[Federal Register Volume 78, Number 9 (Monday, January 14, 2013)]
[Notices]
[Pages 2700-2706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-00516]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30345; File No. 812-13895]
First Trust Exchange-Traded Fund, et al.; Notice of Application
January 8, 2013.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 12(d)(1)(J)
of the Investment Company Act of 1940 (the ``1940 Act'') for exemptions
from sections 12(d)(1)(A), (B), and (C) of the 1940 Act, under sections
6(c) and 17(b) of the 1940 Act for an exemption from section 17(a) of
the 1940 Act, and under section 6(c) of the 1940 Act for an exemption
from rule 12d1-2(a) under the 1940 Act.
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Summary of the Application: Applicants request an order that would (a)
permit certain registered open-end management investment companies that
operate as ``funds of funds'' to acquire shares of certain registered
open-end management investment companies, registered closed-end
management investment companies, ``business development companies,'' as
defined by section 2(a)(48) of the 1940 Act, and registered unit
investment trusts that are within or outside the same group of
investment companies as the acquiring investment companies and (b)
permit certain registered open-end management investment companies
relying on rule 12d1-2 under the 1940 Act to invest in certain
financial instruments.
Applicants: First Trust Exchange-Traded Fund, First Trust Exchange-
Traded Fund II, First Trust Exchange-Traded Fund III, First Trust
Exchange-Traded Fund IV, First Trust Exchange-Traded Fund V, First
Trust Exchange-Traded Fund VI, First Trust Exchange-Traded Fund VII,
First Trust Exchange-Traded AlphaDEX Fund and First Trust Exchange-
Traded AlphaDEX Fund II (each an ``ETF Trust''), First Trust Series
Fund (the ``Series Trust''), First Defined Portfolio Fund, LLC (``First
Defined''), First Trust Variable Insurance Trust (``Variable Insurance
Trust'' and, together with First Defined, the Series Trust and the ETF
Trusts, the ``Acquiring Companies''), First Trust Advisors L.P. (the
``Advisor'') and First Trust Portfolios L.P. (the ``Distributor'').
Filing Dates: The application was filed on April 29, 2011, and amended
on October 21, 2011, May 18, 2012, September 14, 2012, and January 3,
2013.
Hearing or Notification of Hearing: An order granting the application
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 February 4, 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: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090. Applicants,
120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187.
FOR FURTHER INFORMATION CONTACT: Jill Ehrlich, Senior Counsel, at (202)
551-6819, 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. Each Acquiring Company other than First Defined was organized as
a Massachusetts business trust, and each Fund (as defined below) will
pursue its own investment objective(s) and strategies.\1\ Each
Acquiring Company is
[[Page 2701]]
or will be registered as an open-end management investment company
under the 1940 Act.\2\
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\1\ Shares of series of the Variable Insurance Trust and
interests in series of First Defined, which is organized as a
Delaware limited liability company, are not offered directly to the
public. Shares of series of the Variable Insurance Trust are offered
to separate accounts that are registered as investment companies
under the 1940 Act (``Registered Separate Accounts'') or that are
not registered under the 1940 Act (``Unregistered Separate
Accounts,'' collectively with Registered Separate Accounts,
``Separate Accounts'') of affiliated and unaffiliated insurance
companies as the underlying investment vehicles for the variable
life insurance and variable annuity contracts (collectively,
``variable insurance contracts'') issued by the insurance companies
(owners of such contracts, ``contract holders''). They are also
offered to qualified pension and retirement plans. Interests in
series of First Defined are offered to a Registered Separate Account
of an unaffiliated insurance company as an underlying investment
vehicle for the variable insurance contracts that the insurance
company issues.
\2\ Applicants request that the order apply not only to any
existing series of the Acquiring Companies, but that the order also
extend to any future series of the Acquiring Companies, and any
other existing or future registered open-end management investment
companies and any series thereof that are part of the same group of
investment companies, as defined in section 12(d)(1)(G)(ii) of 1940
Act, as the Acquiring Companies and are, or may in the future be,
advised by the Advisor or any other investment adviser controlling,
controlled by, or under common control with the Advisor (together
with the existing series of the Acquiring Companies, each series a
``Fund,'' and collectively, the ``Funds''). All entities that
currently intend to rely on the requested 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.
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2. The Advisor, an Illinois limited partnership, is a registered
investment adviser under the Investment Advisers Act of 1940 and serves
as the investment adviser to each of the Funds of Funds (as defined
below).\3\ The Distributor is a Broker (as defined below) and currently
serves as the Funds' principal underwriter and distributor.
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\3\ All references to the term ``Advisor'' include successors-
in-interest to the Advisor. A successor-in-interest is limited to an
entity that results from a reorganization into another jurisdiction
or a change in the type of business organization.
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3. Applicants request relief to the extent necessary to permit: (a)
A Fund (each, a ``Fund of Funds,'' and collectively, the ``Funds of
Funds'') to acquire shares of registered open-end management investment
companies (each an ``Unaffiliated Open-End Investment Company''),
registered closed-end management investment companies, ``business
development companies'' as defined by section 2(a)(48) of the 1940 Act
(``business development companies'') (each registered closed-end
management investment company and each business development company, an
``Unaffiliated Closed-End Investment Company'' and, together with the
Unaffiliated Open-End Investment Companies, the ``Unaffiliated
Investment Companies''), and registered unit investment trusts
(``UITs'') (the ``Unaffiliated Trusts,'' and together with the
Unaffiliated Investment Companies, the ``Unaffiliated Funds''), in each
case, that are not part of the same ``group of investment companies''
as the Funds of Funds;\4\ (b) the Unaffiliated Funds, their principal
underwriters and any broker or dealer registered under the Securities
Exchange Act of 1934 (the ``1934 Act'') (``Broker'') to sell shares of
such Unaffiliated Funds to the Funds of Funds; (c) the Funds of Funds
to acquire shares of other registered investment companies, including
open-end management investment companies and series thereof, closed-end
management investment companies and UITs, as well as business
development companies (if any), in the same group of investment
companies as the Funds of Funds (collectively, the ``Affiliated
Funds,'' and, together with the Unaffiliated Funds, the ``Underlying
Funds'');\5\ and (d) the Affiliated Funds, their principal underwriters
and any Broker to sell shares of the Affiliated Funds to the Funds of
Funds.\6\ Applicants also request an order under sections 6(c) and
17(b) of the 1940 Act to exempt applicants from section 17(a) to the
extent necessary to permit Underlying Funds organized as open-end
investment companies (``Underlying Open-End Funds'') to sell their
shares to Funds of Funds and redeem their shares from Funds of
Funds.\7\
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\4\ For purposes of the request for relief from Sections
12(d)(1)(A), (B), and (C) of the 1940 Act, the term ``group of
investment companies'' means any two or more registered investment
companies, including closed-end investment companies, that hold
themselves out to investors as related companies for purposes of
investment and investor services.
\5\ Certain of the Underlying Funds may be registered under the
1940 Act as either UITs or open-end management investment companies
and have obtained exemptions from the Commission necessary to permit
their shares to be listed and traded on a national securities
exchange at negotiated prices and, accordingly, to operate as
exchange-traded funds (collectively, ``ETFs'' and each, an ``ETF'').
In addition, certain of the Underlying Funds currently pursue, or
may in the future pursue, their investment objectives through a
master-feeder arrangement in reliance on section 12(d)(1)(E) of the
1940 Act. In accordance with condition 12, a Fund of Funds may not
invest in an Underlying Fund that operates as a feeder fund unless
the feeder fund is part of the same ``group of investment
companies'' as its corresponding master fund or the Fund of Funds.
If a Fund of Funds invests in an Affiliated Fund that operates as a
feeder fund and the corresponding master fund is not within the same
``group of investment companies'' as the Fund of Funds and
Affiliated Fund, the master fund would be an Unaffiliated Fund for
purposes of the application and its conditions.
\6\ With respect to investments in business development
companies, applicants only seek an exemption from section
12(d)(1)(A) of the 1940 Act, not section 12(d)(1)(C). Applicants
state that they do not believe that investments in business
development companies present any particular considerations or
concerns that may be different from those presented by investments
in registered closed-end investment companies.
\7\ Applicants note that a Fund of Funds will purchase and sell
shares of an Underlying Fund that is a closed-end fund through
secondary market transactions at market prices rather than through
principal transactions with the closed-end fund. Accordingly,
applicants are not requesting section 17(a) relief with respect to
principal transactions with closed-end funds.
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4. Applicants also request an exemption under section 6(c) from
rule 12d1-2 under the 1940 Act to permit any existing or future Fund of
Funds that relies on section 12(d)(1)(G) of the 1940 Act (``Section
12(d)(1)(G) Fund of Funds'') and that otherwise complies with rule
12d1-2 under the 1940 Act, to also invest, to the extent consistent
with its investment objective(s), policies, strategies and limitations,
in other financial instruments that may not be securities within the
meaning of section 2(a)(36) of the 1940 Act (``Other Investments'').
Applicants' Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(A) of the 1940 Act, in relevant part, 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 1940 Act prohibits a
registered open-end investment company, its principal underwriter, and
any Broker 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. Section 12(d)(1)(C) prohibits
an investment company from acquiring any security issued by a
registered closed-end investment company if such acquisition would
result in the acquiring company, any other investment companies having
the same investment adviser, and companies controlled by such
investment companies, collectively, owning more than 10% of the
outstanding voting stock of the registered closed-end investment
company.
2. Section 12(d)(1)(J) of the 1940 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. Applicants request an
exemption under
[[Page 2702]]
section 12(d)(1)(J) of the 1940 Act from the limitations of sections
12(d)(1)(A), (B) and (C) to the extent necessary to permit: (i) the
Funds of Funds to acquire shares of Underlying Funds in excess of the
limits set forth in section 12(d)(1)(A) and (C) of the 1940 Act; and
(ii) the Underlying Funds, their principal underwriters and any Broker
to sell shares of the Underlying Funds to the Funds of Funds in excess
of the limits set forth in section 12(d)(1)(B) of the 1940 Act.
3. Applicants state that the proposed arrangement will not give
rise to the policy concerns underlying sections 12(d)(1)(A), (B), and
(C), which include concerns about undue influence by a fund of funds
over underlying funds, excessive layering of fees, and overly complex
fund structures. Accordingly, applicants believe that the requested
exemption is consistent with the public interest and the protection of
investors.
4. Applicants submit that the proposed structure will not result in
the exercise of undue influence by a Fund of Funds or its affiliated
persons over the Underlying Funds. Applicants assert that the concern
about undue influence does not arise in connection with a Fund of
Funds' investment in the Affiliated Funds because they are part of the
same group of investment companies. To limit the control a Fund of
Funds or Fund of Funds Affiliate \8\ may have over an Unaffiliated
Fund, applicants propose a condition prohibiting the Advisor and any
person controlling, controlled by or under common control with the
Advisor, and any investment company and any issuer that would be an
investment company but for section 3(c)(1) or section 3(c)(7) of the
1940 Act advised or sponsored by the Advisor or any person controlling,
controlled by or under common control with the Advisor (collectively,
the ``Group'') from controlling (individually or in the aggregate) an
Unaffiliated Fund within the meaning of section 2(a)(9) of the 1940
Act. The same prohibition would apply to any other investment adviser
within the meaning of section 2(a)(20)(B) of the 1940 Act to a Fund of
Funds (``Sub-Adviser'') and any person controlling, controlled by or
under common control with the 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 1940 Act (or portion of such investment company or
issuer) advised or sponsored by the Sub-Adviser or any person
controlling, controlled by or under common control with the Sub-Adviser
(collectively, the ``Sub-Adviser Group'').
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\8\ A ``Fund of Funds Affiliate'' is the Advisor, any Sub-
Adviser, promoter or principal underwriter of a Fund of Funds, as
well as any person controlling, controlled by or under common
control with any of those entities. An ``Unaffiliated Fund
Affiliate'' is an investment adviser(s), sponsor, promoter or
principal underwriter of any Unaffiliated Fund or any person
controlling, controlled by or under common control with any of those
entities.
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5. With respect to closed-end underlying funds, applicants submit
that one significant difference from open-end underlying funds is that,
whereas open-end underlying funds may be unduly influenced by the
threat of large-scale redemptions, closed-end underlying funds cannot
be so influenced because they do not issue redeemable securities and,
therefore, are not subject to large-scale redemptions. On the other
hand, applicants state that closed-end underlying funds may be unduly
influenced by a holder's ability to vote a large block of stock. To
address this concern, applicants submit that, with respect to a Fund's
investment in an Unaffiliated Closed-End Investment Company, (i) each
member of the Group or Sub-Adviser Group that is an investment company
or an issuer that would be an investment company but for section
3(c)(1) or 3(c)(7) of the 1940 Act will vote its shares of the
Unaffiliated Closed-End Investment Company in the manner prescribed by
section 12(d)(1)(E) of the 1940 Act and (ii) each other member of the
Group or Sub-Adviser Group will vote its shares of the Unaffiliated
Closed-End Investment Company in the same proportion as the vote of all
other holders of the same type of such Unaffiliated Closed-End
Investment Company's shares (except that any member of the Group or
Sub-Adviser Group that is a Separate Account will instead be subject to
the separate but similar voting procedures described in condition 1
below). Applicants state that, in this way, an Unaffiliated Closed-End
Investment Company will be protected from undue influence by a Fund of
Funds through the voting of the Unaffiliated Closed-End Investment
Company's shares.
6. Applicants propose other conditions to limit the potential for
undue influence over the Unaffiliated Funds, including that no Fund of
Funds or Fund of Funds Affiliate (except to the extent it is acting in
its capacity as an investment adviser to an Unaffiliated Investment
Company or sponsor to an Unaffiliated Trust) will cause an Unaffiliated
Fund to purchase a security in an offering of securities during the
existence of any underwriting or selling syndicate of which a principal
underwriter is an Underwriting Affiliate (``Affiliated
Underwriting'').\9\
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\9\ An ``Underwriting Affiliate'' is a principal underwriter in
any underwriting or selling syndicate that is an officer, director,
trustee, advisory board member, investment adviser, sub-adviser or
employee of the Fund of Funds, or a person of which any such
officer, director, trustee, investment adviser, sub-adviser, member
of an advisory board or employee is an affiliated person. An
Underwriting Affiliate does not include any person whose
relationship to an Unaffiliated Fund is covered by section 10(f) of
the 1940 Act.
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7. To further ensure that an Unaffiliated Investment Company
understands the implications of a Fund of Funds' investment under the
requested exemptive relief, prior to its investment in the shares of an
Unaffiliated Investment Company in excess of the limit of section
12(d)(1)(A)(i) of the 1940 Act, a Fund of Funds and the Unaffiliated
Investment Company will execute an agreement stating, without
limitation, that each of their boards of directors or trustees (each, a
``Board'') and their investment advisers understand the terms and
conditions of the order and agree to fulfill their responsibilities
under the order (the ``Participation Agreement''). Applicants note that
an Unaffiliated Investment Company (including an ETF or an Unaffiliated
Closed-End Investment Company) would also retain its right to reject
any initial investment by a Fund of Funds in excess of the limits in
section 12(d)(1)(A)(i) of the 1940 Act by declining to execute the
Participation Agreement with the Fund of Funds. In addition, an
Unaffiliated Investment Company (other than an ETF or closed-end fund
whose shares are purchased by a Fund of Funds in the secondary market)
will retain its right at all times to reject any investment by a Fund
of Funds. Finally, subject solely to the giving of notice to a Fund of
Funds and the passage of a reasonable notice period, an Unaffiliated
Fund (including a closed-end fund) could terminate a Participation
Agreement with the Fund of Funds.
8. Applicants state that they do not believe that the proposed
arrangement will result in excessive layering of fees. The Board of
each Fund of Funds, including a majority of the trustees who are not
``interested persons'' within the meaning of section 2(a)(19) of the
1940 Act (the ``Independent Trustees''), will find that the management
or advisory fees charged under a Fund of Funds' advisory contract are
based on services provided that are in addition to, rather than
duplicative of, services provided under the advisory contract(s) of any
Underlying Fund in which the Fund of Funds may invest. In addition, the
Advisor will waive fees otherwise
[[Page 2703]]
payable to it by a Fund of Funds in an amount at least equal to any
compensation (including fees received pursuant to any plan adopted by
an Unaffiliated Investment Company under rule 12b-1 under the 1940 Act)
received from an Unaffiliated Fund by the Advisor, or an affiliated
person of the Advisor, other than any advisory fees paid to the Advisor
or an affiliated person of the Advisor by the Unaffiliated Investment
Company, in connection with the investment by the Fund of Funds in the
Unaffiliated Fund.
9. Applicants further state that, with respect to Registered
Separate Accounts that invest in a Fund of Funds, no sales load will be
charged at the Fund of Funds level or at the Underlying Fund level.
Other sales charges and service fees, as defined in rule 2830 of the
Conduct Rules of the NASD (``NASD Conduct Rule 2830''),\10\ if any,
will only be charged at the Fund of Funds level or at the Underlying
Fund level, not both. With respect to other investments in a Fund of
Funds, any sales charges and/or service fees charged with respect to
shares of a Fund of Funds will not exceed the limits applicable to
funds of funds set forth in NASD Conduct Rule 2830.
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\10\ Any references to NASD Conduct Rule 2830 include any
successor or replacement FINRA rule to NASD Conduct Rule 2830.
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10. Applicants assert that each Fund of Funds will represent in the
Participation Agreement that no insurance company sponsoring a Separate
Account funding variable insurance contracts will be permitted to
invest in the Fund of Funds unless the insurance company has certified
to the Fund of Funds that the aggregate of all fees and charges
associated with each contract that invests in the Fund of Funds,
including fees and charges at the Separate Account, Fund of Funds, and
the Underlying Fund levels, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed
by the insurance company.
11. Applicants submit that the proposed arrangement will not create
an overly complex fund structure. Applicants note that no Underlying
Fund will acquire securities of any other investment company or company
relying on section 3(c)(1) or 3(c)(7) of the 1940 Act in excess of the
limits contained in section 12(d)(1)(A) of the 1940 Act, except in
certain circumstances identified in condition 12 below.
B. Section 17(a)
1. Section 17(a) of the 1940 Act generally prohibits sales or
purchases of securities between a registered investment company and any
affiliated person of the company. Section 2(a)(3) of the 1940 Act
defines an ``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; (b) any person 5% or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or held with
power to vote by the other person; and (c) any person directly or
indirectly controlling, controlled by, or under common control with the
other person.
2. Applicants state that the Funds of Funds and the Affiliated
Funds may be deemed to be under the common control of the Advisor and,
therefore, affiliated persons of one another. Applicants also state
that the Funds of Funds and the Underlying Open-End Funds may also be
deemed to be affiliated persons of one another if a Fund of Funds owns
5% or more of the outstanding voting securities of one or more of such
Underlying Open-End Funds. Applicants state that the sale of shares by
the Underlying Open-End Funds to the Funds of Funds and the purchase of
those shares from the Funds of Funds by the Underlying Open-End Funds
(through redemptions) could be deemed to violate section 17(a).\11\
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\11\ Applicants acknowledge that receipt of any 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 of
an Underlying Fund or (b) an affiliated person of an Underlying
Fund, or an affiliated person of such person, for the sale by the
Underlying Fund of its shares to a Fund of Funds may be prohibited
by section 17(e)(1) of the 1940 Act. The Participation Agreement
also will include this acknowledgement.
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3. Section 17(b) of the 1940 Act authorizes the Commission to grant
an order permitting a transaction otherwise prohibited by section 17(a)
if it finds that (i) the terms of the proposed transaction are fair and
reasonable and do not involve overreaching on the part of any person
concerned; (ii) the proposed transaction is consistent with the
policies of each registered investment company concerned; and (iii) the
proposed transaction is consistent with the general purposes of the
1940 Act. Section 6(c) of the 1940 Act permits the Commission to exempt
any person or transactions from any provision of the 1940 Act if 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 1940 Act.
4. Applicants submit that the proposed transactions satisfy the
standards for relief under sections 17(b) and 6(c) of the 1940 Act.
Applicants state that the terms of the transactions are reasonable and
fair and do not involve overreaching. Applicants state that the terms
upon which an Underlying Open-End Fund will sell its shares to or
purchase its shares from a Fund of Funds will be based on the net asset
value of each Underlying Open-End Fund.\12\ Applicants also state that
the proposed transactions will be consistent with the policies of each
Fund of Funds and Underlying Open-End Fund, and with the general
purposes of the 1940 Act.
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\12\ Applicants note that a Fund of Funds generally would
purchase and sell shares of an Underlying Fund that operates as an
ETF through secondary market transactions rather than through
principal transactions with the Underlying Fund. Applicants
nevertheless request relief from sections 17(a)(1) and (2) to permit
each Fund of Funds that is an affiliated person, or an affiliated
person of an affiliated person, as defined in section 2(a)(3) of the
1940 Act, of an ETF to purchase or redeem shares from the ETF.
Applicants are not seeking relief from section 17(a) for, and the
requested relief will not apply to, transactions where an ETF could
be deemed an affiliated person, or an affiliated person of an
affiliated person, of a Fund of Funds because an investment adviser
to the ETF or an entity controlling, controlled by or under common
control with the investment adviser to the ETF is also an investment
adviser to the Fund of Funds. Applicants note that a Fund of Funds
will purchase and sell shares of an Underlying Fund that is a
closed-end fund through secondary market transactions at market
prices rather than through principal transactions with the closed-
end fund. Accordingly, applicants are not requesting section 17(a)
relief with respect to principal transactions with closed-end funds.
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C. Other Investments by Section 12(d)(1)(G) Funds of Funds
1. Section 12(d)(1)(G) of the 1940 Act provides that section
12(d)(1) will not apply to securities of an acquired company purchased
by an acquiring company if: (i) the acquiring company and acquired
company are part of the same ``group of investment companies,'' as
defined in section 12(d)(1)(G)(ii) of the 1940 Act; (ii) the acquiring
company holds only securities of acquired companies that are part of
the same ``group of investment companies,'' as defined in section
12(d)(1)(G)(ii) of the 1940 Act, government securities, and short-term
paper; (iii) the aggregate sales loads and distribution-related fees of
the acquiring company and the acquired company are not excessive under
rules adopted pursuant to section 22(b) or section 22(c) of the 1940
Act by a securities association registered under section 15A of the
1934 Act or by the Commission; and (iv) the acquired
[[Page 2704]]
company has a policy that prohibits it from acquiring securities of
registered open-end management investment companies or registered UITs
in reliance on section 12(d)(1)(F) or (G) of the 1940 Act.
2. Rule 12d1-2 under the 1940 Act permits a registered open-end
investment company or a registered UIT that relies on section
12(d)(1)(G) of the 1940 Act to acquire, in addition to securities
issued by another registered investment company in the same group of
investment companies, government securities, and short-term paper: (1)
Securities issued by an investment company that is not in the same
group of investment companies, when the acquisition is in reliance on
section 12(d)(1)(A) or 12(d)(1)(F) of the 1940 Act; (2) securities
(other than securities issued by an investment company); and (3)
securities issued by a money market fund, when the investment is in
reliance on rule 12d1-1 under the 1940 Act. For the purposes of rule
12d1-2, ``securities'' means any security as defined in section
2(a)(36) of the 1940 Act.
3. Applicants state that the proposed arrangement would comply with
rule 12d1-2 under the 1940 Act, but for the fact that the Section
12(d)(1)(G) Funds of Funds may invest a portion of their assets in
Other Investments. Applicants request an order under section 6(c) of
the 1940 Act for an exemption from rule 12d1-2(a) to allow the Section
12(d)(1)(G) Funds of Funds to invest in Other Investments. Applicants
assert that permitting a Section 12(d)(1)(G) Fund of Funds to invest in
Other Investments as described in the application would not raise any
of the concerns that section 12(d)(1) of the 1940 Act was intended to
address.
4. Consistent with its fiduciary obligations under the 1940 Act, a
Section 12(d)(1)(G) Fund of Funds' Board will review the advisory fees
charged by the Section 12(d)(1)(G) Fund of Funds' investment adviser(s)
to ensure that the fees are based on services provided that are in
addition to, rather than duplicative of, services provided pursuant to
the advisory agreement of any investment company in which the Section
12(d)(1)(G) Fund of Funds may invest.
Applicants' Conditions
A. Investments by Funds of Funds in Underlying Funds
Applicants agree that the order granting the requested relief to
permit Funds of Funds to invest in Underlying Funds shall be subject to
the following conditions:
1. The members of the Group will not control (individually or in
the aggregate) an Unaffiliated Fund within the meaning of section
2(a)(9) of the 1940 Act. The members of a Sub-Adviser Group will not
control (individually or in the aggregate) an Unaffiliated Fund within
the meaning of section 2(a)(9) of the 1940 Act. With respect to a
Fund's investment in an Unaffiliated Closed-End Investment Company, (i)
each member of the Group or Sub-Adviser Group that is an investment
company or an issuer that would be an investment company but for
section 3(c)(1) or 3(c)(7) of the 1940 Act will vote its shares of the
Unaffiliated Closed-End Investment Company in the manner prescribed by
section 12(d)(1)(E) of the 1940 Act and (ii) each other member of the
Group or Sub-Adviser Group will vote its shares of the Unaffiliated
Closed-End Investment Company in the same proportion as the vote of all
other holders of the same type of such Unaffiliated Closed-End
Investment Company's shares (except that any member of the Group or
Sub-Adviser Group that is a Separate Account will instead be subject to
the voting procedures described below). If, as a result of a decrease
in the outstanding voting securities of any other Unaffiliated Fund,
the Group or a Sub-Adviser Group, each in the aggregate, becomes a
holder of more than 25 percent of the outstanding voting securities of
such Unaffiliated Fund, then the Group or the Sub-Adviser Group (except
for any member of the Group or Sub-Adviser Group that is a Separate
Account) will vote its shares of the Unaffiliated Fund in the same
proportion as the vote of all other holders of the Unaffiliated Fund's
shares. This condition will not apply to a Sub-Adviser Group with
respect to an Unaffiliated Fund for which the Sub-Adviser or a person
controlling, controlled by or under common control with the Sub-Adviser
acts as the investment adviser within the meaning of section
2(a)(20)(A) of the 1940 Act (in the case of an Unaffiliated Investment
Company) or as the sponsor (in the case of an Unaffiliated Trust).
A Registered Separate Account will seek voting instructions from
its contract holders and will vote its shares of an Unaffiliated Fund
in accordance with the instructions received and will vote those shares
for which no instructions were received in the same proportion as the
shares for which instructions were received. An Unregistered Separate
Account will either (a) vote its shares of the Unaffiliated Fund in the
same proportion as the vote of all other holders of the Unaffiliated
Fund's shares or (b) seek voting instructions from its contract holders
and vote its shares in accordance with the instructions received and
vote those shares for which no instructions were received in the same
proportion as the shares for which instructions were received.
2. No Fund of Funds or Fund of Funds Affiliate will cause any
existing or potential investment by the Fund of Funds in an
Unaffiliated Fund to influence the terms of any services or
transactions between the Fund of Funds or a Fund of Funds Affiliate and
the Unaffiliated Fund or an Unaffiliated Fund Affiliate.
3. The Board of each Fund of Funds, including a majority of the
Independent Trustees, will adopt procedures reasonably designed to
ensure that its Advisor and any Sub-Adviser to the Fund of Funds are
conducting the investment program of the Fund of Funds without taking
into account any consideration received by the Fund of Funds or Fund of
Funds Affiliate from an Unaffiliated Investment Company or Unaffiliated
Trust or any Unaffiliated Fund Affiliate of such Unaffiliated
Investment Company or Unaffiliated Trust in connection with any
services or transactions.
4. Once an investment by a Fund of Funds in the securities of an
Unaffiliated Investment Company exceeds the limit of section
12(d)(1)(A)(i) of the 1940 Act, the Board of the Unaffiliated
Investment Company, including a majority of the Independent Trustees,
will determine that any consideration paid by the Unaffiliated
Investment Company to a Fund of Funds or a Fund of Funds Affiliate in
connection with any services or transactions: (a) Is fair and
reasonable in relation to the nature and quality of the services and
benefits received by the Unaffiliated Investment Company; (b) is within
the range of consideration that the Unaffiliated Investment Company
would be required to pay to another unaffiliated entity in connection
with the same services or transactions; and (c) does not involve
overreaching on the part of any person concerned. This condition does
not apply with respect to any services or transactions between an
Unaffiliated Investment Company and its investment adviser(s), or any
person controlling, controlled by, or under common control with such
investment adviser(s).
5. No Fund of Funds or Fund of Funds Affiliate (except to the
extent it is acting in its capacity as an investment adviser to an
Unaffiliated Investment
[[Page 2705]]
Company or sponsor to an Unaffiliated Trust) will cause an Unaffiliated
Fund to purchase a security in any Affiliated Underwriting.
6. The Board of an Unaffiliated Investment Company, including a
majority of the Independent Trustees, will adopt procedures reasonably
designed to monitor any purchases of securities by the Unaffiliated
Investment Company in an Affiliated Underwriting once an investment by
a Fund of Funds in the securities of the Unaffiliated Investment
Company exceeds the limit of section 12(d)(1)(A)(i) of the 1940 Act,
including any purchases made directly from an Underwriting Affiliate.
The Board of the Unaffiliated Investment Company 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 Unaffiliated Investment Company. The Board of
the Unaffiliated Investment Company will consider, among other things:
(a) whether the purchases were consistent with the investment
objectives and policies of the Unaffiliated Investment Company; (b) how
the performance of securities purchased in an Affiliated Underwriting
compares to the performance of comparable securities purchased during a
comparable period of time in underwritings other than Affiliated
Underwritings or to a benchmark such as a comparable market index; and
(c) whether the amount of securities purchased by the Unaffiliated
Investment Company in Affiliated Underwritings and the amount purchased
directly from an Underwriting Affiliate have changed significantly from
prior years. The Board of the Unaffiliated Investment Company will take
any appropriate actions based on its review, including, if appropriate,
the institution of procedures designed to ensure that purchases of
securities in Affiliated Underwritings are in the best interests of
shareholders.
7. Each Unaffiliated Investment Company 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 an Affiliated Underwriting once an investment by a Fund
of Funds in the securities of an Unaffiliated Investment Company
exceeds the limit of section 12(d)(1)(A)(i) of the 1940 Act, setting
forth (1) the party from whom the securities were acquired, (2) the
identity of the underwriting syndicate's members, (3) the terms of the
purchase, and (4) the information or materials upon which the
determinations of the Board of the Unaffiliated Investment Company were
made.
8. Prior to its investment in shares of an Unaffiliated Investment
Company in excess of the limit set forth in section 12(d)(1)(A)(i) of
the 1940 Act, the Fund of Funds and the Unaffiliated Investment Company
will execute a Participation Agreement stating, without limitation,
that their Boards and their investment advisers 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 an
Unaffiliated Investment Company in excess of the limit set forth in
section 12(d)(1)(A)(i), a Fund of Funds will notify the Unaffiliated
Investment Company of the investment. At such time, the Fund of Funds
will also transmit to the Unaffiliated Investment Company a list of the
names of each Fund of Funds Affiliate and Underwriting Affiliate. The
Fund of Funds will notify the Unaffiliated Investment Company of any
changes to the list as soon as reasonably practicable after a change
occurs. The Unaffiliated Investment Company and the Fund of Funds 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.
9. Before approving any advisory contract under section 15 of the
1940 Act, the Board of each Fund of Funds, including a majority of the
Independent Trustees, shall find that the advisory fees charged under
the advisory contract are based on services provided that are in
addition to, rather than duplicative of, services provided under the
advisory contract(s) of any Underlying Fund in which the Fund of Funds
may invest. Such finding, and the basis upon which the finding was
made, will be recorded fully in the minute books of the appropriate
Fund of Funds.
10. The Advisor will waive fees otherwise payable to it by a Fund
of Funds in an amount at least equal to any compensation (including
fees received pursuant to any plan adopted by an Unaffiliated
Investment Company pursuant to rule 12b-1 under the 1940 Act) received
from an Unaffiliated Fund by the Advisor, or an affiliated person of
the Advisor, other than any advisory fees paid to the Advisor or its
affiliated person by the Unaffiliated Investment Company, in connection
with the investment by the Fund of Funds in the Unaffiliated Fund. Any
Sub-Adviser will waive fees otherwise payable to the Sub-Adviser,
directly or indirectly, by the Fund of Funds in an amount at least
equal to any compensation received by the Sub-Adviser, or an affiliated
person of the Sub-Adviser, from an Unaffiliated Fund, other than any
advisory fees paid to the Sub-Adviser or its affiliated person by the
Unaffiliated Investment Company, in connection with the investment by
the Fund of Funds in the Unaffiliated Fund made at the direction of the
Sub-Adviser. In the event that the Sub-Adviser waives fees, the benefit
of the waiver will be passed through to the Fund of Funds.
11. With respect to Registered Separate Accounts that invest in a
Fund of Funds, no sales load will be charged at the Fund of Funds level
or at the Underlying Fund level. Other sales charges and service fees,
as defined in NASD Conduct Rule 2830, if any, will only be charged at
the Fund of Funds level or at the Underlying Fund level, not both. With
respect to other investments in a Fund of Funds, any sales charges and/
or service fees charged with respect to shares of a Fund of Funds will
not exceed the limits applicable to funds of funds set forth in NASD
Conduct Rule 2830.
12. No Underlying Fund will acquire securities of any other
investment company or company relying on section 3(c)(1) or 3(c)(7) of
the 1940 Act, in excess of the limits contained in section 12(d)(1)(A)
of the 1940 Act, except to the extent that such Underlying Fund: (a)
Acquires such securities in compliance with section 12(d)(1)(E) of the
1940 Act and either is an Affiliated Fund or is in the same ``group of
investment companies'' as its corresponding master fund; (b) 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 1940 Act); or (c)
acquires (or is deemed to have acquired) securities of another
investment company pursuant to exemptive relief from the Commission
permitting such Underlying Fund to: (i) Acquire securities of one or
more investment companies for short-term cash management purposes or
(ii) engage in inter-fund borrowing and lending transactions.
[[Page 2706]]
B. Other Investments by Section 12(d)(1)(G) Funds of Funds
Applicants agree that the order granting the requested relief to
permit Section 12(d)(1)(G) Funds of Funds to invest in Other
Investments shall be subject to the following condition:
1. Applicants will comply with all provisions of rule 12d1-2 under
the 1940 Act, except for paragraph (a)(2) to the extent that it
restricts any Section 12(d)(1)(G) Fund of Funds from investing in Other
Investments as described in the application.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00516 Filed 1-11-13; 8:45 am]
BILLING CODE 8011-01-P