[Federal Register Volume 78, Number 54 (Wednesday, March 20, 2013)]
[Notices]
[Pages 17240-17247]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-06399]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30425; 812-13989]
Krane Funds Advisors LLC., et al.; Notice of Application
March 14, 2013.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (``Act'') for an exemption from sections
2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act and rule 22c-1 under the
Act, under sections 6(c) and 17(b) of the Act for an exemption from
sections 17(a)(1) and (a)(2) of the Act, and under section 12(d)(1)(J)
for an exemption from sections 12(d)(1)(A) and 12(d)(1)(B) of the Act.
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Applicants: Krane Funds Advisors LLC (``Adviser''), KraneShares Trust
(``Trust'') and SEI Investments Distribution Company (``Distributor'').
SUMMARY: Summary of Application: Applicants request an order that
permits: (a) Certain open-end management investment companies or series
thereof to issue shares (``Shares'') redeemable in large aggregations
only (``Creation Units''); (b) secondary market transactions in Shares
to occur at negotiated market prices; (c) certain series to pay
redemption proceeds, under certain circumstances, more than seven days
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.
DATES: Filing Dates: The application was filed on December 8, 2011, and
amended on June 5, 2012, November 9, 2012 and March 5, 2013.
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 April 5, 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. Adviser and
Trust, 1350 Avenue of the Americas, 2nd Floor, New York, NY 10019 and
Distributor, One Freedom Valley Drive, Oaks, PA 19456.
[[Page 17241]]
FOR FURTHER INFORMATION CONTACT: Jaea F. Hahn, Senior Counsel, at (202)
551-6870 or Jennifer L. Sawin, Branch Chief, at (202) 551-6821
(Division of Investment Management, Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or an applicant
using the Company name box, at http://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicants' Representations
1. The Trust is registered as an open-end management investment
company under the Act and organized as a Delaware statutory trust. The
Trust will initially offer one series, the Krane Shares Dow Jones China
Select Dividend ETF (``Initial Fund'') whose performance will
correspond generally to the price and yield performance of a particular
index comprised solely of securities (``Underlying Index'').\1\
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\1\ The Underlying Index for the Initial Fund is the Dow Jones
China Select Dividend Index.
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2. Applicants request that the order apply to the Initial Fund and
any future series of the Trust and any other future open-end management
investment companies, or series thereof, that are advised by the
Adviser or an entity controlling, controlled by, or under common
control with the Adviser (together, the ``Adviser''), and comply with
the terms and conditions of the application (``Future Funds,'' and
together with the Initial Fund, the ``Funds'').\2\ Each Fund will hold
certain equity and/or fixed income securities (``Portfolio
Securities'') and other financial instruments, assets and positions
selected to correspond before fees and expenses generally to the price
and yield performance of an Underlying Index (the Portfolio Securities,
together with such other instruments, the ``Portfolio
Investments'').\3\ No entity that creates, compiles, sponsors or
maintains an Underlying Index (``Index Provider'') is or will be an
affiliated person, as defined in section 2(a)(3) of the Act, or an
affiliated person of an affiliated person of the Trust, a Fund, or a
promoter, the Adviser, a Subadviser or the Distributor of the Trust or
Funds.
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\2\ All existing entities that currently intend to rely on the
order are named as applicants. Any other existing or future entity
that relies on the order will comply with the terms and conditions
of the application. An Acquiring Fund (as defined below) may rely on
the order only to invest in the Funds and not in any other
registered investment company.
\3\ Applicants anticipate that many, if not all, of the Foreign
Funds and Global Funds (each defined below) will invest a portion of
their assets in Depositary Receipts (as defined below) representing
the component securities of their respective Underlying Indexes
(``Component Securities''). Depositary Receipts are typically issued
by a financial institution, a ``Depository,'' and evidence ownership
in a security or pool of securities that have been deposited with
the Depository. No affiliated persons of applicants, any Fund, or
any Subadviser (as defined below) will serve as Depository for any
Depositary Receipts held by a Fund.
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3. Funds may be based on Underlying Indexes comprised of domestic
equity securities (``Domestic Equity Funds''), foreign equity
securities (``Foreign Equity Funds''), domestic fixed income securities
(``Domestic Fixed Income Funds''), foreign fixed income securities
(``Foreign Fixed Income Funds''), or some combination thereof.\4\
Certain Underlying Indexes will include only long positions in
component securities (``Standard Index'' and Funds based on them,
``Standard Funds''). An Underlying Index's Component Securities may
include both long and Short Positions \5\ (such an index, a ``Long/
Short Index''). Funds based on Long/Short Indexes are ``Long/Short
Funds.'' Funds based on an Underlying Index that uses a 130/30
investment strategy (``130/30 Index'') are ``130/30 Funds.''
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\4\ Funds that invest in both domestic and foreign equity, or
both domestic and foreign fixed income, securities are ``Global
Equity Funds,'' or ``Global Fixed Income Funds'', respectively.
Funds that invest in both equity and fixed income securities are
``Mixed Funds'' and may be Domestic Mixed Funds, Foreign Mixed Funds
or Global Mixed Funds. That portion of a Global Fund that invests in
domestic securities will comply with the requirements applicable to
Domestic Equity and/or Domestic Fixed Income Funds, as applicable,
and that portion that invests in foreign securities will comply with
the requirements applicable to Foreign Equity and/or Foreign Fixed
Income Funds, as applicable. Similarly, that portion of a Mixed Fund
that invests in equity securities will comply with the requirements
applicable to equity securities of the type held, and that portion
of a Mixed Fund that invests in fixed income securities will comply
with the requirements applicable to fixed-income securities of the
type held. Domestic Equity, Fixed Income, and Mixed Funds are
referred to collectively as ``Domestic Funds''; Foreign Equity,
Fixed Income and Mixed Funds are referred to collectively as
``Foreign Funds''; and Global Equity, Fixed Income and Mixed Funds
are referred to collectively as ``Global Funds''.
\5\ ``Short Positions'' include short sales and other short
positions and may refer either to (i) Component Securities that are
short positions (``Component Security Short Positions'') or (ii) a
Fund's holdings in its Asset Basket that are short positions
representative of the Component Security Short Positions, as the
context may require.
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4. The Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940 (``Advisers Act'') and will serve as
investment adviser to the Funds. The Adviser may enter into sub-
advisory agreements with additional investment advisers to act as
subadvisers to a Fund (each, a ``Subadviser''). Any Subadviser will be
registered under the Advisers Act or not subject to such registration.
The Distributor is a broker-dealer registered under the Securities
Exchange Act of 1934 (``Exchange Act''). The Distributor will serve as
the distributor and principal underwriter of the Shares of Funds. The
Distributor is not and will not be affiliated with any exchange on
which Shares are listed.
5. The investment objective of each Fund will be to provide
investment returns that correspond, before fees and expenses, to the
price and yield performance of its Underlying Index.\6\ A Fund will
utilize either a replication or representative sampling strategy to
track its Underlying Index. A Fund that utilizes a representative
sampling strategy will hold a basket of Component Securities, but may
not hold all of the Component Securities of the Underlying Index (a
Fund that uses a replication strategy invests in substantially all of
the Component Securities in the same approximate proportion as they
appear in the Underlying Index).\7\ Applicants state that a Fund using
the representative sampling strategy may not track its Underlying Index
with the same degree
[[Page 17242]]
of accuracy as would a Fund that invests in every Component Security of
the Underlying Index. Applicants expect that each Fund will have a
tracking error relative to the performance of its Underlying Index of
less than 5 percent.
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\6\ Applicants represent that each Standard Fund will invest at
least 80% of its total assets in Component Securities or, as
applicable, Depositary Receipts or to-be-announced transactions
(``TBA Transactions'') representing such Component Securities. Each
Long/Short Fund will invest at least 80% of its total assets in the
Component Securities (including Depositary Receipts, TBA
Transactions and Short Positions) of a Long/Short Index; for
purposes of this calculation, cash proceeds received from short
sales will not be included in total assets. Each 130/30 Fund will
hold at least 80% of its total assets in Component Securities
(including Depositary Receipts, TBA Transactions and Short
Positions); cash proceeds from sale of Short Positions will be
invested in additional long positions of Component Securities of the
130/30 Index.
Each Fund may also invest up to 20% of its total assets (the
``Asset Basket'') in securities not included in its Underlying
Index, Short Positions representative of Component Security Short
Positions, and other assets (``Financial Instruments'') such as
options on securities, indices and futures contracts, equity caps
and floors, swap agreements, forward contracts, and money market
instruments, which the Adviser and/or Subadviser believes will
assist the Fund in tracking the performance of its Underlying Index.
A TBA Transaction is a method of trading mortgage-backed
securities. In a TBA transaction, the buyer and seller agree upon
general trade parameters such as agency, settlement date, par amount
and price. The actual pools delivered generally are determined two
days prior to the settlement date.
\7\ A Fund following a representative sampling strategy will
select securities having aggregate investment characteristics (based
on market capitalization and industry weightings), fundamental
characteristics (such as return variability, earnings, valuation and
yield) and, and liquidity measures similar to those of the Fund's
Underlying Index taken in its entirety.
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6. The Trust will sell and redeem Creation Units of each Fund on
any day that the Fund is open, including as required by section 22(e)
of the Act (each such day, a ``Business Day''). Applicants state that
Creation Units are expected to consist of between 25,000 and 100,000
Shares and that an initial offering price of a Creation Unit will be a
minimum of $1 million. All orders to purchase Creation Units must be
placed with the Distributor by or through a party that has entered into
an agreement with the Distributor (``Authorized Participant''). The
Distributor will be responsible for transmitting the orders to the
relevant Fund. An Authorized Participant must be either: (a) A broker-
dealer or other participant in the continuous net settlement system of
the National Securities Clearing Corporation, a clearing agency
registered with the Commission, or (b) a participant in the Depository
Trust Company (``DTC,'' and such participant, ``DTC Participant''). The
Distributor also will be responsible for delivering the Fund's
prospectus to those persons purchasing Creation Units and for
maintaining records of both the order placed with it and the
acknowledgements of acceptance furnished by it. In addition, the
Distributor will maintain a record of the instructions given to the
Trust to implement the delivery of Shares.
7. Shares of each Fund will be purchased and redeemed in Creation
Units and generally on an in-kind basis. Except where the purchase or
redemptions 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'').\8\ On
any given Business Day, the names and quantities of the instruments
that constitute the Deposit Instruments and the names and quantities of
the instruments that constitute the Redemption Instruments will be
identical, unless the Fund is Rebalancing (as defined below). In
addition, the Deposit Instruments and Redemption Instruments will each
correspond pro rata to the positions in the Fund's portfolio (including
cash positions),\9\ 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; \10\ (c) TBA Transactions,
Short Positions and other positions that cannot be transferred in kind;
\11\ (d) to the extent the Fund determines, on a given Business Day, to
use a representative sampling of a Fund's portfolio; \12\ or (e) for
temporary periods, to effect changes in the Fund's portfolio as a
result of the rebalancing of its Underlying Index (any such change, a
``Rebalancing'').
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\8\ 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.
\9\ The portfolio used for this purpose will be the same
portfolio used to calculate the Fund's NAV for that Business Day.
\10\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
\11\ These instruments will be excluded from the Deposit
Instruments and Redemption Instruments, and their value will be
reflected in the determination of the Balancing Amount (as defined
below).
\12\ A Fund may use sampling for this purpose only if the
sample: (i) Is designed to generate performance that is highly
correlated to the performance of the Fund's portfolio; (ii) consists
entirely of instruments that are already included in the Fund's
portfolio; and (iii) is the same for all Authorized Participants on
a given Business Day.
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8. If there is a difference between the NAV attributable to a
Creation Unit and the aggregate market value of the Deposit Instruments
or Redemption Instruments exchanged for the Creation Unit, the party
conveying instruments with the lower value will also pay to the other
an amount in cash equal to that difference (``Balancing Amount'').
9. Purchases and redemptions of Creation Units may be made in whole
or in part on a cash basis, rather than in kind, solely under the
following circumstances: (a) To the extent there is a Balancing Amount,
as described above; (b) if, on a given Business Day, the Fund announces
before the open of trading that all purchases, all redemptions, or all
purchases and redemptions on that day will be made entirely in cash;
(c) if, upon receiving a purchase or redemption order from an
Authorized Participant, the Fund determines to require the purchase or
redemption, as applicable, to be made entirely in cash; (d) if, on a
given Business Day, the Fund requires all Authorized Participants
purchasing or redeeming Shares on that day to deposit or receive (as
applicable) cash in lieu of some or all of the Deposit Instruments or
Redemption Instruments, respectively, solely because: (i) such
instruments are not eligible for transfer through either the NSCC or
the DTC; or (ii) in the case of Foreign or Global Funds, such
instruments are not eligible for trading due to local restrictions,
local restrictions on securities transfers or other similar
circumstances; or (e) if the Fund permits an Authorized Participant to
deposit or receive (as applicable) cash in lieu of some or all of the
Deposit 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 or Global Fund would be
subject to unfavorable income tax treatment if the holder receives
redemption proceeds in kind.\13\
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\13\ A ``custom order'' is any purchase or redemption of Shares
made in whole or in part on a cash basis in reliance on clause
(e)(i) or (e)(ii).
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10. Each Business Day, before the open of trading on the national
securities exchange (as defined in section 2(a)(26) of the Act)
(``Exchange'') on which its Shares are listed (``Primary Listing
Exchange''), each Fund will cause to be published through the NSCC the
names and quantities of the instruments comprising the Deposit
Instruments and the Redemption Instruments, as well as the estimated
Balancing Amount (if any) for that day. The Primary Listing Exchange
will disseminate every 15 seconds throughout the trading day through
the facilities of the Consolidated Tape Association the Indicative
Intra-Day Value (``IIV'') for each Fund, on a per Share basis. The list
of Deposit Instruments and Redemption Instruments will apply until a
new list is announced on the following Business Day, and there will be
no intra-day changes to the list except to correct errors in the
published list. Because the NSCC's system is not currently capable of
processing information with respect to Short Positions and Financial
Instruments, for the Long/Short Funds and 130/30 Funds, before the
opening of business on each Business Day, the Adviser will provide full
portfolio holdings disclosure on the Web site and
[[Page 17243]]
develop an ``IIV File'' which it will use to disclose the Fund's full
portfolio holdings, including Short Positions and Financial
Instruments.\14\
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\14\ The information on the public Web site will be the same as
that disclosed to Authorized Participants in the IIV File, except
that (i) the information provided on the Web site will be formatted
to be reader-friendly and (ii) the portfolio holdings data on the
Web site will be calculated and displayed on a per Fund basis, while
the information in the IIV File will be calculated and displayed on
a per Creation Unit basis.
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11. An investor purchasing or redeeming a Creation Unit from a Fund
may be charged a fee (``Transaction Fee'') to protect the continuing
shareholders from the possible dilutive transaction expenses associated
with the purchase or redemption of Creation Units.\15\ Transaction Fees
will be limited to amounts that have been determined by the Fund to be
appropriate and will take into account operational processing costs
associated with the recent Deposit Instruments and Redemption
Instruments of the Funds. In all cases, such Transaction Fees will be
limited in accordance with the requirements of the Commission
applicable to management investment companies offering redeemable
securities.
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\15\ Where a Fund permits an in-kind purchaser to substitute
cash-in-lieu of depositing one or more of the requisite Deposit
Instruments, the purchaser may be assessed a higher Transaction Fee
to cover the cost of purchasing such securities.
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12. Purchasers of Shares in Creation Units may hold such Shares or
may sell such Shares into the secondary market. Shares will be listed
and traded at negotiated prices on one or more Exchanges. It is
expected that one or more Exchange member firms will be designated to
act as a specialist or market maker and maintain a market for Shares of
a Fund trading on its Primary Listing Exchange or another Exchange.
Price of Shares trading on an Exchange will be based on a current bid-
offer market. The sale of Shares on an Exchange will be subject to
customary brokerage commissions and charges.
13. Applicants expect that purchasers of Creation Units will
include institutional investors and arbitrageurs. Exchange specialists
and market makers also may purchase or redeem Creation Units in
connection with their market making activities. Applicants expect that
secondary market purchasers of Shares will include both institutional
investors and retail investors.\16\ The price at which Shares trade
will be disciplined by arbitrage opportunities created by the ability
to purchase or redeem Creation Units at NAV, which should help to
ensure that Shares will not trade at a material discount or premium in
relation to their NAV.
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\16\ Shares will be registered in book-entry form only. DTC or
its nominee will be the record or registered owner of all
outstanding Shares. Beneficial ownership of Shares will be shown on
the records of DTC or DTC Participants.
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14. Shares will not be individually redeemable and owners of Shares
may acquire those Shares from a Fund or tender such shares for
redemption to the Fund, in Creation Units only. To redeem, an investor
must accumulate enough Shares to constitute a Creation Unit. Redemption
requests must be placed by or through an Authorized Participant.
15. Neither the Trust nor any Fund will be marketed or otherwise
held out as a traditional open-end investment company or ``mutual
fund.'' Instead, each Fund will be marketed as an ``ETF.'' All
marketing materials that describe the features or method of obtaining,
buying or selling Creation Units, or individual Shares traded on an
Exchange, or refer to redeemability, will prominently disclose that
Shares are not individually redeemable and that the owners of Shares
may acquire or tender such Shares for redemption to the Fund in
Creation Units only. The same approach will be followed in shareholder
reports and investor educational materials issued or circulated in
connection with the Shares. The Funds will provide copies of their
shareholder reports to DTC Participants for distribution to
shareholders.
Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the Act
granting an exemption from sections 2(a)(32), 5(a)(1), 22(d) and 22(e)
of the Act and rule 22c-1 under the Act; and under sections 6(c) and
17(b) of the Act granting an exemption from sections 17(a)(1) and (2)
of the Act, and under section 12(d)(1)(J) for an exemption from
sections 12(d)(1)(A) and (B) of the Act.
2. Section 6(c) of the Act provides that the Commission may exempt
any person, security or transaction, or any class of persons,
securities or transactions, from any provision of the Act, if and to
the extent that such exemption is necessary or appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Act.
Section 17(b) of the Act authorizes the Commission to exempt a proposed
transaction from section 17(a) of the Act if evidence establishes that
the terms of the transaction, including the consideration to be paid or
received, are reasonable and fair and do not involve overreaching on
the part of any person concerned, and the proposed transaction is
consistent with the policies of the registered investment company and
the general provisions of the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may exempt any person, security, or
transaction, or any class or classes of persons, securities or
transactions, from any provisions of section 12(d)(1) if the exemption
is consistent with the public interest and the protection of investors.
Sections 5(a)(1) and 2(a)(32) of the Act
3. Section 5(a)(1) of the Act defines an ``open-end company'' as a
management investment company that is offering for sale or has
outstanding any redeemable security of which it is the issuer. Section
2(a)(32) of the Act defines a redeemable security as any security,
other than short-term paper, under the terms of which the holder, upon
its presentation to the issuer, is entitled to receive approximately a
proportionate share of the issuer's current net assets, or the cash
equivalent. Because Shares will not be individually redeemable,
applicants request an order that would permit the Funds to redeem
Shares in Creation Units only. Applicants state that Creation Units
will be redeemable in accordance with the provisions of the Act.
Applicants state that because Creation Units may always be purchased
and redeemed at NAV, the secondary market price of the Shares should
not vary materially from their NAV.
Section 22(d) of the Act and Rule 22c-1 Under the Act
4. Section 22(d) of the Act, among other things, prohibits a dealer
from selling a redeemable security which is currently being offered to
the public by or through an underwriter, except at a current public
offering price described in the prospectus. Rule 22c-1 under the Act
generally requires that a dealer selling, redeeming, or repurchasing a
redeemable security do so only at a price based on its NAV. Applicants
state that secondary market trading in Shares will take place at
negotiated prices, not at a current offering price described in a
Fund's prospectus and not at a price based on NAV. Thus, purchases and
sales of Shares in the secondary market will not comply with section
22(d) of the Act and rule 22c-1 under the Act. Applicants request an
exemption under section 6(c) from these provisions.
5. Applicants assert that the concerns sought to be addressed by
section 22(d) of the Act and rule 22c-1 under the Act with respect to
pricing are equally satisfied by the proposed method of
[[Page 17244]]
pricing Shares. Applicants maintain that, while there is little
legislative history regarding section 22(d), its provisions, as well as
those of rule 22c-1, appear to have been designed to (a) prevent
dilution caused by certain riskless-trading schemes by principal
underwriters and contract dealers, (b) prevent unjust discrimination or
preferential treatment among buyers, and (c) ensure an orderly
distribution system of shares by eliminating price competition from
non-contract dealers offering shares at less than the published sales
price and repurchasing shares at more than the published redemption
price.
6. Applicants believe that none of these purposes will be thwarted
by permitting Shares to trade in the secondary market at negotiated
prices. Applicants state that (a) secondary market trading in Shares
would not cause dilution for owners of such Shares because such
transactions do not directly involve Trust 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,
such as supply and demand. Therefore, applicants assert that secondary
market transactions in Shares will not lead to discrimination or
preferential treatment among purchasers. Finally, applicants contend
that the proposed distribution system will be orderly because
competitive forces will ensure that the difference between the market
price of Shares and their NAV remains narrow.
Section 22(e) of the Act
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
state that settlement of redemptions of Creation Units for Foreign
Funds and the foreign investments of Global Funds will be contingent
not only on the settlement cycle of the U.S. markets but also on the
currently practicable delivery cycles in local markets for the
underlying foreign investments held by those Funds. Applicants state
that local market delivery cycles for transferring Redemption
Instruments to investors redeeming Creation Units, together with local
market holiday schedules, will under certain circumstances require a
delivery process longer than seven (7) calendar days for the Foreign
and Global Funds. Applicants therefore request relief under section
6(c) of the Act from section 22(e) to allow Foreign and Global Funds
that deliver Redemption Instruments in-kind to pay redemption proceeds
up to a maximum of 14 calendar days after the tender of a Creation Unit
for redemption.\17\
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\17\ Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations applicants
may have under rule 15c6-1 under the Exchange Act. Rule 15c6-1
requires that most securities transactions be settled within three
business days of the trade.
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8. Applicants believe that section 22(e) was designed to prevent
unreasonable, undisclosed and unforeseen delays in the actual payment
of redemption proceeds. Applicants state that allowing redemption
payments for Creation Units of a Fund to be made within 14 calendar
days would not be inconsistent with the spirit and intent of section
22(e). Applicants state that the SAI for each Foreign and Global Fund
will disclose those local holidays, if any, that are expected to
prevent the delivery of redemption proceeds in seven calendar days, and
the maximum number of days, up to 14 calendar days, needed to deliver
the proceeds for each affected Foreign or Global Fund. Applicants are
seeking relief from section 22(e) only to the extent that those Foreign
and Global Funds create and redeem in-kind.
Section 12(d)(1) of the Act
9. Section 12(d)(1)(A) of the Act prohibits a registered investment
company from acquiring shares of an investment company if the
securities represent more than 3% of the total outstanding voting stock
of the acquired company, more than 5% of the total assets of the
acquiring company, or, together with the securities of any other
investment companies, more than 10% of the total assets of the
acquiring company. Section 12(d)(1)(B) of the Act prohibits a
registered open-end investment company, its principal underwriter, or
any other broker or dealer from selling its shares to another
investment company if the sale will cause the acquiring company to own
more than 3% of the acquired company's voting stock, or if the sale
will cause more than 10% of the acquired company's voting stock to be
owned by investment companies generally.
10. Applicants request an exemption to permit management investment
companies (``Acquiring Management Companies'') and unit investment
trusts (``Acquiring Trusts'') registered under the Act that are not
sponsored or advised by the Adviser or an entity controlling,
controlled by, or under common control with the Adviser and are not
part of the same ``group of investment companies,'' as defined in
section 12(d)(1)(G)(ii) of the Act, as the Funds (collectively,
``Acquiring Funds'') to acquire shares of a Fund beyond the limits of
section 12(d)(1)(A). In addition, applicants seek relief to permit the
Funds, the Distributor any Broker to sell Shares to Acquiring Funds in
excess of the limits of section 12(d)(1)(B).
11. Each Acquiring Management Company will be advised by an
investment adviser within the meaning of section 2(a)(20)(A) of the Act
(the ``Acquiring Fund Adviser'') and may be sub-advised by one or more
investment advisers within the meaning of section 2(a)(20)(B) of the
Act (each an ``Acquiring Fund Sub-adviser''). Any Acquiring Fund
Adviser or Acquiring Fund Sub-adviser will be registered under the
Advisers Act. Each Acquiring Trust will be sponsored by a sponsor
(``Sponsor'').
12. Applicants submit that the proposed conditions to the requested
relief adequately address the concerns underlying the limits in section
12(d)(1)(A) and (B), which include concerns about undue influence by a
fund of funds over underlying funds, excessive layering of fees and
overly complex fund structures. Applicants believe that the requested
exemption is consistent with the public interest and the protection of
investors.
13. Applicants believe that neither an Acquiring Fund nor an
Acquiring Fund Affiliate would be able to exert undue influence over a
Fund.\18\ To limit the control that an Acquiring Fund may have over a
Fund, applicants propose a condition prohibiting the Acquiring Fund
Adviser, Sponsor, any person controlling, controlled by, or under
common control with the Acquiring Fund Adviser or Sponsor, and any
investment company and any issuer that would be an investment company
but for sections 3(c)(1) or 3(c)(7) of the Act that is advised or
sponsored by the Acquiring Fund Adviser, the Sponsor, or any person
controlling, controlled by, or under common control with the Acquiring
Fund Adviser or Sponsor (``Acquiring Fund's Advisory Group'') from
controlling (individually or in the aggregate) a Fund within the
meaning of section 2(a)(9) of the Act. The same prohibition would apply
to any Acquiring Fund Sub-adviser, any person controlling, controlled
by or under
[[Page 17245]]
common control with the Acquiring Fund Sub-adviser, and any investment
company or issuer that would be an investment company but for section
3(c)(1) or 3(c)(7) of the Act (or portion of such investment company or
issuer) advised or sponsored by the Acquiring Fund Sub-adviser or any
person controlling, controlled by or under common control with the
Acquiring Fund Sub-adviser (``Sub-Adviser Group'').
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\18\ An ``Acquiring Fund Affiliate'' is any Acquiring Fund
Adviser, Acquiring Fund Sub-adviser(s), Sponsor, promoter or
principal underwriter of an Acquiring Fund, and any person
controlling, controlled by or under common control with any of these
entities. A ``Fund Affiliate'' is an investment adviser, promoter,
or principal underwriter of a Fund or any person controlling,
controlled by or under common control with any of these entities.
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14. Applicants propose other conditions to limit the potential for
undue influence over the Funds, including that no Acquiring Fund or
Acquiring 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 an offering of securities during the existence
of an underwriting or selling syndicate of which a principal
underwriter is an Underwriting Affiliate (``Affiliated
Underwriting'').\19\
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\19\ An ``Underwriting Affiliate'' is a principal underwriter in
any underwriting or selling syndicate that is an officer, director,
member of an advisory board, Acquiring Fund Adviser, Acquiring Fund
Sub-adviser, employee, or Sponsor of the Acquiring Fund, or a person
of which any such officer, director, member of an advisory board,
Acquiring Fund Adviser, Acquiring Fund Sub-adviser, employee or
Sponsor is an affiliated person (except any person whose
relationship to the Fund is covered by section 10(f) of the Act is
not an Underwriting Affiliate).
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15. Applicants do not believe that the proposed arrangement will
involve excessive layering of fees. The board of directors or trustees
of any Acquiring Management Company, including a majority of the
directors or trustees who are not interested directors or trustees
within the meaning of section 2(a)(19) of the Act (``disinterested
directors or trustees''), will find that the advisory fees charged
under the contract are based on services provided that will be in
addition to, rather than duplicative of, services provided under the
advisory contract of any Fund in which the Acquiring Management Company
may invest. In addition, under condition 9, an Acquiring Fund Adviser,
or an Acquiring Trust's trustee (``Trustee'') or Sponsor, will waive
fees otherwise payable to it by the Acquiring Fund in an amount at
least equal to any compensation (including fees received pursuant to
any plan adopted by a Fund under rule 12b-1 under the Act) received by
the Acquiring Fund Adviser, Trustee or Sponsor or an affiliated person
of the Acquiring Fund Adviser, Trustee or Sponsor, in connection with
the investment by the Acquiring Fund in the Fund. Applicants also state
that any sales charges and/or service fees charged with respect to
shares of an Acquiring Fund will not exceed the limits applicable to a
fund of funds as set forth in NASD Conduct Rule 2830.\20\
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\20\ All 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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16. Applicants submit that the proposed arrangement will not create
an overly complex fund structure. Applicants note that no Fund may
acquire securities of any investment company or company relying on
section 3(c)(1) or 3(c)(7) of the Act in excess of the limits contained
in section 12(d)(1)(A) of the Act, except to the extent permitted by
exemptive relief from the Commission permitting the Fund to purchase
shares of other investment companies for short-term cash management
purposes. To ensure that an Acquiring Fund understands and will comply
with the terms and conditions of the requested order, the Acquiring
Funds must enter into an agreement with the respective Funds
(``Participation Agreement'') requiring the Acquiring Fund to adhere to
the terms and conditions of the requested order. The Participation
Agreement also will include an acknowledgement from the Acquiring Fund
that it may rely on the order only to invest in the Funds and not in
any other investment company.
17. Applicants also note that a Fund may choose to reject a direct
purchase of Shares in Creation Units by an Acquiring Fund. A Fund would
also retain its right to reject any initial investment by an Acquiring
Fund in excess of the limits in Section 12(d)(l)(A) of the Act by
declining to execute a Participation Agreement with an Acquiring Fund.
Section 17 of the Act
18. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such a person (``second-tier affiliate''), from selling any security to
or acquiring any security from the company. Section 2(a)(3) of the Act
defines ``affiliated 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 the 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. 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 (an ``Affiliated Fund'').
19. Applicants request an exemption under sections 6(c) and 17(b)
of the Act from sections 17(a)(1) and 17(a)(2) of the Act in order to
permit certain affiliated persons to make in-kind purchases and
redemptions with a Fund when they are affiliated persons or second-tier
affiliates of the Funds solely by virtue of one or more of the
following: (a) Holding 5% or more, or more than 25%, of the Shares of
one or more Funds; (b) having an affiliation with a person with an
ownership interest described in (a); or (c) holding 5% or more, or more
than 25%, of the shares of one or more Affiliated Funds.
20. Applicants contend that no useful purpose would be served by
prohibiting such affiliated persons from making in-kind purchases or
in-kind redemptions of Shares of a Fund in Creation Units. Deposit
Instruments, Redemptions Instruments, and the Balancing Amount (except
for any permitted cash determined in accordance with section II.B.1.a.
of the application) will be the same regardless of the identity of the
purchaser or redeemer. The procedures for both in-kind purchases and
in-kind redemptions of Creation Units will be the same for all
purchases and redemptions. Deposit Instruments and Redemption
Instruments for each Fund will be valued in the same manner as the
Portfolio Investments currently held by such Fund and in the same
manner for all purchasers and redeemers. Applicants also believe that
in-kind purchases and redemptions will not result in self-dealing or
overreaching of the Fund.
21. Applicants seek an exemption from Section 17(a) pursuant to
Section 17(b) and Section 6(c) of the Act to permit a Fund, to the
extent that the Fund is an affiliated person or second-tier affiliate
(as defined in Section 2(a)(3)(B) of the Act) of an Acquiring Fund, to
sell its Shares to and redeem its Shares from an Acquiring Fund, and to
engage in any accompanying in-kind
[[Page 17246]]
transactions.\21\ Applicants state that the terms of the transactions
are fair and reasonable and do not involve overreaching. Further,
absent the unusual circumstances discussed in section II.B of the
application, the Deposit Instruments and Redemption Instruments
available for a Fund will be the same for all purchasers and redeemers,
respectively, and will correspond pro rata to the Fund's Portfolio
Investments. Applicants note that any consideration paid for the
purchase or redemption of Shares directly from a Fund will be based on
the NAV of the Shares.\22\ Applicants believe that any proposed
transactions directly between the Funds and Acquiring Funds will be
consistent with the policies and procedures of each Fund involved as
set forth in its registration statements. The Participation Agreement
will require any Acquiring Fund that purchases Creation Units directly
from a Fund to represent that the purchase of Creation Units from a
Fund by an Acquiring Fund will be accomplished in compliance with the
investment restrictions of the Acquiring Fund and will be consistent
with the investment policies set forth in the Acquiring Fund's
registration statement. Applicants also state that the proposed
transactions are consistent with the general purposes of the Act and
appropriate in the public interest.
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\21\ To the extent that purchases of Shares of a Fund occur in
the secondary market and not through principal transactions directly
between an Acquiring Fund and a Fund, relief from section 17(a)
would not be necessary. However, the requested relief would apply to
direct sales of Shares in Creation Units by a Fund to an Acquiring
Fund and redemptions of those Shares. The requested relief is also
intended to cover the in-kind transactions that would accompany such
sales and redemptions.
Applicants are not seeking relief from section 17(a) for, and
the requested relief would not apply to, transactions where a Fund
could be deemed an affiliated person, or an affiliated person of an
affiliated person of an Acquiring Fund because the Adviser (or any
entity controlling, controlled by or under common control with the
Adviser) provides investment advisory services to that Acquiring
Fund.
\22\ Applicants acknowledge that receipt of compensation by (a)
an affiliated person of an Acquiring Fund, or an affiliated person
of such person, for the purchase by the Acquiring Fund of Shares or
(b) an affiliated person of a Fund, or an affiliated person of such
person, for the sale by the Fund of its Shares to an Acquiring Fund
may be prohibited by section 17(e)(1) of the Act. The Participation
Agreement also will include this acknowledgment.
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Applicants' Conditions
Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
ETF Relief
1. As long as a Fund operates in reliance on the requested order,
its Shares will be listed on an Exchange.
2. Neither the Trust nor any Fund will be advertised or marketed as
an open-end investment company or a mutual fund. Any advertising
material that describes the purchase or sale of Creation Unit or refers
to redeemability will prominently disclose that Shares are not
individually redeemable and that owners of Shares may acquire those
Shares from a Fund and tender those Shares for redemption to a Fund in
Creation Units only.
3. The Web site maintained for the Funds, which will be publicly
accessible at no charge, will contain, on a per Share basis for each
Fund, the prior Business Day's NAV and the market closing price or the
midpoint of the bid/ask spread at the time of the calculation of such
NAV (``Bid/Ask Price''), and a calculation of the premium or discount
of the market closing price or the Bid/Ask Price against such NAV.
4. The requested relief to permit ETF operations will expire on the
effective date of any Commission rule under the Act that provides
relief permitting the operation of index-based exchange-traded funds.
Section 12(d)(1) Relief
Applicants agree that any order granting the requested 12(d)(1)
relief will be subject to the following conditions:
5. The members of an Acquiring 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 Sub-adviser Group will
not control (individually or in the aggregate) a Fund within the
meaning of section 2(a)(9) of the Act. If, as a result of a decrease in
the outstanding voting securities of a Fund, an Acquiring Funds'
Advisory Group or the Sub-adviser Group, each in the aggregate, becomes
a holder of more than 25% of the outstanding voting securities of a
Fund, it will vote its Shares of the Fund in the same proportion as the
vote of all other holders of the Fund Shares. This condition does not
apply to the Sub-adviser Group with respect to a Fund for which the
Acquiring Fund Sub-adviser or a person controlling, controlled by, or
under common control with the Acquiring Fund Sub-adviser acts as the
investment adviser within the meaning of section 2(a)(20)(A) of the
Act.
6. No Acquiring Fund or Acquiring Funds Affiliate will cause any
existing or potential investment by the Acquiring Fund in a Fund to
influence the terms of any services or transactions between the
Acquiring Fund or an Acquiring Funds Affiliate and the Fund or a Fund
Affiliate.
7. The board of directors or trustees of an Acquiring Management
Company, including a majority of the disinterested directors or
trustees, will adopt procedures reasonably designed to ensure that the
Acquiring Fund Adviser and any Acquiring Fund Sub-adviser are
conducting the investment program of the Acquiring Management Company
without taking into account any consideration received by the Acquiring
Management Company or an Acquiring Fund Affiliate from a Fund or a Fund
Affiliate in connection with any services or transactions.
8. Once an investment by an Acquiring Fund in the Shares of a Fund
exceeds the limit in section 12(d)(1)(A)(i) of the Act, the board of
trustees of the Trust (``Board''), including a majority of the
disinterested Board members, will determine that any consideration paid
by the Fund to the Acquiring Fund or an Acquiring 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 Fund; (b) 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 (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 a Fund and its investment adviser(s), or any person
controlling, controlled by, or under common control with such
investment adviser(s).
9. An Acquiring Fund Adviser, or a Trustee or Sponsor of an
Acquiring Trust, as applicable, will waive fees otherwise payable to it
by the Acquiring Management Company or Acquiring Trust in an amount at
least equal to any compensation (including fees received pursuant to
any plan adopted by a Fund under rule 12b-1 under the Act) received
from a Fund by the Acquiring Fund Adviser, Trustee or Sponsor, or an
affiliated person of the Acquiring Fund Adviser, Trustee or Sponsor,
other than any advisory fees paid to the Acquiring Fund Adviser,
Trustee, or Sponsor, or its affiliated person by the Fund, in
connection with the investment by the Acquiring Fund in the Fund. Any
Acquiring Fund Sub-adviser will waive fees otherwise payable to the
Acquiring Fund Sub-adviser, directly or indirectly, by the Acquiring
Management Company
[[Page 17247]]
in an amount at least equal to any compensation received from a Fund by
the Acquiring Fund Sub-adviser, or an affiliated person of the
Acquiring Fund Sub-adviser, other than any advisory fees paid to the
Acquiring Fund Sub-adviser or its affiliated person by the Fund, in
connection with any investment by the Acquiring Management Company in
the Fund made at the direction of the Acquiring Fund Sub-adviser. In
the event that the Acquiring Fund Sub-adviser waives fees, the benefit
of the waiver will be passed through to the Acquiring Management
Company.
10. No Acquiring Fund or Acquiring Funds Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Fund)
will cause the Fund to purchase a security in any Affiliated
Underwriting.
11. The Board, including a majority of the disinterested Board
members, will adopt procedures reasonably designed to monitor any
purchases of securities by a Fund in an Affiliated Underwriting, once
an investment by the Acquiring Fund in the Shares of the Fund exceeds
the limit of section 12(d)(1)(A)(i) of the Act, including any purchases
made directly from an Underwriting Affiliate. The Board will review
these purchases periodically, but no less frequently than annually, to
determine whether the purchases were influenced by the investment by
the Acquiring Fund in the Fund. The Board will consider, among other
things: (a) Whether the purchases were consistent with the investment
objectives and policies of the Fund; (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 Fund in Affiliated Underwritings
and the amount purchased directly from an Underwriting Affiliate have
changed significantly from prior years. The Board will take any
appropriate actions based on its review, including, if appropriate, the
institution of procedures designed to assure that purchases of
securities in Affiliated Underwritings are in the best interest of
shareholders of the Fund.
12. Each Fund will maintain and preserve permanently in an easily
accessible place a written copy of the procedures described in the
preceding condition, and any modifications to such procedures, and will
maintain and preserve for a period of not less than six years from the
end of the fiscal year in which any purchase in an Affiliated
Underwriting occurred, the first two years in an easily accessible
place, a written record of each purchase of securities in Affiliated
Underwritings, once an investment by an Acquiring Fund in the
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.
13. Before investing in a Fund in excess of the limits in section
12(d)(1)(A), each Acquiring Fund and the Fund will execute a
Participation Agreement stating, without limitation, that their boards
of directors or trustees and their investment advisers, or their
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), an Acquiring Fund will notify the
Fund of the investment. At such time, the Acquiring Fund will also
transmit to the Fund a list of the names of each Acquiring Fund
Affiliate and Underwriting Affiliate. The Acquiring Fund will notify
the Fund of any changes to the list of names as soon as reasonably
practicable after a change occurs. The Fund and the Acquiring Fund will
maintain and preserve a copy of the order, the Participation Agreement,
and the list with any updated information for the duration of the
investment and for a period of not less than six years thereafter, the
first two years in an easily accessible place.
14. Before approving any advisory contract under section 15 of the
Act, the board of directors or trustees of each Acquiring Management
Company, including a majority of the disinterested directors or
trustees, will find that the advisory fees charged under such advisory
contract are based on services provided that will be in addition to,
rather than duplicative of, the services provided under the advisory
contract(s) of any Fund in which the Acquiring Management Company may
invest. These findings and their basis will be recorded fully in the
minute books of the appropriate Acquiring Management Company.
15. Any sales charges and/or service fees charged with respect to
shares of an Acquiring Fund will not exceed the limits applicable to a
fund of funds as set forth in NASD Conduct Rule 2830.
16. No Fund will acquire securities of an investment company or
company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of
the limits contained in section 12(d)(1)(A) of the Act, except to the
extent permitted by exemptive relief from the Commission permitting the
Fund to purchase shares of other investment companies for short-term
cash management purposes.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06399 Filed 3-19-13; 8:45 am]
BILLING CODE 8011-01-P