[Federal Register Volume 77, Number 244 (Wednesday, December 19, 2012)]
[Notices]
[Pages 75200-75207]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-30551]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30305; 812-13797]
AllianceBernstein Active ETFs, Inc., et al.; Notice of
Application
December 13, 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
[[Page 75201]]
2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act and rule 22c-1 under the
Act, under sections 6(c) and 17(b) of the Act for an exemption from
sections 17(a)(1) and 17(a)(2) of the Act, and under section
12(d)(1)(J) of the Act for an exemption from sections 12(d)(1)(A) and
12(d)(1)(B) of the Act.
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Applicants: AllianceBernstein Active ETFs, Inc. (``Corporation''),
AllianceBernstein L.P. (``Adviser''), and ALPS Distributors, Inc.
(``Distributor'').
SUMMARY: Summary of Application: Applicants request an order that would
permit: (a) series of certain open-end management investment companies
to issue shares (``Shares'') redeemable in large aggregations only
(``Creation Units''); (b) secondary market transactions in Shares to
occur at negotiated market prices; (c) certain series to pay redemption
proceeds, under certain circumstances, more than seven days from the
tender of Shares for redemption; (d) certain affiliated persons of the
series to deposit securities into, and receive securities from, the
series in connection with the purchase and redemption of Creation
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.\1\
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\1\ Capitalized terms not otherwise defined in this notice have
the same meaning ascribed to them in the application.
DATES: Filing Dates: The application was filed on July 16, 2010, and
amended on December 28, 2010, July 28, 2011, February 24, 2012, May 22,
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2012, September 20, 2012, and December 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 January 7, 2013, 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: 1345 Avenue of the
Americas, New York, NY 10105.
FOR FURTHER INFORMATION CONTACT: Courtney S. Thornton, Senior Counsel,
at (202) 551-6812 or David P. Bartels, 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 for 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 Corporation, a Maryland corporation, will register with the
Commission as an open-end management investment company under the Act.
Depending on, among other things, market conditions and anticipated
investor demand, the initial series of the Corporation (``Initial
Fund'') will be either Style Pure Equity ETF, which will seek to
achieve its investment objective by investing primarily in large-
capitalization publicly traded U.S. equity securities, or Treasury
Inflation Protected Securities ETF, which will invest primarily in
Treasury inflation protected securities.
2. The Adviser, a Delaware limited partnership registered as an
investment adviser under the Investment Advisers Act of 1940 (the
``Advisers Act''), will be the investment adviser to the Initial Fund.
Applicants state that the Adviser reserves the right to enter into sub-
advisory agreements with one or more investment advisers, each of which
will serve as sub-adviser to a Fund (each, a ``Sub-Adviser''). Each
Sub-Adviser will be registered as an investment adviser under the
Advisers Act.
3. The Corporation will enter into a distribution agreement with
the Distributor or one or more other principal underwriters or
distributors. The Distributor, a Colorado corporation, is, and each
other principal underwriter or distributor will be, a broker-dealer
(``Broker'') registered under the Securities Exchange Act of 1934
(``Exchange Act'') and will act as distributor and principal
underwriter for one or more of the Funds. No principal underwriter or
distributor is or will be affiliated with any Exchange (as defined
below). The principal underwriter or distributor of any Fund may be an
``affiliated person,'' or an affiliated person of an affiliated person,
of that Fund's Adviser and/or Sub-Adviser within the meaning of section
2(a)(3) of the Act.
4. Applicants are requesting relief to permit the Trust to create
and operate certain actively managed series of the Trust that offer
Shares with limited redeemability. Applicants request that the order
apply to the Initial Fund, any future additional series of the
Corporation and other open-end management investment companies, or
series thereof, that may be created in the future (``Future Funds,''
collectively with the Initial Fund, ``Funds''). Any Future Fund will
(a) be advised by the Adviser or an entity controlling, controlled by
or under common control with the Adviser and (b) comply with the terms
and conditions of the application.\2\ Each Fund will operate as an
actively managed exchange-traded fund (``ETF''). The Funds may invest
in equity securities or fixed income securities traded in the U.S. or
non-U.S. markets.\3\ Funds that invest all or a portion of their assets
in foreign equity and/or fixed income securities are ``Foreign Funds.''
Funds may invest in Depositary Receipts.\4\
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\2\ All entities that currently intend to rely on the order are
named as applicants. Any other entity that relies on the order in
the future will comply with the terms and conditions of the
application.
\3\ If a Fund invests in derivatives, then (a) the Fund's Board
will periodically review and approve the fund's use of derivatives
and how the Fund's investment adviser assesses and manages risk with
respect to the Fund's use of derivatives and (b) the Fund's
disclosure of its use of derivatives in its offering documents and
periodic reports will be consistent with relevant Commission and
staff guidelines.
\4\ A Fund will not invest in any Depositary Receipt that the
Adviser or Sub-Adviser deems to be illiquid or for which pricing
information is not readily available.
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5. The requested order also would permit management investment
companies (``Investing Management Companies'') and unit investment
trusts (``Investing Trusts,'' collectively with such Investing
Management Companies, ``Funds of Funds'') registered under the Act that
are not part of the same ``group of investment companies,'' within the
meaning of section 12(d)(1)(G)(ii) of the Act, as the Funds to acquire
Shares of the Funds beyond the limitations in section 12(d)(1)(A). The
requested order also would permit the Funds, any principal underwriter
for the Funds, and any Broker to sell Shares of the Funds beyond the
limitations in section 12(d)(1)(B) to Funds of Funds (``Fund of Funds
Relief''). Applicants ask that any exemption under section 12(d)(1)(J)
from sections 12(d)(1)(A) and (B) apply to each Fund of Funds that
enters into a participation agreement (``FOF
[[Page 75202]]
Participation Agreement'') with a Fund.\5\
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\5\ A Fund of Funds (as defined below) may rely on the order
only to invest in the Funds and not in any other registered
investment company.
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6. Applicants state that Creation Units will consist of a fixed
number of Shares and that the price of a Share will range from $20 to
$100. All orders to purchase Creation Units must be placed with the
Distributor by or through a party that has entered into a participant
agreement with the Distributor and the transfer agent of the Fund
(``Authorized Participant'') with respect to the creation and
redemption of Creation Units. An Authorized Participant is either (a) a
Broker or other participant in the Continuous Net Settlement System
(``CNS'') of the National Securities Clearing Corporation (``NSCC''), a
clearing agency registered with the Commission and affiliated with the
Depository Trust Company (``DTC''), or (b) a participant in DTC (such
participant, a ``DTC Participant'').
7. 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'').\6\ On any given
Business Day,\7\ 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 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),\8\ 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; \9\ or (c)
TBA Transactions 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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\6\ 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.
\7\ 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'').
\8\ The portfolio used for this purpose will be the same
portfolio used to calculate the Fund's NAV for that Business Day.
\9\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
\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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8. 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 or
DTC; or (ii) in the case of 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 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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9. Each Business Day, before the open of trading on the primary
national securities exchange (``Exchange''), as defined in section
2(a)(26) of the Act, on which Shares are listed (``Listing Exchange''),
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 correct errors in the published Creation
Basket. An Exchange will disseminate every 15 seconds throughout the
trading day an amount representing, on a per Share basis, the sum of
the current value of each Fund's Portfolio Securities and other assets.
10. An investor purchasing or redeeming a Creation Unit from a Fund
will be charged a fee (``Transaction Fee'') to protect existing
shareholders from the dilutive costs associated with the purchase of
Creation Units.\13\ The Distributor will deliver a confirmation and
prospectus (``Prospectus'') to the purchaser. In addition, the
Distributor will maintain a record of the instructions given to the
Corporation to implement the delivery of Shares.
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\13\ Where a Fund permits a purchaser to substitute cash in lieu
of depositing a portion of the requisite Deposit Instruments, the
purchaser may be assessed a higher Transaction Fee to offset the
cost to the Fund of purchasing those Deposit 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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11. Purchasers of Shares in Creation Units may hold the Shares or
sell the Shares on an Exchange. Shares will be listed and traded on the
New York Stock Exchange (``NYSE'') or another Listing Exchange. It is
expected that one or more Exchange member firms will be designated by
the Exchange to act as a market maker (``Market Maker'').\14\ The
[[Page 75203]]
price of Shares trading on an Exchange will be based on a current bid/
offer market. Transactions involving the sale of Shares on an Exchange
will be subject to customary brokerage commissions and charges.
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\14\ If Shares are listed on Nasdaq or a similar electronic
Exchange (including NYSE Arca (``Arca'')), one or more member firms
of that Exchange will act as Market Maker and maintain a market for
Shares trading on the Exchange. On Nasdaq, no particular Market
Maker would be contractually obligated to make a market in Shares.
However, the listing requirements on Nasdaq, for example, stipulate
that at least two Market Makers must be registered in Shares to
maintain a listing. In addition, on Nasdaq and Arca, 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 section 2(a)(3)(A) or (C) of the
Act due solely to ownership of Shares.
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12. Applicants expect that purchasers of Creation Units will
include institutional investors and arbitrageurs (which could include
institutional investors). Applicants expect that secondary market
purchasers of Shares will include both institutional investors and
retail investors.\15\ Applicants submit that in light of the full
portfolio transparency and efficient arbitrage mechanism inherent in
each Fund's structure, the secondary market prices for Shares of such
Funds should be close to NAV and should reflect the value of each
Fund's portfolio securities (``Portfolio Securities''). Applicants do
not believe that the Shares will persistently trade in the secondary
market at a material premium or discount in relation to the 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.
DTC or DTC Participants will maintain records reflecting owners of
Shares (``Beneficial Owners'').
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13. The Corporation will not be advertised or marketed or otherwise
held out as a traditional open-end investment company or a 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 an Exchange, or refer to redeemability, will prominently disclose
that Shares are not individually redeemable shares and will disclose
that the Beneficial Owners may acquire those Shares from the Fund, or
tender those Shares for redemption to the Fund, in Creation Units only.
The same approach will be followed in connection with the statement of
additional information (``SAI''), shareholder reports and investor
educational materials issued or circulated in connection with the
Shares.
14. The Corporation intends to maintain a Web site that will
include the Prospectus and additional quantitative information for each
Fund that is updated on a daily basis, including daily trading volume,
closing price and closing NAV for each Fund. 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 Bid/Ask Price
against such NAV. On each Business Day, before commencement of trading
in Shares on the primary Listing Exchange, the Fund will disclose on
its Web site the identities and quantities of the Portfolio Securities
and other assets held by the Fund that will form the basis for the
Fund's calculation of NAV at the end of the Business Day.\16\
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\16\ Under accounting procedures to be followed by the Funds,
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 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) 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 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. 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 to permit the Corporation to register as an
open-end management investment company and issue Shares that are
redeemable in Creation Units only. Applicants state that beneficial
owners of Shares may sell their Shares in the secondary market, but
must accumulate enough Shares to constitute a Creation Unit in order to
redeem through the Corporation. Applicants further state that, because
of the arbitrage possibilities created by the redeemability of Creation
Units, applicants expect that the market price of an individual Share
will not deviate materially from its 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, rather than at the current offering price
described in the Fund's Prospectus or 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 intended (a) to prevent dilution caused by
certain riskless-
[[Page 75204]]
trading schemes by principal underwriters and contract dealers, (b) to
prevent unjust discrimination or preferential treatment among buyers,
and (c) to ensure an orderly distribution system of shares by contract
dealers by eliminating price competition from non-contract dealers who
could offer investors shares at less than the published sales price and
who could pay investors a little 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 transactions in
Shares would not cause dilution for owners of such Shares because such
transactions do not directly involve Fund assets, 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.
Therefore, applicants assert that secondary market transactions in
Shares will not lead to discrimination or preferential treatment among
purchasers. Finally, applicants contend that the structure of the Funds
will enable efficient arbitrage, thereby ensuring that secondary market
transactions in Shares should generally occur at prices at or close to
NAV.
Section 22(e)
7. Section 22(e) of the Act generally prohibits a registered
investment company from suspending the right of redemption or
postponing the date of payment of redemption proceeds for more than
seven days after the tender of a security for redemption. Applicants
observe that the settlement of redemptions of Creation Units of Foreign
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 in which those Funds invest. Applicants have been advised that,
under certain circumstances, the delivery cycles for transferring
Portfolio Securities to redeeming investors, coupled with local market
holiday schedules, will require a delivery process of longer than seven
days. Applicants therefore request relief from section 22(e) in order
to provide 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
Securities of each Foreign Fund customarily clear and settle, but in
all cases no later than 14 days following the tender of a Creation
Unit.\17\
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\17\ Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations that they
may otherwise 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 Congress adopted section 22(e) to prevent
unreasonable, undisclosed or 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 the number of
days indicated above would not be inconsistent with the spirit and
intent of section 22(e). Applicants state that the SAI will disclose
those local holidays (over the period of at least one year following
the date of the SAI), if any, that are expected to prevent the delivery
of redemption proceeds in seven calendar days and the maximum number of
days needed to deliver the proceeds for each affected Foreign Fund.
Applicants are not seeking relief from section 22(e) with respect to
Foreign Funds that do not effect creations or redemptions in-kind.
Section 12(d)(1)
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 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 Funds of 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 Funds of Funds in excess of the limits in section 12(d)(1)(B)
of the Act. Applicants submit that the concerns underlying section
12(d)(1) of the Act and the potential and actual abuses identified in
the Commission's 1966 report to Congress \18\ are not present in the
proposed transactions and that, in any event, applicants have proposed
a number of conditions to address those concerns.
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\18\ Report of the Securities and Exchange Commission on the
Public Policy Implications of Investment Company Growth, H.R. Rep.
No. 2337, 89th Cong., 2d Sess., 311-324.
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11. Applicants submit that their proposed conditions address any
concerns regarding the potential for undue influence. A Fund of Funds
or Fund of Funds Affiliate \19\ will not cause any existing or
potential investment in a Fund to influence the terms of any services
or transactions between the Fund of Funds or a Fund of Funds Affiliate
and the Fund or a Fund Affiliate.\20\ A Fund of Funds Advisory Group
\21\ or a Fund of Funds Sub-Advisory Group \22\ will not control a Fund
within the meaning of section 2(a)(9) of the Act. Applicants also
propose a condition to ensure that no Fund of Funds or Fund of Funds
Affiliate will cause a Fund to purchase a security from an Affiliated
Underwriting.\23\
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\19\ A ``Fund of Funds Affiliate'' is defined as the Fund of
Funds Adviser, Fund of Funds Sub-Adviser(s), any Sponsor, promoter
or principal underwriter of a Fund of Funds and any person
controlling, controlled by or under common control with any of these
entities.
\20\ A ``Fund Affiliate'' is defined as an investment adviser,
promoter or principal underwriter of a Fund and any person
controlling, controlled by or under common control with any of these
entities.
\21\ A ``Fund of Funds Advisory Group'' is the Fund of Funds
Adviser, Sponsor, any person controlling, controlled by or under
common control with the Fund of Funds 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 Fund of Funds Adviser, Sponsor or any person
controlling, controlled by or under common control with the Fund of
Funds Adviser or Sponsor. In this regard, each Investing Management
Company's investment adviser within the meaning of Section
29(a)(20)(A) of the Act is the ``Fund of Funds Adviser.'' Similarly,
each Investing Trust's sponsor is the ``Sponsor.'' Each Fund of
Funds Adviser will be registered as an investment adviser under the
Advisers Act. No Fund of Funds Adviser or Sponsor will control, be
controlled by, or be under common control with the Adviser.
\22\ A ``Fund of Funds Sub-Advisory Group'' is any Fund of Funds
Sub-Adviser, any person controlling, controlled by, or under common
control with the Fund of Funds 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 Fund of Funds Sub-
Adviser or any person controlling, controlled by or under common
control with the Fund of Funds Sub-Adviser.
\23\ An ``Affiliated Underwriting'' is an offering of securities
during the existence of an underwriting or selling syndicate of
which a principal underwriter is an Underwriting Affiliate. An
``Underwriting Affiliate'' is a principal underwriter in any
underwriting or selling syndicate that is an officer, director,
member of an advisory board, Fund of Funds Adviser, Fund of Funds
Sub-Adviser, Sponsor, or employee of the Fund of Funds, or a person
of which any such officer, director, member of an advisory board,
Fund of Funds Adviser, Fund of Funds Sub-Adviser, Sponsor, or
employee 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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[[Page 75205]]
12. Applicants propose several conditions to address the potential
for excessive layering of fees. Applicants note that the board of
directors or trustees of an Investing Management Company, including a
majority of the independent directors or trustees who are not
``interested persons'' within the meaning of section 2(a)(19) of the
Act (``independent directors or trustees''), will be required to find
that any fees charged under the Investing Management Company's advisory
contract(s) are based on services provided that will be in addition to,
rather than duplicative of, services provided under the advisory
contract(s) of any Fund in which the Investing Management Company may
invest. Applicants state that any sales charges and/or service fees
charged with respect to shares of a Fund of Funds will not exceed the
limits applicable to a fund of funds set forth in NASD Conduct Rule
2830. \24\
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\24\ Any references to NASD Conduct Rule 2830 include any
successor or replacement rule that may be adopted by the Financial
Industry Regulatory Authority.
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13. 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 or engage in interfund borrowing and lending
transactions.
14. To ensure that a Fund of Funds is aware of the terms and
conditions of the requested order, the Fund of Funds must enter into an
FOF Participation Agreement with the respective Fund. The FOF
Participation Agreement will include an acknowledgment from the Fund of
Funds that it may rely on the order only to invest in the Fund and not
in any other investment company.
Sections 17(a)(1) and (2) of the Act
15. Section 17(a)(1) and (2) of the Act generally prohibit an
affiliated person of a registered investment company, or an affiliated
person of such a person (``second tier affiliate''), from selling any
security to or 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 defines ``control'' as the power to exercise a controlling
influence over the management or policies of a company and 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'').
16. Applicants request an exemption from section 17(a) under
sections 6(c) and 17(b) to permit in-kind purchases and redemptions 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 outstanding Shares of the Corporation
or one or more Funds; (b) 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.
17. Applicants assert that no useful purpose would be served by
prohibiting the affiliated persons described above from making in-kind
purchases or in-kind redemptions of Shares of a Fund in Creation Units.
Absent the unusual circumstances discussed in the application, the
Deposit Instruments and Redemption Instruments available for a Fund
will be the same for all purchases and redemptions, respectively, and
will correspond pro rata to the Fund's Portfolio Securities. Both the
deposit procedures for in-kind purchases of Creation Units and the
redemption procedures for in-kind redemptions will be effected in
exactly the same manner for all purchases and redemptions. Deposit
Instruments and Redemption Instruments will be valued in the same
manner as those Portfolio Securities currently held by the Funds.
Therefore, applicants state that the in-kind purchases and redemptions
will afford no opportunity for the specified affiliated persons of a
Fund to effect a transaction detrimental to other holders of Shares.
Applicants do not believe that in-kind purchases and redemptions will
result in abusive self-dealing or overreaching of the Fund.
18. Applicants also request an exemption in order to permit a Fund
to sell its Shares to and redeem its Shares from, and engage in the in-
kind transactions that would accompany such sales and redemptions with,
a Fund of Funds of which the Fund is an affiliated person or a second
tier affiliate.\25\
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\25\ Applicants anticipate that most Funds of 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 a Fund of Funds 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 a
Fund of Funds 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 a Fund of
Funds or an entity controlling, controlled by, or under common
control with the Adviser is also an investment adviser to that Fund
of Funds.
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19. Applicants also submit that the sale of Shares to and
redemption of Shares from a Fund of Funds satisfies the standards for
relief under sections 17(b) and 6(c) of the Act. Any consideration paid
for the purchase or redemption of Shares directly from a Fund will be
based on the NAV of the Fund.\26\ The FOF Participation Agreement will
require any Fund of Funds that purchases Creation Units directly from a
Fund to represent that the purchase will be accomplished in compliance
with the investment restrictions of the Fund of Funds and will be
consistent with the investment objectives and policies of the Fund of
Funds. Applicants believe that the proposed transactions are consistent
with the general purposes of the Act and appropriate in the public
interest.
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\26\ Applicants acknowledge that the receipt of compensation by
(a) an affiliated person of a Fund of Funds or an affiliated person
of such person, for the purchase by the Fund of Funds 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 a Fund of Funds,
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:
[[Page 75206]]
Actively-Managed ETF Relief
1. 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 actively managed ETFs.
2. As long as a Fund operates in reliance on the requested order,
the Shares of such Fund will be listed on an Exchange.
3. Neither the Corporation nor any Fund will be advertised or
marketed as an open-end investment company or mutual fund. Any
advertising material that describes the purchase or sale of Creation
Units or refers to redeemability will prominently disclose that the
Shares are not individually redeemable and that owners of the Shares
may acquire those Shares from the Fund and tender those Shares for
redemption to the Fund in Creation Units only.
4. The Web site for the Funds, which is and will be publicly
accessible at no charge, will contain, on a per Share basis for each
Fund, the prior Business Day's NAV and the market closing price or Bid/
Ask Price, and a calculation of the premium or discount of the market
closing price or Bid/Ask Price against such NAV.
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. On each Business Day, before commencement of trading in Shares
on each Fund's Listing Exchange, each Fund will disclose on its Web
site the identities and quantities of the Portfolio Securities and
other assets held by the Fund that will form the basis for the Fund's
calculation of NAV at the end of the Business Day.
Fund of Funds Relief
7. The members of the Fund of Funds Advisory Group will not control
(individually or in the aggregate) a Fund within the meaning of section
2(a)(9) of the Act. The members of the Fund of Funds Sub-Advisory Group
will not control (individually or in the aggregate) a Fund within the
meaning of section 2(a)(9) of the Act. If, as a result of a decrease in
the outstanding voting securities of a Fund, the Fund of Funds Advisory
Group or the Fund of Funds 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 voting securities of the Fund in
the same proportion as the vote of all other holders of the Fund's
voting securities. This condition does not apply to the Fund of Funds
Sub-Advisory Group with respect to a Fund for which the Fund of Funds
Sub-Adviser or a person controlling, controlled by, or under common
control with the Fund of Funds Sub-Adviser acts as the investment
adviser within the meaning of section 2(a)(20)(A) of the Act.
8. No Fund of Funds or Fund of Funds Affiliate will cause any
existing or potential investment by the Fund of Funds in a Fund to
influence the terms of any services or transactions between the Fund of
Funds or a Fund of Funds Affiliate and the Fund or a Fund Affiliate.
9. The board of directors or trustees of an Investing Management
Company, including a majority of the independent directors or trustees,
will adopt procedures reasonably designed to ensure that the Fund of
Funds Adviser and any Fund of Funds 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 a Fund of Funds Affiliate from a Fund or a Fund Affiliate in
connection with any services or transactions.
10. Once an investment by a Fund of Funds in Shares exceeds the
limits in section 12(d)(1)(A)(i) of the Act, the board of directors of
the Corporation (``Board''), including a majority of the independent
directors, will determine that any consideration paid by the Fund to
the Fund of Funds or a Fund of Funds 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).
11. The Fund of Funds Adviser, or Trustee or Sponsor, as
applicable, will waive fees otherwise payable to it by the Fund of
Funds in an amount at least equal to any compensation (including fees
received pursuant to any plan adopted by a Fund under rule 12b-1 under
the Act) received from a Fund by the Fund of Funds Adviser, or Trustee
or Sponsor, or an affiliated person of the Fund of Funds Adviser, or
Trustee or Sponsor, other than any advisory fees paid to the Fund of
Funds Adviser, or Trustee or Sponsor, or its affiliated person by the
Fund, in connection with the investment by the Fund of Funds in the
Fund. Any Fund of Funds Sub-Adviser will waive fees otherwise payable
to the Fund of Funds Sub-Adviser, directly or indirectly, by the
Investing Management Company in an amount at least equal to any
compensation received from a Fund by the Fund of Funds Sub-Adviser, or
an affiliated person of the Fund of Funds Sub-Adviser, other than any
advisory fees paid to the Fund of Funds Sub-Adviser or its affiliated
person by the Fund, in connection with any investment by the Investing
Management Company in the Fund made at the direction of the Fund of
Funds Sub-Adviser. In the event that the Fund of Funds Sub-Adviser
waives fees, the benefit of the waiver will be passed through to the
Investing Management Company.
12. No Fund of Funds or Fund of Funds Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Fund)
will cause a Fund to purchase a security in any Affiliated
Underwriting.
13. The Board, including a majority of the independent directors,
will adopt procedures reasonably designed to monitor any purchases of
securities by the Fund in an Affiliated Underwriting, once an
investment by a Fund of Funds in the securities of the Fund exceeds the
limit of section 12(d)(1)(A)(i) of the Act, including any purchases
made directly from an Underwriting Affiliate. The Board will review
these purchases periodically, but no less frequently than annually, to
determine whether the purchases were influenced by the investment by
the Fund of Funds 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 ensure that
[[Page 75207]]
purchases of securities in Affiliated Underwritings are in the best
interest of shareholders of the Fund.
14. 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 a Fund of Funds in the securities
of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act,
setting forth from whom the securities were acquired, the identity of
the underwriting syndicate's members, the terms of the purchase, and
the information or materials upon which the Board's determinations were
made.
15. Before investing in a Fund in excess of the limits in section
12(d)(1)(A), a Fund of Funds will execute a FOF Participation Agreement
with the Fund stating, without limitation, that their respective boards
of directors or trustees and their investment advisers, or Trustee and
Sponsor, as applicable, understand the terms and conditions of the
order, and agree to fulfill their responsibilities under the order. At
the time of its investment in Shares of a Fund in excess of the limit
in section 12(d)(1)(A)(i), a Fund of Funds will notify the Fund of the
investment. At such time, the Fund of Funds will also transmit to the
Fund a list of the names of each Fund of Funds Affiliate and
Underwriting Affiliate. The Fund of Funds will notify the Fund of any
changes to the list of the names as soon as reasonably practicable
after a change occurs. The Fund and the Fund of Funds 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.
16. Before approving any advisory contract under section 15 of the
Act, the board of directors or trustees of each Investing Management
Company, including a majority of the independent directors or trustees,
will find that the advisory fees charged under such contract are based
on services provided that will be in addition to, rather than
duplicative of, the services provided under the advisory contract(s) of
any Fund in which the Investment Management Company may invest. These
findings and their basis will be recorded fully in the minute books of
the appropriate Investing Management Company.
17. Any sales charges and/or service fees charged with respect to
shares of a Fund of Funds will not exceed the limits applicable to a
fund of funds as set forth in NASD Conduct Rule 2830.
18. 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 that such Fund: (i) Receives securities of another investment
company as a dividend or as a result of a plan of reorganization of a
company (other than a plan devised for the purpose of evading section
12(d)(1) of the Act); or (ii) acquires (or is deemed to have acquired)
securities of another investment company pursuant to exemptive relief
from the Commission permitting such Fund to (a) acquire securities of
one or more investment companies for short-term cash management
purposes or (b) engage in interfund borrowing and lending transactions.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30551 Filed 12-18-12; 8:45 am]
BILLING CODE 8011-01-P