[Federal Register Volume 77, Number 189 (Friday, September 28, 2012)]
[Notices]
[Pages 59683-59686]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-23858]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30211; 812-13968]
Northern Trust Investments, Inc., et al.; Notice of Application
September 24, 2012.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application to amend a prior order under section
6(c) of the Investment Company Act of 1940 (``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, 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) of the Act for an exemption from sections
12(d)(1)(A) and 12(d)(1)(B) of the Act.
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SUMMARY OF APPLICATION: Applicants seek to amend the Prior Order \1\ to
offer certain exchange-traded funds based on equity and/or fixed income
securities indexes for which Northern Trust Investments, Inc.
(``Adviser'') or an Affiliated Person (as defined below) is an index
provider (each a ``Self Indexing Fund'').
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\1\ Northern Trust Investments, Inc., et al., Investment Company
Act Release Nos. 29752 (Aug. 10, 2011) (notice) and 29782 (Sept. 6,
2011) (order).
APPLICANTS: Adviser, FlexShares Trust (``Trust''), and Foreside Fund
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Services, LLC (``Foreside'').
Filing Dates: The application was filed on October 13, 2011, and
amended on April 16, 2012 and August 16, 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
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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
22, 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 may request
notification of a hearing by writing to the Commission's Secretary.
ADDRESSES: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090. The Trust and
the Adviser, 50 S. LaSalle Street, Chicago, IL 60603; Foreside, Two
Portland Square, First Floor, Portland, ME 04101.
FOR FURTHER INFORMATION CONTACT: Jean E. Minarick, Senior Counsel, at
(202) 551-6811, 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 as an open-end management investment
company under the Act and organized as a Maryland statutory trust.
Northern Trust Investments, Inc., an investment adviser registered
under the Investment Advisers Act of 1940 (``Advisers Act''), serves as
investment adviser to the Trust. Any Adviser (as defined below) will be
registered as an adviser under the Advisers Act. The Adviser may retain
sub-advisers (``Sub-Advisers'') to manage the assets of one or more
Funds. Any Sub-Adviser will be registered or not subject to
registration as an adviser under the Advisers Act. The Trust will enter
into a distribution agreement with one or more distributors (each, a
``Distributor''). Foreside is, and any other Distributor will be, a
broker-dealer registered under the Securities Exchange Act of 1934
(``Exchange Act'').
2. The applicants are currently permitted to offer open-end
management investment companies that are exchange traded funds (each, a
``Fund'') tracking the performance of equity and fixed income indexes
developed by third parties that are not ``affiliated persons'' (as such
term is defined in section 2(a)(3) of the Act), or affiliated persons
of affiliated persons, of the Trust, the Adviser, any Sub-Adviser, the
Distributor or a promoter of a Fund. Applicants seek an order amending
the Prior Order (``Amended Order'') that would allow them to offer
Funds based on equity and/or fixed income securities indexes for which
the Adviser or an affiliated person, or an affiliated person of an
affiliated person, of the Trust, the Adviser, the Distributor,
promoter, or any Sub-Adviser to the Fund (each other than the Adviser,
an ``Affiliated Person'') is an index provider (as defined below)
(each, a ``Self Indexing Fund''). Applicants request that the order
apply to any Self Indexing Funds that are advised by the Adviser or an
entity controlling, controlled by or under common control with the
Adviser (with the Adviser, each an ``Adviser'') and operate pursuant to
the terms and conditions of the Prior Order, as amended.\2\ The
applicants also seek to amend the Prior Order to revise the terms and
conditions concerning the purchase and redemption of shares of the
Funds. Applicants believe that the requested relief continues to meet
the necessary exemptive standards.
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\2\ All entities that currently intend to rely on the Amended
Order are named as applicants. Any other entity that relies on the
Amended Order in the future will comply with the terms and
conditions of the application. For purposes of this notice, the term
``Trust'' also includes any other open-end series management
investment company registered under the Act and advised by the
Adviser that complies with the terms and conditions of the
application.
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3. Each underlying index for a Self Indexing Fund (``Underlying
Index'') will be a rules based index comprised of equity and/or fixed
income securities (including depositary receipts). The Adviser or an
Affiliated Person, in its capacity as the index provider of an
Underlying Index (the ``Index Provider''), will create and/or own a
proprietary, rules based methodology (``Rules-Based Process'') to
create indexes for use by the Self Indexing Funds and other
investors.\3\ The Adviser, if it is the Index Provider, will be the
owner of the Underlying Indexes and all related intellectual property
related thereto, or the Adviser will enter into a license agreement
with any other Affiliated Person who is an Index Provider for the use
of the Underlying Indexes and related intellectual property at no cost
to the Trust and the Self Indexing Funds.
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\3\ The Underlying Indexes may be made available to registered
investment companies, as well as separately managed accounts of
institutional investors and privately offered funds that are not
deemed to be ``investment companies'' in reliance on section 3(c)(1)
or 3(c)(7) of the Act and other pooled investment vehicles for which
the Adviser acts as adviser or subadviser (``Affiliated Accounts'')
as well as other such registered investment companies, separately
managed accounts, privately offered funds and other pooled
investment vehicles for which it does not act either as adviser or
subadviser (``Unaffiliated Accounts''). The Affiliated Accounts and
the Unaffiliated Accounts, like the Self Indexing Funds, would seek
to track the performance of one or more Underlying Index(es) by
investing in the constituents of such Underlying Index(es) or a
representative sample of such constituents of the Underlying Index.
To the extent prohibited by Section 17(a) of the Act and consistent
with the relief requested from section 17(a), the Affiliated
Accounts will not engage in transactions in aggregations of Shares
(``Creation Units'') with a Self Indexing Fund.
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4. Applicants contend that any potential conflicts of interest
arising from the fact that the Index Provider will be the Adviser or an
Affiliated Person will not have any impact on the operation of the Self
Indexing Funds because the Underlying Indexes will maintain
transparency, the Self Indexing Funds' Deposit Securities and Fund
Securities will be transparent, and the Adviser, or any Affiliated
Person who is an Index Provider, any Sub-Adviser and the Self Indexing
Funds each will adopt policies and procedures to address any potential
conflicts of interest (``Policies and Procedures''). The Index Provider
will publish in the public domain, including on its Web site and/or the
Self Indexing Funds' Web site (``Web site''), the rules that govern the
construction and maintenance of each of its Underlying Indexes.
Applicants believe that this public disclosure will prevent the Adviser
from possessing any advantage over other market participants by virtue
of being the Index Provider or being affiliated with an Index Provider.
Applicants note that the identity and Underlying Index weightings of
the securities that meet the criteria of the Rules-Based Process,
including the selection criteria, will be freely available.
5. Like other index providers, the Index Provider may modify the
Rules-Based Process in the future. The Rules-Based Process could be
modified, for example, to reflect changes in the underlying market
tracked by an Underlying Index, the way in which the Rules-Based
Process takes into account market events or to change the way a
corporate action, such as a stock split, is handled. Such changes would
not take effect until the Index Provider has given (a) the Calculation
Agent (defined below) reasonable prior written notice of such rule
changes, and (b) the investing public at least sixty (60) days
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published notice that such changes will be implemented. Underlying
Indexes may have reconstitution dates and rebalance dates that occur on
a periodic basis more frequently than once yearly, but no more
frequently than monthly.
6. As owner of the Underlying Indexes, the Index Provider will
enter into an agreement (``Calculation Agent Agreement'') with a third
party to act as ``Calculation Agent.'' The Calculation Agent will be
solely responsible for the calculation and maintenance of each
Underlying Index, as well as the dissemination of the values of each
Underlying Index. The Calculation Agent will not be an affiliated
person, as such term is defined in the Act, or an affiliated person of
an affiliated person, of the Self Indexing Funds, the Adviser, any Sub-
Adviser, any promoter of a Fund or the Distributor.
7. The Adviser, any Affiliated Person who is an Index Provider, any
Sub-Adviser and the Self Indexing Funds each will adopt and implement
Policies and Procedures to address any potential conflicts of interest.
Among other things, the Policies and Procedures will be designed to
limit or prohibit communication with respect to issues/information
related to the maintenance, calculation and reconstitution of the
Underlying Indexes between the personnel of the Index Provider who have
responsibility for the Underlying Indexes and Rules-Based Process
(``Index Personnel') and the personnel who have responsibility for the
management of the Self Indexing Funds or any Affiliated Accounts. The
Index Personnel (i) will not have any responsibility for the management
of Self Indexing Funds or any Affiliated Account, (ii) will be
expressly prohibited from sharing this information with any employees
of the Adviser or those of any Sub-Adviser, that have responsibility
for the management of the Self Indexing Funds or any Affiliated Account
until such information is publicly announced, and (iii) will be
expressly prohibited from sharing or using this non-public information
in any way except in connection with the performance of their
respective duties. In addition, the Adviser has, and any Sub-Adviser
will have, pursuant to Rule 206(4)-7 under the Advisers Act, written
policies and procedures designed to prevent violations of the Advisers
Act and the rules under the Advisers Act. Also, the Adviser has adopted
a code of ethics pursuant to rule 17j-1 under the Act and rule 204A-1
under the Advisers Act (``Code of Ethics''). Any Sub-Adviser will be
required to adopt a Code of Ethics and provide the Trust with the
certification required by rule 17j-1 under the Act.
8. The Self Indexing Funds, except as otherwise noted herein, will
operate in a manner identical to the operation of the other Funds.
Applicants agree that any order of the Commission granting the
requested relief will be subject to all of the terms and conditions in
the Prior Order, except as described in the application.
Additional Changes to the Prior Order
1. Applicants also seek to amend the Prior Order to revise the
terms and conditions concerning the purchase and redemption of shares
of the Funds. Under the Amended Order, the discussion of purchases and
redemptions of Creation Units in paragraphs 1-9 under Section IV.C. of
the Prior Application, as well as the last two sentences of the first
paragraph and the second paragraph under Section IV.E, is replaced with
the following:
Each Fund will sell Shares to investors in Creation Units through
the Distributor on a continuous basis at net asset value (``NAV'') per
share next determined after an order in proper form is received. For
Funds utilizing an in-kind purchase process shares will be purchased in
Creation Units in exchange for the deposit, by the purchaser, of a
particular portfolio of specified instruments, i.e., Deposit
Securities, designated by the Adviser, together with the deposit or
refund of a specified cash payment, as determined under the procedures
described below, as the case may be (any such cash, collectively with
the Deposit Securities, a ``Fund Deposit''). Each Fund will sell and
redeem Creation Units on each day that a Fund is open, which includes
any day that the Fund is required to be open under Section 22(e) of the
Act (``Business Day''). The Funds may also be open on days not required
under Section 22(e) of the Act, including days that a national
securities exchange, as defined in Section 2(a)(26) of the Act, on
which Shares are traded (``Exchange'') is closed. The NAV of each Fund
will normally be determined as of the close of the regular trading
session on the New York Stock Exchange (``NYSE'') (ordinarily 4:00 p.m.
Eastern time) on each Business Day.\4\ The NAV of each Fund that
invests (1) primarily in fixed income securities and seek investment
returns that closely correspond to the price and performance of a fixed
income indices and (2) in equity securities or fixed income securities
traded in foreign markets and seeks investment results that closely
correspond to the price and yield of underlying indices whose component
securities include such securities (``International Funds'') may be
determined prior to 4:00 p.m. Eastern time on each Business Day.
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\4\ Applicants note that each Fund will have in place procedures
that provide for the fair valuation of securities and other
instruments in its portfolio (``Portfolio Securities'') in
calculating NAV.
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In order to keep costs low and permit each Fund to be as full
invested as possible, Shares will be purchased and redeemed in Creation
Units and generally on an in-kind basis. Accordingly, 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 Deposit Securities and
shareholders redeeming their shares will receive an in-kind transfer of
specified instruments (``Fund Securities'').\5\ On any given Business
Day, the names and quantities of the instruments that constitute the
Deposit Securities and the names and quantities of the instruments that
constitute the Fund Securities will be identical, unless the Fund is
Rebalancing (as defined below). In addition, the Deposit Securities and
the Fund Securities will correspond pro rata to the positions in the
Fund's portfolio (including cash positions),\6\ 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; \7\ (c)
TBA Transactions, derivatives and other positions that cannot be
transferred in kind \8\ will be excluded from the Deposit Securities
and Fund Securities; \9\ (d) to
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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 NAV attributable
to a Creation Unit and the aggregate market value of the Deposit
Securities or Fund Securities 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
Component'').
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\5\ The Funds must comply with the federal securities laws in
accepting Deposit Securities and satisfying redemptions with Fund
Securities, including that the Deposit Securities and Fund
Securities are sold in transactions that would be exempt from
registration under the Securities Act of 1933 (``Securities Act'').
In accepting Deposit Securities and satisfying redemptions with Fund
Securities that are restricted securities eligible for resale
pursuant to rule 144A under the Securities Act, the Funds will
comply with the conditions of rule 144A.
\6\ The portfolio used for this purpose will be the same
portfolio used to calculate the Fund's NAV for that Business Day.
\7\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
\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
Securities and the Fund Securities, their value will be reflected in
the determination of the Cash Component (as 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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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 Component,
as described above; (b) if, on a given Business Day, the 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,\11\ the Fund determines to require the purchase
or redemption, as applicable, to be made entirely in cash; \12\ (d) if,
on a given Business Day, the 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 Securities or
Fund Securities, respectively, solely because: (i) Such instruments are
not eligible for transfer through either the NSCC Process or the DTC
Process; or (ii) in the case of International 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 the Fund permits an Authorized Participant to deposit or receive
(as applicable) cash in lieu of some or all of the Deposit Securities
or Fund Securities, 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 an
International Fund would be subject to unfavorable income tax treatment
if the holder receives redemption proceeds in kind.\13\
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\11\ An ``Authorized Participant'' is either (1) a
``Participating Party,'' i.e., a broker-dealer or other participant
in the Shares Clearing Process (as defined below) through the
Continuous Net Settlement System of the National Securities Clearing
Corporation (``NSCC''), or (2) a participant of The Depository Trust
Company, a limited purpose trust company organized under the laws of
the State of New York (``DTC,'' and such participant, a ``DTC
Participant''), which in either case has executed an agreement with
a Distributor, with respect to creations and redemptions of Creation
Units. The ``Shares Clearing Process'' refers to processes through
the Continuous Net Settlement System of the NSCC as such processes
have been enhanced to effect purchases and redemptions of Creation
Units.
\12\ 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 that Share purchasers because of the 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.
\13\ 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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Each Business Day, before the open of trading on a national
securities exchange as defined in Section 2(a)(26) of the Act on which
the Shares are listed (``Listing Exchange'), the Fund will cause to be
published through the NSCC the names and quantities of the instruments
comprising the Deposit Securities and the Fund Securities, as well as
the estimated Cash Component (if any), for that day.\14\ The list of
Deposit Securities and Fund Securities will apply until a new list is
announced on the following Business Day, and there will be no intra-day
changes to the list except to correct errors in the published list.
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\14\ If the Fund is Rebalancing, it may need to announce two
estimated Cash Components for that day, one for deposits and one for
redemptions.
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In order to defray the transaction expenses, including brokerage
costs, that will be incurred by a Fund when investors purchase or
redeem Creation Units, and other expenses, such as custody fees and
stamp taxes, each Fund will impose purchase or redemption transaction
fees (``Transaction Fees'') to be borne only by such purchasers or
redeemers. Where a Fund permits an in-kind purchaser to substitute cash
in lieu of depositing a portion of the Deposit Securities, the
purchaser may be assessed a higher Transaction Fee to cover the cost of
purchasing those securities. The exact amounts of such Transaction Fees
will be determined separately for each Fund. The Transaction Fee is
designed to protect the continuing shareholders of a Fund against the
dilutive costs associated with the transfer or purchase of Portfolio
Securities in connection with the purchase of Creation Units and with
the transfer or sale of Portfolio Securities in connection with the
redemption of Creation Units.
Transaction Fees will be limited to amounts that have been
determined by the Adviser to be appropriate and will take into account
transaction costs and associated with the relevant Deposit Securities
of the Funds. In all cases, such Transaction Fee will be limited in
accordance with requirements of the Commission applicable to management
investment companies offering redeemable securities.
Creation Units will be issued in aggregations of at least 25,000
Shares. Applicants recognize that each Share is issued by an investment
company and, accordingly, the acquisition of any Shares by an
investment company, whether acquired from the Fund or in the secondary
market, shall be subject to the restrictions of Section 12(d)(1) of the
Act except as permitted by an exemptive order that permits investment
companies to invest in a Fund beyond those limitations.
2. Finally, Applicants also seek to make certain conforming changes
to the Prior Application related to the changes set forth above.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-23858 Filed 9-27-12; 8:45 am]
BILLING CODE 8011-01-P