from each
Fund. Applicants further state that because the market price of Shares
will be disciplined by arbitrage opportunities, investors should be
able to buy and sell Shares in the secondary market at prices that do
not vary materially 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 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
investment company 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 Trust assets and will not result in dilution of an
investment in Shares, and (b) to the extent different prices exist
during a given trading day, or from day to day, such variances occur as
a result of third party market forces, such as supply and demand.
Therefore, applicants assert that secondary market transactions in
Shares will not lead to discrimination or preferential treatment among
purchasers. Finally, applicants contend that the proposed distribution
system will be orderly because competitive forces will ensure that the
difference between the market price of Shares and their NAV remains
narrow.
Section 22(e)
7. Section 22(e) of the Act generally prohibits a registered
investment company from suspending the right of redemption or
postponing the date of payment of redemption proceeds for more than
seven days after the tender of a security for redemption. Applicants
observe that the settlement of redemptions for the Foreign Funds will
be contingent not only on the settlement cycle of the U.S. securities
markets, but also on the delivery cycles in local markets for the
underlying foreign securities held by the Foreign Funds. Applicants
believe that under certain circumstances, the delivery cycles for
transferring Portfolio Investments to redeeming investors, coupled with
local market holiday schedules, will require a delivery process of up
to 14 calendar days. Applicants therefore request relief from section
22(e) in order to provide for payment or satisfaction of redemptions
within the maximum number of calendar days required for such payment or
satisfaction in the principal local markets where transactions in the
Portfolio Investments of each Foreign Fund customarily clear and
settle, but in all cases no later than 14 calendar days following the
tender of a Creation Unit.\16\ With respect to
[[Page 58597]]
Future Funds that are Foreign Funds, applicants seek the same relief
from section 22(e) only to the extent that circumstances exist similar
to those described in the application.
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\16\ Applicants acknowledge that relief obtained from the
requirements of section 22(e) will not affect any obligations
applicants may have under rule 15c6-1 under the Exchange Act. Rule
15c6-1 requires that most securities transactions be settled within
three business days of the trade date.
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8. Applicants submit that section 22(e) was designed to prevent
unreasonable, undisclosed and unforeseen delays in the actual payment
of redemption proceeds. Applicants state that allowing redemption
payments for Creation Units of a Foreign Fund to be made within 14
calendar days would not be inconsistent with the spirit and intent of
section 22(e). Applicants state that the SAI will disclose those local
holidays (over the period of at least one year following the date of
the SAI), if any, that are expected to prevent the delivery of
redemption proceeds in seven calendar days, and the maximum number of
days, up to 14 calendar days, needed to deliver the proceeds for each
affected Foreign Fund. Applicants are not seeking relief from section
22(e) with respect to Foreign Funds that do not effect creations and
redemptions of Creation Units in-kind.
Section 12(d)(1)
9. Section 12(d)(1)(A) of the Act, in relevant part, prohibits a
registered investment company from acquiring securities of an
investment company if such securities represent more than 3% of the
total outstanding voting stock of the acquired company, more than 5% of
the total assets of the acquiring company, or, together with the
securities of any other investment companies, more than 10% of the
total assets of the acquiring company. Section 12(d)(1)(B) of the Act
prohibits a registered open-end investment company, its principal
underwriter or any other broker or dealer from selling the investment
company's shares to another investment company if the sale will cause
the acquiring company to own more than 3% of the acquired company's
voting stock, or if the sale will cause more than 10% of the acquired
company's voting stock to be owned by investment companies generally.
10. Applicants request an exemption to permit management investment
companies (``Acquiring Management Companies'') and unit investment
trusts (``Acquiring Trusts'') registered under the Act that are not
sponsored or advised by the Adviser and are not part of the same
``group of investment companies,'' as defined in section
12(d)(1)(G)(ii) of the Act, as the Funds (collectively, ``Acquiring
Funds'') to acquire Shares beyond the limits of section 12(d)(1)(A). In
addition, applicants seek relief to permit the Funds, the Distributor,
and any broker-dealer that is registered under the Exchange Act to sell
Shares to Acquiring Funds in excess of the limits of section
12(d)(1)(B).
11. Each Acquiring Management Company will be advised by an
investment adviser within the meaning of section 2(a)(20)(A) of the Act
(the ``Acquiring Fund Adviser'') and may be sub-advised by one or more
investment advisers within the meaning of section 2(a)(20)(B) of the
Act (each an ``Acquiring Fund Sub-adviser''). Any Acquiring Fund
Adviser or Acquiring Fund Sub-adviser will be registered under the
Advisers Act. Each Acquiring Trust will be sponsored by a sponsor
(``Sponsor'').
12. Applicants submit that the proposed conditions to the requested
relief adequately address the concerns underlying the limits in section
12(d)(1)(A) and (B), which include concerns about undue influence by a
fund of funds over underlying funds, excessive layering of fees and
overly complex fund structures. Applicants believe that the requested
exemption is consistent with the public interest and the protection of
investors.
13. Applicants believe that neither the Acquiring Funds nor any
Acquiring Fund Affiliate would be able to exert undue influence over
the Funds or any Fund Affiliates.\17\ To limit the control that an
Acquiring Fund may have over a Fund, applicants propose a condition
prohibiting an Acquiring Fund Adviser or a Sponsor, any person
controlling, controlled by, or under common control with the Acquiring
Fund Adviser or Sponsor, and any investment company or issuer that
would be an investment company but for section 3(c)(1) or 3(c)(7) of
the Act that is advised or sponsored by the Acquiring Fund Adviser or
Sponsor, or any person controlling, controlled by, or under common
control with the Acquiring Fund Adviser or Sponsor (``Acquiring Fund's
Advisory Group'') from controlling (individually or in the aggregate) a
Fund within the meaning of section 2(a)(9) of the Act. The same
prohibition would apply to any Acquiring Fund 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 (``Sub-
adviser Group''). Applicants propose other conditions to limit the
potential for undue influence over the Funds, including that no
Acquiring Fund or Acquiring Fund Affiliate (except to the extent it is
acting in its capacity as an investment adviser to a Fund) will cause a
Fund to purchase a security in an offering of securities during the
existence of an underwriting or selling syndicate of which a principal
underwriter is an Underwriting Affiliate (``Affiliated Underwriting'').
An ``Underwriting Affiliate'' is a principal underwriter in any
underwriting or selling syndicate that is an officer, director, member
of an advisory board, Acquiring Fund Adviser, Acquiring Fund Sub-
adviser, Sponsor, or employee of the Acquiring Fund, or a person of
which any such officer, director, member of an advisory board,
Acquiring Fund Adviser, Acquiring Fund Sub-adviser, Sponsor, or
employee is an affiliated person (except that any person whose
relationship to the Fund is covered by section 10(f) of the Act is not
an Underwriting Affiliate).
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\17\ An ``Acquiring Fund Affiliate'' is the Acquiring Fund
Adviser, Acquiring Fund Sub-adviser, any Sponsor, promoter, or
principal underwriter of an Acquiring Fund, and any person
controlling, controlled by, or under common control with any of
those entities. A ``Fund Affiliate'' is the investment adviser,
promoter, or principal underwriter of a Fund and any person
controlling, controlled by or under common control with any of those
entities.
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14. Applicants do not believe that the proposed arrangement
involves excessive layering of fees. The board of directors or trustees
of any Acquiring Management Company, including a majority of the
disinterested directors or trustees, will find that the advisory fees
charged 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, except as provided in condition 9, an
Acquiring Fund Adviser or a trustee or Sponsor of an Acquiring Trust
will waive fees otherwise payable to it by the Acquiring Fund in an
amount at least equal to any compensation (including fees received
pursuant to any plan adopted by a Fund under rule 12b-1 under the Act)
received by the Acquiring Fund Adviser, trustee or Sponsor to the
Acquiring Trust or an affiliated person of the Acquiring Fund Adviser,
trustee
[[Page 58598]]
or Sponsor, from the Fund in connection with the investment by the
Acquiring Fund in the Fund. Applicants state that any sales loads or
service fees charged with respect to shares of an Acquiring Fund will
not exceed the limits applicable to a fund of funds set forth in NASD
Conduct Rule 2830.\18\
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\18\ Any references to NASD Conduct Rule 2830 include any
successor or replacement rule to NASD Conduct Rule 2830 that may be
adopted by the Financial Industry Regulatory Authority.
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15. Applicants submit condition 16 addresses concerns over
meaninglessly complex arrangements. Under condition 16, no Fund may
acquire securities of any investment company or company relying on
section 3(c)(1) or 3(c)(7) of the Act in excess of the limits contained
in section 12(d)(1)(A) of the Act, except to the extent permitted by
exemptive relief from the Commission permitting the Fund to purchase
shares of a money market fund for short-term cash management purposes.
To ensure that Acquiring Funds comply with the terms and conditions of
the requested relief from section 12(d)(1), any Acquiring Fund that
intends to invest in a Fund in reliance on the requested order will be
required to enter into an agreement (``Participation Agreement'')
between the Fund and the Acquiring Fund. The Participation Agreement
will require the Acquiring Fund to adhere to the terms and conditions
of the requested order and participate in the proposed transactions in
a manner that addresses concerns regarding the requested relief from
section 12(d)(1). The Participation Agreement also will include an
acknowledgement from the Acquiring Fund that it may rely on the
requested order only to invest in Funds and not in any other investment
company.
16. Applicants also note that a Fund may choose to reject a direct
purchase of Shares by an Acquiring Fund. To the extent that an
Acquiring Fund purchases Shares in the secondary market, a Fund would
still retain its ability to reject initial purchases of Shares made in
reliance on the requested order by declining to enter into the
Participation Agreement prior to any investment by an Acquiring Fund in
excess of the limits of section 12(d)(1)(A).
Sections 17(a)(1) and (2) of the Act
17. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such a person (``second-tier affiliate''), from selling any security or
other property to or acquiring any security or other property from the
company. Section 2(a)(3) of the Act defines ``affiliated person'' of
another 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, 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 defines control as the power
to exercise a controlling influence over the management of policies of
a company. It also provides that a control relationship will be
presumed where one person owns more than 25% of a company's voting
securities. The Funds may be deemed to be controlled by 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 (an ``Affiliated
Fund'').
18. Applicants request an exemption from section 17(a) of the Act
pursuant to sections 17(b) and 6(c) of the Act to permit persons to
effectuate in-kind purchases and redemptions with a Fund when they are
affiliated persons or second-tier affiliates of the Fund solely by
virtue of one or more of the following: (1) Holding 5% or more, or more
than 25%, of the outstanding Shares of one or more Funds; (2) having an
affiliation with a person with an ownership interest described in (1);
or (3) holding 5% or more, or more than 25%, of the shares of one or
more Affiliated Funds.
19. Applicants assert that no useful purpose would be served by
prohibiting these types of affiliated persons from acquiring or
redeeming Creation Units through in-kind transactions. Except for
permitted cash-in-lieu amounts, the Deposit Instruments and Redemption
Instruments will be the same for all purchasers and redeemers
regardless of their identity. The deposit procedures for both in-kind
purchases and in-kind redemptions of Creation Units will be the same
for all purchases and redemptions, regardless of size or number.
Deposit Instruments and Redemption Instruments will be valued in the
same manner as Portfolio Investments are valued for purposes of
calculating NAV. Applicants submit that, by using the same standards
for valuing Portfolio Investments as are used for calculating the value
of Deposit Instruments and Redemption Instruments, the Fund will ensure
that its NAV will not be adversely affected by such transactions.
Applicants also believe that in-kind purchases and redemptions will not
result in self-dealing or overreaching of the Fund.
20. Applicants also seek relief from section 17(a) to permit a Fund
that is an affiliated person or second-tier affiliate of an Acquiring
Fund to sell its Shares to and redeem its Shares from an Acquiring
Fund, and to engage in the accompanying in-kind transactions with the
Acquiring Fund.\19\ Applicants state that the terms of the proposed
transactions will be fair and reasonable and will not involve
overreaching. Applicants note that any consideration paid by an
Acquiring Fund for the purchase or redemption of Shares directly from a
Fund will be based on the NAV of the Fund in accordance with policies
and procedures set forth in the Fund's registration statement.\20\
Further, absent the unusual circumstances discussed in the application,
the Deposit Instruments and Redemption Instruments available for a Fund
will be the same for all purchasers and redeemers, respectively and
will correspond pro rata to the Fund's Portfolio Investments, except as
described above. 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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\19\ To the extent that purchases and sales of Shares occur in
the secondary market and not through principal transactions directly
between an Acquiring Fund and a Fund, relief from section 17(a)
would not be necessary. However, the requested relief would apply to
direct sales of Shares in Creation Units by a Fund to an Acquiring
Fund and redemptions of those Shares. The requested relief also is
intended to cover the in-kind transactions that may 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
second-tier affiliate of an Acquiring Fund because the Adviser
provides investment advisory services to the Acquiring Fund.
\20\ Applicants acknowledge that receipt of compensation by (a)
an affiliated person of an Acquiring Fund, or an affiliated person
of such person, for the purchase by the Acquiring Fund of Shares or
(b) an affiliated person of a Fund, or an affiliated person of such
person, for the sale by the Fund of its Shares to an Acquiring Fund
may be prohibited by section 17(e)(1) of the Act. The Participation
Agreement also will include this acknowledgment.
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Applicants' Conditions
Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
ETF Relief
1. As long as the Funds operate in reliance on the requested order,
the Shares will be listed on an Exchange.
2. Neither the Trust nor any Fund will be advertised or marketed as
an open-end fund or a mutual fund. Any advertising material that
describes the
[[Page 58599]]
purchase or sale of Creation Units or refers to redeemability will
prominently disclose that Shares are not individually redeemable and
that owners of Shares may acquire those Shares from a Fund and tender
those Shares for redemption to a Fund in Creation Units only.
3. The website maintained for the Funds, which will be publicly
accessible at no charge, will contain on a per Share basis for each
Fund, the prior Business Day's NAV and the market closing price or the
midpoint of the bid/ask spread at the time of the calculation of such
NAV (``Bid/Ask Price''), and a calculation of the premium or discount
of the market closing price or Bid/Ask Price against such NAV.
4. The requested relief to permit ETF operations will expire on the
effective date of any Commission rule under the Act that provides
relief permitting the operation of index-based exchange-traded funds.
Section 12(d)(1) Relief
5. The members of an Acquiring Fund's Advisory Group will not
control (individually or in the aggregate) a Fund within the meaning of
section 2(a)(9) of the Act. The members of the Sub-adviser Group will
not control (individually or in the aggregate) a Fund within the
meaning of section 2(a)(9) of the Act. If, as a result of a decrease in
the outstanding voting securities of a Fund, an Acquiring Fund's
Advisory Group or Sub-adviser Group, each in the aggregate, becomes a
holder of more than 25% of the outstanding voting securities of a Fund,
it will vote its shares of the Fund in the same proportion as the vote
of all other holders of the Fund's shares. This condition does not
apply to the Sub-adviser Group with respect to a Fund for which the
Acquiring Fund Sub-adviser or a person controlling, controlled by, or
under common control with the Acquiring Fund Sub-adviser acts as the
investment adviser within the meaning of section 2(a)(20)(A) of the
Act.
6. No Acquiring Fund or Acquiring Fund Affiliate will cause any
existing or potential investment by the Acquiring Fund in a Fund to
influence the terms of any services or transactions between the
Acquiring Fund or Acquiring Fund Affiliate and the Fund or a Fund
Affiliate.
7. The board of directors or trustees of an Acquiring Management
Company, including a majority of the disinterested directors or
trustees, will adopt procedures reasonably designed to assure that the
Acquiring Fund Adviser and any Acquiring Fund Sub-adviser are
conducting the investment program of the Acquiring Management Company
without taking into account any consideration received by the Acquiring
Management Company or an Acquiring Fund Affiliate from a Fund or a Fund
Affiliate in connection with any services or transactions.
8. Once an investment by an Acquiring Fund in the Shares of a Fund
exceeds the limit in section 12(d)(1)(A)(i) of the Act, the Board,
including a majority of the disinterested Board members, will determine
that any consideration paid by a Fund to the Acquiring Fund or an
Acquiring Fund Affiliate in connection with any services or
transactions: (i) Is fair and reasonable in relation to the nature and
quality of the services and benefits received by the Fund; (ii) is
within the range of consideration that the Fund would be required to
pay to another unaffiliated entity in connection with the same services
or transactions; and (iii) does not involve overreaching on the part of
any person concerned. This condition does not apply with respect to any
services or transactions between a Fund and its investment adviser(s),
or any person controlling, controlled by, or under common control with
such investment adviser(s).
9. An Acquiring Fund Adviser or a trustee or Sponsor of an
Acquiring Trust will waive fees otherwise payable to it by the
Acquiring Management Company or Acquiring Trust in an amount at least
equal to any compensation (including fees received pursuant to any plan
adopted by a Fund under rule 12b-l under the Act) received from a Fund
by the Acquiring Fund Adviser or trustee or Sponsor to the Acquiring
Trust or an affiliated person of the Acquiring Fund Adviser, trustee or
Sponsor, other than any advisory fees paid to the Acquiring Fund
Adviser or trustee or Sponsor, or an affiliated person of the Acquiring
Fund Adviser, trustee or Sponsor by the Fund, in connection with the
investment by the Acquiring Management Company or Acquiring Trust in
the Fund. Any Acquiring Fund Sub-adviser will waive fees otherwise
payable to the Acquiring Fund Sub-adviser, directly or indirectly, by
the Acquiring Management Company in an amount at least equal to any
compensation received from a Fund by the Acquiring Fund Sub-adviser, or
an affiliated person of the Acquiring Fund Sub-adviser, other than any
advisory fees paid to the Acquiring Fund Sub-adviser or its affiliated
person by the Fund, in connection with the investment by the Acquiring
Management Company in the Fund made at the direction of the Acquiring
Fund Sub-adviser. In the event that the Acquiring Fund Sub-adviser
waives fees, the benefit of the waiver will be passed through to the
Acquiring Management Company.
10. No Acquiring Fund or Acquiring Fund Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Fund)
will cause a Fund to purchase a security in any Affiliated
Underwriting.
11. The Board, including a majority of the disinterested Board
members, will adopt procedures reasonably designed to monitor any
purchases of securities by a Fund in an Affiliated Underwriting once an
investment by the Acquiring Fund in the Shares of the Fund exceeds 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: (i) whether the purchases were consistent with the investment
objectives and policies of the Fund; (ii) how the performance of
securities purchased in an Affiliated Underwriting compares to the
performance of comparable securities purchased during a comparable
period of time in underwritings other than Affiliated Underwritings or
to a benchmark such as a comparable market index; and (iii) whether the
amount of securities purchased by the Fund in Affiliated Underwritings
and the amount purchased directly from an Underwriting Affiliate have
changed significantly from prior years. The Board will take any
appropriate actions based on its review, including, if appropriate, the
institution of procedures designed to assure that purchases of
securities in Affiliated Underwritings are in the best interests of
shareholders.
12. Each Fund will maintain and preserve permanently in an easily
accessible place a written copy of the procedures described in the
preceding condition, and any modifications to such procedures, and will
maintain and preserve for a period of not less than six years from the
end of the fiscal year in which any purchase in an Affiliated
Underwriting occurred, the first two years in an easily accessible
place, a written record of each purchase of securities in Affiliated
Underwritings, once an investment by an Acquiring Fund in the Shares of
the Fund exceeds the limits of section 12(d)(l)(A)(i) of the Act,
setting forth from whom the securities were acquired, the identity of
the underwriting syndicate's members,
[[Page 58600]]
the terms of the purchase, and the information or materials upon which
the Board's determinations were made.
13. Before investing in a Fund in excess of the limits in section
12(d)(1)(A), the Acquiring Fund and the Fund will execute a
Participation Agreement stating, without limitation, that their boards
of directors or trustees and their investment advisers, or the trustee
and Sponsor of an Acquiring Trust, as applicable, understand the terms
and conditions of the order, and agree to fulfill their
responsibilities under the order. At the time of its investment in
Shares of a Fund in excess of the limit in section 12(d)(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 names of
each Acquiring Fund Affiliate and Underwriting Affiliate. The Acquiring
Fund will notify the Fund of any changes to the list of names as soon
as reasonably practicable after a change occurs. The Fund and the
Acquiring Fund will maintain and preserve a copy of the order, the
Participation Agreement, and the list with any updated information for
the duration of the investment and for a period of not less than six
years thereafter, the first two years in an easily accessible place.
14. Before approving any advisory contract under section 15 of the
Act, the board of directors or trustees of each Acquiring Management
Company, including a majority of the disinterested directors or
trustees, will find that the advisory fees charged under such advisory
contract are based on services provided that will be in addition to,
rather than duplicative of, the services provided under the advisory
contract(s) of any Fund in which the Acquiring Management Company may
invest. These findings and their basis will be recorded fully in the
minute books of the appropriate Acquiring Management Company.
15. Any sales charges and/or service fees charged with respect to
shares of an Acquiring Fund will not exceed the limits applicable to a
fund of funds as set forth in NASD Conduct Rule 2830.
16. No Fund will acquire securities of any investment company or
company relying on sections 3(c)(1) or 3(c)(7) of the Act in excess of
the limits contained in section 12(d)(1)(A) of the Act, except to the
extent permitted by exemptive relief from the Commission that allows
the Fund to purchase shares of a money market fund for short-term cash
management purposes.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-23317 Filed 9-20-12; 8:45 am]
BILLING CODE 8011-01-P