[Federal Register Volume 78, Number 128 (Wednesday, July 3, 2013)]
[Notices]
[Pages 40213-40220]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-16025]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30584; 812-14009]
Charles Schwab Investment Management, Inc., et al.; Notice of
Application
June 27, 2013.
AGENCY: Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (the ``Act'') for an exemption from
sections 2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act and rule 22c-1
under the Act, and under sections 6(c) and 17(b) of the Act for 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.
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Applicants: Charles Schwab Investment Management, Inc. (``CSIM''),
the Schwab Strategic Trust (the ``Trust''), and SEI Investments
Distribution Co. (the ``Distributor'').
Summary of Application: Applicants request an order that permits:
(a) Actively-managed series of the Trusts to issue shares (``Shares'')
redeemable in large aggregations only (``Creation Units''); (b)
secondary market transactions in Shares to occur at negotiated market
prices; (c) certain series to pay redemption proceeds, under certain
circumstances, more than seven days after the tender of Shares for
redemption; (d) certain affiliated persons of the series to deposit
securities into, and receive securities from, the series in connection
with the purchase and redemption of Creation Units; (e) certain
registered management investment companies and unit investment trusts
outside of the same group of investment companies as the series to
acquire Shares; and (f) certain series to perform creations and
redemptions of Shares in-kind in a master-feeder structure.
DATES: Filing Dates: The application was filed on February 27, 2012,
and amended on August 8, 2012, January 25, 2013, and June 21, 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 July 22, 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. Applicants, David
J. Lekich, Esq., Charles Schwab Investment Management, Inc., 211 Main
Street, SF211-05-491, San Francisco, CA 94105.
FOR FURTHER INFORMATION CONTACT: Mark N. Zaruba, Senior Counsel, at
(202) 551-6878 or Mary Kay Frech, Branch Chief, at (202) 551-6821
(Division of Investment Management, Exemptive Applications Office).
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 is organized as a Delaware statutory trust.
The Trust will offer Funds (as defined below), each of which will have
distinct investment strategies and will attempt to achieve its
investment objective by utilizing an active management strategy based
on investments in equity and debt securities, including shares of other
investment companies. Initially, the requested order will apply to a
new series of the Trust (the ``New Fund'') that will seek a high level
of current income consistent with preservation of capital and daily
liquidity by investing at least 90% of its assets in a portfolio of
investment grade short-term fixed income securities issued by U.S. and
foreign issuers and other short-term investments.
2. CSIM, a Delaware corporation, is, and any other Adviser (as
defined below) will be, registered as an investment adviser under the
Investment Advisers Act of 1940 (the ``Advisers Act''). Subject to
approval of the Trust's Board (as defined below), an Adviser will be
the investment adviser to each Fund. The Adviser may enter into sub-
advisory agreements with one or more investment advisers to serve as a
subadviser to a Fund (each a ``Sub-Adviser''). Any Sub-Adviser will be
registered, or not subject to registration, under the Advisers Act. SEI
Investments Distribution Co., a Pennsylvania corporation, is registered
as a broker-dealer (``Broker'') under the Securities Exchange Act of
1934 (the ``Exchange Act''). A Distributor will serve as the principal
underwriter and distributor for each of the Funds.\1\
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\1\ For purposes of the requested order, the term
``Distributor'' shall include any other entity that acts as the
distributor and principal underwriter of the Creation Units of
Shares of the Funds in the future and complies with the terms and
conditions of the application. Any future Distributor will be a
Broker registered under the Exchange Act.
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3. Applicants request that the order apply to the New Fund as well
as to additional series of the Trust or to any other open-end
investment company or
[[Page 40214]]
series thereof that may be created in the future that, in each case,
(a) is an actively managed exchange-traded fund (``ETF''), (b) is
advised by CSIM or an entity controlling, controlled by, or under
common control with CSIM (each such entity, an ``Adviser'') and (c)
complies with the terms and conditions of the application (individually
a ``Fund,'' and collectively, the ``Funds'').\2\ The Funds, or their
respective Master Funds, may invest in equity securities or fixed
income securities traded in the U.S. or non-U.S. markets. Funds that
invest in foreign equity securities or foreign fixed income securities,
either directly or through a Master Fund, are ``Foreign Funds.'' The
Funds, either directly or through a Master Fund, may also invest in
``Depositary Receipts'' \3\ and may engage in TBA Transactions (defined
below). To implement each Fund's investment strategy, the Adviser and/
or Subadvisers of a Fund may review and change the portfolio
securities, other assets, and other positions held by the Fund (the
``Portfolio Instruments'') daily.\4\
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\2\ All entities that currently intend to rely on the order are
named as applicants. Any entity that relies on the order in the
future will comply with the terms and conditions of the application.
\3\ Depositary Receipts are typically issued by a financial
institution (a ``Depositary'') and evidence ownership in a security
or pool of securities that have been deposited with the Depositary.
A Fund will not invest in any Depositary Receipts that the Adviser
or any Sub-Adviser deems to be illiquid or for which pricing
information is not readily available. No affiliated persons of
applicants or any Sub-Adviser will serve as the Depositary for any
Depositary Receipts held by a Fund (or its respective Master Fund).
\4\ If a Fund (or its respective Master Fund) invests in
derivatives, then (a) the Fund's board of trustees or directors (for
any entity, the ``Board'') will periodically review and approve the
Fund's (or its respective Master Fund's) use of derivatives and how
the Fund's investment adviser assesses and manages risk with respect
to the Fund's (or its respective Master Fund's) use of derivatives
and (b) the Fund's disclosure of its use of derivatives in its
offering documents and periodic reports will be consistent with
relevant Commission and staff guidance.
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4. Applicants also request that any exemption under section
12(d)(1)(J) of the Act from sections 12(d)(1)(A) and (B) apply to: (i)
Any Fund; (ii) any Fund of Funds (as defined below); and (iii) any
Brokers selling Shares of a Fund to a Fund of Funds or any principal
underwriter of a Fund.\5\ A management investment company or unit
investment trust registered under the Act that is not part of the same
``group of investment companies'' as the Funds within the meaning of
section 12(d)(1)(G)(ii) of the Act and that acquires Shares of a Fund
in excess of the limits of section 12(d)(1)(A) of the Act is referred
to as an ``Investing Management Company'' or an ``Investing Trust,''
respectively, and the Investing Management Companies and Investing
Trusts are referred to collectively as ``Funds of Funds.'' \6\
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\5\ Any future principal underwriter of a Fund will be a Broker
registered under the Exchange Act and will comply with the terms and
conditions of the application.
\6\ A Fund of Funds may rely on the order only to invest in the
Funds and not in any other registered investment company. In no case
will a Fund that invests in other investment companies and/or ETFs
rely on the exemption from section 12(d)(1) being requested in the
application.
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5. A Fund may operate as a feeder fund in a master-feeder structure
(``Feeder Fund''). Applicants request that the order permit a Feeder
Fund to acquire shares of another registered investment company in the
same group of investment companies having substantially the same
investment objectives as the Feeder Fund (``Master Fund'') beyond the
limitations in section 12(d)(1)(A) of the Act and permit the Master
Fund, and any principal underwriter for the Master Fund, to sell shares
of the Master Fund to the Feeder Fund beyond the limitations in section
12(d)(1)(B) of the Act (``Master-Feeder Relief''). Applicants may
structure certain Feeder Funds to generate economies of scale and incur
lower overhead costs.\7\ There would be no ability by Fund shareholders
to exchange Shares of Feeder Funds for shares of another feeder series
of the Master Fund.
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\7\ Operating in a master-feeder structure could also impose
costs on a Feeder Fund and reduce its tax efficiency. The Feeder
Fund's Board will consider any such potential disadvantages against
the benefits of economies of scale and other benefits of operating
within a master-feeder structure. In a master-feeder structure, the
Master Fund--rather than the Feeder Fund--would generally invest its
portfolio in compliance with the requested order.
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6. A Creation Unit will consist of at least 25,000 Shares and
applicants expect that the trading price of a Share will range from $20
to $100. All orders to purchase Creation Units must be placed with the
Distributor by or through an ``Authorized Participant,'' which is
either (a) a Broker or other participant in the Continuous Net
Settlement System of the National Securities Clearing Corporation
(``NSCC''), a clearing agency registered with the Commission, or (b) a
participant in the Depository Trust Company (``DTC,'' and such
participant a ``DTC Participant''), which, in either case, has executed
an agreement with the Distributor with respect to the purchase and
redemption of Creation Units.
7. Shares will be purchased and redeemed in Creation Units and
generally on an in-kind basis. Except where the purchase or redemption
will include cash under the limited circumstances specified below,
purchasers will be required to purchase Creation Units by making an in-
kind deposit of specified instruments (``Deposit Instruments''), and
shareholders redeeming their Shares will receive an in-kind transfer of
specified instruments (``Redemption Instruments'').\8\ On any given
Business Day \9\ the names and quantities of the instruments that
constitute the Deposit Instruments and the names and quantities of the
instruments that constitute the Redemption Instruments will be
identical, and these instruments may be referred to, in the case of
either a purchase or a redemption, as the ``Creation Basket.'' In
addition, the Creation Basket will correspond pro rata to the positions
in a Fund's (or its respective Master Fund's) portfolio (including cash
positions),\10\ 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;\11\ or (c) TBA Transactions,\12\ short
positions or other positions that cannot be transferred in kind \13\
will be excluded from the Creation Basket.\14\ If there is a difference
between the NAV attributable to a Creation Unit and the aggregate
market value of the Creation Basket exchanged for the Creation Unit,
the party
[[Page 40215]]
conveying instruments with the lower value will also pay to the other
an amount in cash equal to that difference (the ``Balancing Amount'').
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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\ Each Fund will sell and redeem Creation Units on any day
that the Fund is open, including as required by section 22(e) of the
Act (each, a ``Business Day'').
\10\ The portfolio used for this purpose will be the same
portfolio used to calculate the Fund's net asset value (``NAV'') for
that Business Day.
\11\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
\12\ A TBA Transaction is a method of trading mortgage-backed
securities. In a TBA Transaction, the buyer and seller agree on
general trade parameters such as agency, settlement date, par amount
and price.
\13\ This includes instruments that can be transferred in kind
only with the consent of the original counterparty to the extent the
Fund does not intend to seek such consents.
\14\ Because these instruments will be excluded from the
Creation Basket, their value will be reflected in the determination
of the Balancing Amount (defined below).
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8. Purchases and redemptions of Creation Units may be made in whole
or in part on a cash basis, rather than in kind, solely under the
following circumstances: (a) To the extent there is a Balancing Amount,
as described above; (b) if, on a given Business Day, a Fund announces
before the open of trading that all purchases, all redemptions or all
purchases and redemptions on that day will be made entirely in cash;
(c) if, upon receiving a purchase or redemption order from an
Authorized Participant, a Fund determines to require the purchase or
redemption, as applicable, to be made entirely in cash; (d) if, on a
given Business Day, a Fund requires all Authorized Participants
purchasing or redeeming Shares on that day to deposit or receive (as
applicable) cash in lieu of some or all of the Deposit Instruments or
Redemption Instruments, respectively, solely because: (i) Such
instruments are not eligible for transfer through either the NSCC or
DTC; or (ii) in the case of Foreign Funds, such instruments are not
eligible for trading due to local trading restrictions, local
restrictions on securities transfers or other similar circumstances; or
(e) if a Fund permits an Authorized Participant to deposit or receive
(as applicable) cash in lieu of some or all of the Deposit Instruments
or Redemption Instruments, respectively, solely because: (i) Such
instruments are, in the case of the purchase of a Creation Unit, not
available in sufficient quantity; (ii) such instruments are not
eligible for trading by an Authorized Participant or the investor on
whose behalf the Authorized Participant is acting; or (iii) a holder of
Shares of a Foreign Fund would be subject to unfavorable income tax
treatment if the holder receives redemption proceeds in kind.\15\
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\15\ A ``custom order'' is any purchase or redemption of Shares
made in whole or in part on a cash basis in reliance on clause
(e)(i) or (e)(ii).
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9. Each Business Day, before the open of trading on a national
securities exchange, as defined in section 2(a)(26) of the Act (a
``Listing Exchange''), on which Shares are listed and traded, each Fund
will cause to be published through the NSCC the names and quantities of
the instruments comprising the Creation Basket, as well as the
estimated Balancing Amount (if any), for that day. The published
Creation Basket will apply until a new Creation Basket is announced on
the following Business Day, and there will be no intra-day changes to
the Creation Basket except to correct errors in the published Creation
Basket. For each Fund, the relevant Listing Exchange will disseminate
every 15 seconds throughout the trading day an amount representing, on
a per Share basis, the current value of the Portfolio Instruments held
by the Fund.
10. An investor purchasing or redeeming a Creation Unit from a Fund
may be charged a fee (the ``Transaction Fee'') to defray transaction
expenses as well as prevent possible shareholder dilution.\16\ With
respect to Feeder Funds, the Transaction Fee would be paid indirectly
to the Master Fund.\17\ All orders to purchase Creation Units must be
placed with the Distributor by or through an Authorized Participant and
the Distributor will transmit such orders to the Funds. The Distributor
will be responsible for maintaining records of both the orders placed
with it and the confirmations of acceptance furnished by it.
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\16\ Where a Fund permits a 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
costs of purchasing those Deposit Instruments. In all cases, the
Transaction Fee will be limited in accordance with requirements of
the Commission applicable to management investment companies
offering redeemable securities.
\17\ Applicants are not requesting relief from section 18 of the
Act. Accordingly, a Master Fund may require a Transaction Fee
payment to cover expenses related to purchases or redemptions of the
Master Fund's shares by a Feeder Fund only if it requires the same
payment for equivalent purchases or redemptions by any other feeder
fund. Thus, for example, a Master Fund may require payment of a
Transaction Fee by a Feeder Fund for transactions of 200,000 or more
shares so long as it requires payment of the same Transaction Fee by
all feeder funds for transactions involving 200,000 or more shares.
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11. 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 a Listing Exchange and it is
expected that the relevant Listing Exchange will designate one or more
member firms to maintain a market for the Shares.\18\ The price of
Shares trading on a Listing Exchange will be based on a current bid-
offer in the secondary market. Purchases and sales of Shares in the
secondary market will not involve a Fund and will be subject to
customary brokerage commissions and charges.
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\18\ If Shares are listed on The NASDAQ Stock Market LLC
(``Nasdaq'') or a similar electronic Listing Exchange (including
NYSE Arca, Inc.), one or more member firms of that Listing Exchange
will act as market maker (a ``Market Maker'') and maintain a market
for Shares trading on that Listing Exchange. On Nasdaq, no
particular Market Maker would be contractually obligated to make a
market in Shares. However, the listing requirements on Nasdaq
stipulate that at least two Market Makers must be registered in
Shares to maintain a listing. Registered Market Makers are required
to make a continuous two-sided market or subject themselves to
regulatory sanctions. No Market Maker will be an affiliated person,
or an affiliated person of an affiliated person, of the Funds,
except within the meaning of section 2(a)(3)(A) or (C) of the Act
due solely to ownership of Shares.
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12. Applicants expect that purchasers of Creation Units will
include institutional investors and arbitrageurs. Applicants expect
that secondary market purchasers of Shares will include both
institutional and retail investors.\19\ Applicants believe that the
structure and operation of the Funds will be designed to enable
efficient arbitrage and, thereby, minimize the probability that Shares
will trade at a material premium or discount to a Fund's NAV.
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\19\ Shares will be registered in book-entry form only. DTC or
its nominee will be the 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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13. 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. As
discussed above, redemptions of Creation Units will generally be made
on an in-kind basis, subject to certain specified exceptions under
which redemptions may be made in whole or in part on a cash basis, and
may be subject to a Transaction Fee.
14. Neither the Trust nor any Fund will be advertised or marketed
or otherwise held out as a traditional open-end investment company or
mutual fund. Instead, each Fund will be marketed as an ``exchange-
traded fund.'' All marketing materials that describe the features or
method of obtaining, buying, or selling Creation Units, or Shares
traded on a Listing Exchange, or refer to redeemability, will
prominently disclose that Shares are not individually redeemable and
that the owners of Shares may acquire those Shares from a Fund or
tender those Shares for redemption to the Fund in Creation Units only.
15. The Trust's Web site (``Web site''), which will be publicly
available prior to the offering of Shares, will include each Fund's
prospectus (``Prospectus''), statement of additional information
(``SAI''), and summary prospectus, if used. The Web site will contain,
on a per Share basis for each Fund, the prior Business Day's NAV and
the market closing price or mid-point of the bid/ask spread at the time
of calculation of such NAV (``Bid/Ask Price''), and a
[[Page 40216]]
calculation of the premium or discount of the market closing price or
the Bid/Ask Price against such NAV. On each Business Day, prior to the
commencement of trading in Shares on the Listing Exchange, each Fund
shall post on the Web site the identities and quantities of the
Portfolio Instruments held by the Fund \20\ that will form the basis
for the calculation of the NAV at the end of that Business Day.\21\
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\20\ Feeder Funds will disclose information about the securities
and other assets held by the Master Fund.
\21\ Under accounting procedures followed by each Fund, trades
made on the prior Business Day (``T'') will be booked and reflected
in NAV on the current Business Day (T+1). Accordingly, the Funds
will be able to disclose at the beginning of the Business Day the
portfolio that will form the basis for the NAV calculation at the
end of the Business Day.
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Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the Act
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 provision of section 12(d)(1) if the exemption
is consistent with the public interest and the protection of investors.
Sections 5(a)(1) and 2(a)(32) of the Act
3. Section 5(a)(1) of the Act defines an ``open-end company'' as a
management investment company that is offering for sale or has
outstanding any redeemable security of which it is the issuer. Section
2(a)(32) of the Act defines a redeemable security as any security,
other than short-term paper, under the terms of which the holder, upon
its presentation to the issuer, is entitled to receive approximately a
proportionate share of the issuer's current net assets, or the cash
equivalent. Because Shares will not be individually redeemable,
applicants request an order that would permit the Trust and each Fund
to redeem Shares in Creation Units only.\22\ Applicants state that
investors may purchase Shares in Creation Units from each Fund and that
Creation Units will always be redeemable in accordance with the
provisions of the Act. Applicants further state that because the market
price of Shares will be disciplined by arbitrage opportunities,
investors should be able to sell Shares in the secondary market at
prices that do not vary substantially from their NAV.
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\22\ The Master Funds will not require relief from sections
2(a)(32) and 5(a)(1) because the Master Funds will operate as
traditional mutual funds and issue individually redeemable
securities.
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Section 22(d) of the Act and Rule 22c-1 Under the Act
4. Section 22(d) of the Act, among other things, prohibits a dealer
from selling a redeemable security that is currently being offered to
the public by or through a principal underwriter, except at a current
public offering price described in the prospectus. Rule 22c-1 under the
Act generally requires that a dealer selling, redeeming, or
repurchasing a redeemable security do so only at a price based on its
NAV. Applicants state that secondary market trading in Shares will take
place at negotiated prices, not at a current offering price described
in the Prospectus, and not at a price based on NAV. Thus, purchases and
sales of Shares in the secondary market will not comply with section
22(d) of the Act and rule 22c-1 under the Act. Applicants request an
exemption under section 6(c) from these provisions.
5. Applicants assert that the concerns sought to be addressed by
section 22(d) of the Act and rule 22c-1 under the Act with respect to
pricing are equally satisfied by the proposed method of pricing Shares.
Applicants maintain that, while there is little legislative history
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to (a) prevent dilution caused by
certain riskless-trading schemes by principal underwriters and contract
dealers, (b) prevent unjust discrimination or preferential treatment
among buyers resulting from sales at different prices, and (c) assure
an orderly distribution of investment company shares by eliminating
price competition from brokers offering shares at less than the
published sales price and repurchasing shares at more than the
published redemption price.
6. Applicants believe that none of these purposes will be thwarted
by permitting Shares to trade in the secondary market at negotiated
prices. Applicants state that (a) secondary market trading in Shares
does not involve the Funds as parties and cannot result in dilution of
an investment in Shares, and (b) to the extent different prices exist
during a given trading day, or from day to day, such variances occur as
a result of third-party market forces, such as supply and demand.
Therefore, applicants assert that secondary market transactions in
Shares will not lead to discrimination or preferential treatment among
purchasers. Finally, applicants contend that the proposed distribution
system will be orderly because arbitrage activity 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) generally prohibits a registered investment
company from suspending the right of redemption or postponing the date
of payment of redemption proceeds for more than seven days after the
tender of a security for redemption. Applicants observe that the
settlement of redemptions of Creation Units of the Foreign Funds is
contingent not only on the settlement cycle of the U.S. securities
markets but also on the delivery cycles present in foreign markets for
underlying foreign Portfolio Instruments in which those Funds invest.
Applicants have been advised that, under certain circumstances, the
delivery cycles for transferring Portfolio Instruments to redeeming
investors, coupled with local market holiday schedules, will require a
delivery process of up to fourteen (14) calendar days. Applicants
therefore request relief from section 22(e) in order to provide payment
or satisfaction of redemptions within a longer number of calendar days
as required for such payment or satisfaction in the principal local
markets where transactions in the Portfolio Instruments of each Foreign
Fund customarily clear and settle, but in all cases no later than
fourteen (14) days
[[Page 40217]]
following the tender of a Creation Unit.\23\
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\23\ Rule 15c6-1 under the Exchange Act requires that most
securities transactions be settled within three business days of the
trade. Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations applicants
may have under rule 15c6-1.
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8. Applicants state that section 22(e) was designed to prevent
unreasonable, undisclosed or unforeseen delays in the actual payment of
redemption proceeds. Applicants assert that the requested relief will
not lead to the problems that section 22(e) was designed to prevent.
Applicants state that the SAI will identify those instances in a given
year where, due to local holidays, more than seven calendar days, up to
a maximum of fourteen calendar days, will be needed to deliver
redemption proceeds and will list such holidays. Applicants are not
seeking relief from section 22(e) for Foreign Funds that do not effect
redemptions of Creation Units in-kind.
9. With respect to Feeder Funds, only in-kind redemptions may
proceed on a delayed basis pursuant to the relief requested from
section 22(e). In the event of such an in-kind redemption, the Feeder
Fund would make a corresponding redemption from the Master Fund.
Applicants do not believe the master-feeder structure would have any
impact on the delivery cycle.\24\
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\24\ The requested exemption from section 22(e) would only apply
to in-kind redemptions by the Feeder Funds and would not apply to
in-kind redemptions by other feeder funds.
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Section 12(d)(1) of the Act
10. 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.
11. Applicants request relief to permit Funds of Funds to acquire
Shares in excess of the limits in section 12(d)(1)(A) of the Act and to
permit the Funds, their principal underwriters and any Broker to sell
Shares to Funds of Funds in excess of the limits in section 12(d)(1)(B)
of the Act.
12. Applicants assert that the proposed transactions will not lead
to any of the abuses that section 12(d)(1) was designed to prevent.
Applicants submit that the proposed conditions to the requested relief
address the concerns underlying the limits in section 12(d)(1), which
include concerns about undue influence, excessive layering of fees and
overly complex structures.
13. Applicants submit that their proposed conditions address any
concerns regarding the potential for undue influence. To limit the
control that a Fund of Funds may have over a Fund, applicants propose a
condition prohibiting the adviser of an Investing Management Company
(``Fund of Funds' Adviser''), sponsor of an Investing Trust
(``Sponsor''), any person controlling, controlled by, or under common
control with the Fund of Funds' Adviser or Sponsor, and any investment
company or issuer that would be an investment company but for sections
3(c)(1) or 3(c)(7) of the Act that is advised or sponsored by the Fund
of Funds' Adviser, the Sponsor, or any person controlling, controlled
by, or under common control with the Fund of Funds' Adviser or Sponsor
(``Fund of Funds' 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 sub-adviser to a Fund of
Funds (``Fund of Funds' Sub-Adviser''), any person controlling,
controlled by or under common control with the Fund of Funds' Sub-
Adviser, and any investment company or issuer that would be an
investment company but for sections 3(c)(1) or 3(c)(7) of the Act (or
portion of such investment company or issuer) advised or sponsored by
the Fund of Funds' Sub-Adviser or any person controlling, controlled by
or under common control with the Fund of Funds' Sub-Adviser (``Fund of
Funds' Sub-Advisory Group'').
14. Applicants propose a condition to ensure that no Fund of Funds
or Fund of Funds' Affiliate \25\ (except to the extent it is acting in
its capacity as an investment adviser to a Fund) will cause a Fund to
purchase a security in an offering of securities during the existence
of an underwriting or selling syndicate of which a principal
underwriter is an Underwriting Affiliate (``Affiliated Underwriting'').
An ``Underwriting Affiliate'' is a principal underwriter in any
underwriting or selling syndicate that is an officer, director, member
of an advisory board, Fund of Funds' Adviser, Fund of Funds' Sub-
Adviser, employee or Sponsor of the Fund of Funds, or a person of which
any such officer, director, member of an advisory board, Fund of Funds'
Adviser, Fund of Funds' Sub-Adviser, 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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\25\ A ``Fund of Funds' Affiliate'' is any Fund of Funds'
Adviser, Fund of Funds' Sub-Adviser, Sponsor, promoter and principal
underwriter of a Fund of Funds, and any person controlling,
controlled by or under common control with any of these entities.
``Fund Affiliate'' is the Adviser, Sub-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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15. Applicants propose several conditions to address the potential
for layering of fees. Applicants note that the Board of any Investing
Management Company, including a majority of the directors or trustees
who are not ``interested persons'' within the meaning of section
2(a)(19) of the Act (for any Board, the ``Independent Board Members''),
will be required to 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 (or its respective Master Fund) in which the
Investing Management Company may invest. Applicants also state that any
sales charges and/or service fees charged with respect to shares of a
Fund of Funds will not exceed the limits applicable to a fund of funds
as set forth in NASD Conduct Rule 2830.\26\
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\26\ Any reference to NASD Conduct Rule 2830 includes 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 a Fund (or its
respective Master Fund) will be prohibited from acquiring securities of
any investment company or company relying on section 3(c)(1) or 3(c)(7)
of the Act in excess of the limits contained in section 12(d)(1)(A) of
the Act, except to the extent permitted by exemptive relief from the
Commission permitting the Fund to purchase shares of other investment
companies for short-term cash management purposes or pursuant to the
Master-Feeder Relief.
17. To ensure that a Fund of Funds is aware of the terms and
conditions of the requested order, the Funds of Funds
[[Page 40218]]
must enter into an agreement with the respective Funds (``FOF
Participation Agreement''). The FOF Participation Agreement will
include an acknowledgement from the Fund of Funds that it may rely on
the order only to invest in the Funds and not in any other investment
company.
18. Applicants also are seeking the Master-Feeder Relief to permit
the Feeder Funds to perform creations and redemptions of Shares in-kind
in a master-feeder structure. Applicants assert that this structure is
substantially identical to traditional master-feeder structures
permitted pursuant to the exception provided in section 12(d)(1)(E) of
the Act. Section 12(d)(1)(E) provides that the percentage limitations
of section 12(d)(1)(A) and (B) shall not apply to a security issued by
an investment company (in this case, the shares of the applicable
Master Fund) if, among other things, that security is the only
investment security held by the investing investment company (in this
case, the Feeder Fund). Applicants believe the proposed master-feeder
structure complies with section 12(d)(1)(E) because each Feeder Fund
will hold only investment securities issued by its corresponding Master
Fund; however, the Feeder Funds may receive securities other than
securities of its corresponding Master Fund if a Feeder Fund accepts an
in-kind creation. To the extent that a Feeder Fund may be deemed to be
holding both shares of the Master Fund and, for a hypothetical moment
in the course of a creation or redemption, other securities, applicants
request relief from section 12(d)(1)(A) and (B). The Feeder Funds would
operate in compliance with all other provisions of section 12(d)(1)(E).
Section 17(a) of the Act
19. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such person (``Second Tier Affiliates''), from selling any security to
or purchasing any security from the company. Section 2(a)(3) of the Act
defines ``affiliated person'' to include any person directly or
indirectly owning, controlling, or holding with power to vote 5% or
more of the outstanding voting securities of the other person and any
person directly or indirectly controlling, controlled by, or under
common control with, the other person. Section 2(a)(9) of the Act
provides that a control relationship will be presumed where one person
owns more than 25% of another person's voting securities. The Funds may
be deemed to be controlled by the Adviser or an entity controlling,
controlled by or under common control with the Adviser and hence
affiliated persons of each other. In addition, the Funds may be deemed
to be under common control with any other registered investment company
(or series thereof) advised by the Adviser or an entity controlling,
controlled by or under common control with the Adviser (an ``Affiliated
Fund'').
20. 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 to permit in-
kind purchases and redemptions of Creation Units from the Funds by
persons that are affiliated persons or Second Tier Affiliates of the
Funds solely by virtue of one or more of the following: (a) Holding 5%
or more, or more than 25%, of the 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. Applicants also request an
exemption in order to permit each Fund to sell Shares to and redeem
Shares from, and engage in the transactions that would accompany such
sales and redemptions with, any Fund of Funds of which the Fund is an
affiliated person or Second Tier Affiliate.\27\
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\27\ Applicants anticipate that most Fund of Funds will purchase
Shares in the secondary market and will not purchase or redeem
Creation Units directly from a Fund. To the extent that purchases
and sales of Shares occur in the secondary market and not through
principal transactions directly between a Fund of Funds 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 a Fund of Funds and redemptions of those Shares
in Creation Units. The requested relief is intended to cover
transactions that would accompany such sales and redemptions.
Applicants are not seeking relief from section 17(a) for, and the
requested relief will not apply to, transactions where a Fund could
be deemed an affiliated person, or an affiliated person of an
affiliated person of a Fund of Funds because an investment adviser
to the Funds is also an investment adviser to the Fund of Funds.
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21. Applicants contend that no useful purpose would be served by
prohibiting such affiliated persons or Second Tier Affiliates from
acquiring or redeeming Creation Units through in-kind transactions.
Both the deposit procedures for in-kind purchases of Creation Units and
the redemption procedures for in-kind redemptions will be the same for
all purchases and redemptions. Deposit Instruments and Redemptions
Instruments will be valued in the same manner as the Portfolio
Instruments held by the relevant Fund. Applicants thus believe that in-
kind purchases and redemptions will not result in self-dealing or
overreaching of the Fund.
22. Applicants also submit that the sale of Shares to and
redemption of Shares from a Fund of Funds satisfies the standards for
relief under sections 17(b) and 6(c) of the Act. Applicants note that
any consideration paid for the purchase or redemption of Creation Units
directly from a Fund will be based on the NAV of the Fund.\28\ The FOF
Participation Agreement will require any Fund of Funds that purchases
Creation Units directly from a Fund to represent that the purchase will
be in compliance with its investment restrictions and consistent with
the investment policies set forth in its 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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\28\ Applicants acknowledge that the receipt of compensation by
(a) an affiliated person of a Fund of Funds, or an affiliated person
of such person, for the purchase by the Fund of Funds of Shares of a
Fund or (b) an affiliated person of a Fund, or an affiliated person
of such person, for the sale by the Fund of its Shares to a Fund of
Funds, may be prohibited by section 17(e)(1) of the Act. The FOF
Participation Agreement also will include this acknowledgment.
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23. To the extent that a Fund operates in a master-feeder
structure, applicants also request relief permitting the Feeder Funds
to engage in in-kind creations and redemptions with the applicable
Master Fund. Applicants state that the customary section 17(a)(1) and
17(a)(2) relief would not be sufficient to permit such transactions
because the Feeder Funds and the applicable Master Fund could also be
affiliated by virtue of having the same investment adviser. However,
applicants believe that in-kind creations and redemptions between a
Feeder Fund and a Master Fund advised by the same investment adviser do
not involve ``overreaching'' by an affiliated person. Such transactions
will occur only at the Feeder Fund's proportionate share of the Master
Fund's net assets, and the distributed securities will be valued in the
same manner as they are valued for the purposes of calculating the
applicable Master Fund's NAV. Further, all such transactions will be
effected with respect to pre-determined securities and on the same
terms with respect to all investors. Finally, such transaction would
only occur as a result of, and to effectuate, a creation or redemption
transaction between the Feeder Fund and a third-party investor.
Applicants believe that the terms of the proposed transactions are
reasonable and fair and do not involve overreaching on the part of any
person concerned and that the transactions are
[[Page 40219]]
consistent with the general purposes of the Act.
Applicants' Conditions
Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
A. Actively Managed Exchange-Traded Fund Relief
1. The requested relief to permit ETF operations will expire on the
effective date of any Commission rule under the Act that provides
relief permitting the operation of actively managed ETFs.
2. As long as a Fund operates in reliance on the requested order,
the Shares of such Fund will be listed on a Listing Exchange.
3. 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 Units or
refers to redeemability will prominently disclose that Shares are not
individually redeemable and that owners of Shares may acquire Shares
from the Fund and tender Shares for redemption to the Fund in Creation
Units only.
4. The Web site, which is and will be publicly accessible at no
charge, will contain, on a per Share basis for the Fund, the prior
Business Day's NAV and the market closing price or Bid/Ask Price of the
Shares, and a calculation of the premium or discount of the market
closing price or Bid/Ask Price against such NAV.
5. No Adviser or Sub-Adviser, directly or indirectly, will cause
any Authorized Participant (or any investor on whose behalf an
Authorized Participant may transact with the Fund) to acquire any
Deposit Instrument for the Fund through a transaction in which the Fund
could not engage directly.
6. On each Business Day, before the commencement of trading in
Shares on the Fund's Listing Exchange, the Fund (or its respective
Master Fund) will disclose on the Web site the identities and
quantities of the Portfolio Instruments held by the Fund that will form
the basis of the Fund's calculation of NAV at the end of the Business
Day.
B. Section 12(d)(1) Relief
1. The members of the Fund of Funds' Advisory Group will not
control (individually or in the aggregate) a Fund (or its respective
Master Fund) within the meaning of section 2(a)(9) of the Act. The
members of the Fund of Funds' Sub-Advisory Group will not control
(individually or in the aggregate) a Fund (or its respective Master
Fund) within the meaning of section 2(a)(9) of the Act. If, as a result
of a decrease in the outstanding voting securities of a Fund, the Fund
of Funds' Advisory Group or the Fund of Funds' Sub-Advisory Group, each
in the aggregate, becomes a holder of more than 25 percent of the
outstanding voting securities of a Fund, it will vote its voting
securities of the Fund in the same proportion as the vote of all other
holders of the Fund's voting securities. This condition does not apply
to the Fund of Funds' Sub-Advisory Group with respect to a Fund (or its
respective Master Fund) for which the Fund of Funds' Sub-Adviser or a
person controlling, controlled by or under common control with the Fund
of Funds' Sub-Adviser acts as the investment adviser within the meaning
of section 2(a)(20)(A) of the Act.
2. No Fund of Funds or a Fund of Funds' Affiliate will cause any
existing or potential investment by the Fund of Funds in a Fund to
influence the terms of any services or transactions between the Fund of
Funds or a Fund of Funds' Affiliate and the Fund (or its respective
Master Fund) or a Fund Affiliate.
3. The Board of an Investing Management Company, including a
majority of the Independent Board Members, will adopt procedures
reasonably designed to ensure that the Fund of Funds' Adviser and any
Fund of Funds' Sub-Adviser are conducting the investment program of the
Investing Management Company without taking into account any
consideration received by the Investing Management Company or a Fund of
Funds' Affiliate from a Fund (or its respective Master Fund) or a Fund
Affiliate in connection with any services or transactions.
4. Once an investment by a Fund of Funds in the Shares of a Fund
exceeds the limit in section 12(d)(1)(A)(i) of the Act, the Board of
the Fund (or its respective Master Fund), including a majority of the
Independent Board Members, will determine that any consideration paid
by the Fund (or its respective Master Fund) to the Fund of Funds or a
Fund of Funds' Affiliate in connection with any services or
transactions: (i) Is fair and reasonable in relation to the nature and
quality of the services and benefits received by the Fund (or its
respective Master Fund); (ii) is within the range of consideration that
the Fund (or its respective Master Fund) would be required to pay to
another unaffiliated entity in connection with the same services or
transactions; and (iii) does not involve overreaching on the part of
any person concerned. This condition does not apply with respect to any
services or transactions between a Fund (or its respective Master Fund)
and its investment adviser(s), or any person controlling, controlled by
or under common control with such investment adviser(s).
5. The Fund of Funds' Adviser, or trustee or Sponsor of an
Investing Trust, as applicable, will waive fees otherwise payable to it
by the Fund of Funds in an amount at least equal to any compensation
(including fees received pursuant to any plan adopted by a Fund (or its
respective Master Fund) pursuant to rule 12b-l under the Act) received
from a Fund (or its respective Master Fund) by the Fund of Funds'
Adviser, or trustee or Sponsor of the Investing Trust, or an affiliated
person of the Fund of Funds' Adviser, or trustee or Sponsor of the
Investing Trust, other than any advisory fees paid to the Fund of
Funds' Adviser, or trustee or Sponsor of an Investing Trust, or its
affiliated person by the Fund (or its respective Master Fund), in
connection with the investment by the Fund of Funds in the Fund. Any
Fund of Funds' Sub-Adviser will waive fees otherwise payable to the
Fund of Funds' Sub-Adviser, directly or indirectly, by the Investing
Management Company in an amount at least equal to any compensation
received from a Fund (or its respective Master Fund) by the Fund of
Funds' Sub-Adviser, or an affiliated person of the Fund of Funds' Sub-
Adviser, other than any advisory fees paid to the Fund of Funds' Sub-
Adviser or its affiliated person by the Fund (or its respective Master
Fund), in connection with the investment by the Investing Management
Company in the Fund made at the direction of the Fund of Funds' Sub-
Adviser. In the event that the Fund of Funds' Sub-Adviser waives fees,
the benefit of the waiver will be passed through to the Investing
Management Company.
6. No Fund of Funds or Fund of Funds' Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Fund
(or its respective Master Fund)) will cause a Fund (or its respective
Master Fund) to purchase a security in an Affiliated Underwriting.
7. The Board of the Fund (or its respective Master Fund), including
a majority of the Independent Board Members, will adopt procedures
reasonably designed to monitor any purchases of securities by the Fund
(or its respective Master Fund) in an Affiliated Underwriting, once an
investment by a Fund of Funds in the securities of the Fund exceeds the
limit of section 12(d)(1)(A)(i) of the Act, including any purchases
made directly from an Underwriting Affiliate. The Board will review
these purchases periodically, but no less frequently than annually, to
determine whether the
[[Page 40220]]
purchases were influenced by the investment by the Fund of Funds in the
Fund. The Board will consider, among other things: (i) whether the
purchases were consistent with the investment objectives and policies
of the Fund (or its respective Master Fund); (ii) how the performance
of securities purchased in an Affiliated Underwriting compares to the
performance of comparable securities purchased during a comparable
period of time in underwritings other than Affiliated Underwritings or
to a benchmark such as a comparable market index; and (iii) whether the
amount of securities purchased by the Fund (or its respective Master
Fund) in Affiliated Underwritings and the amount purchased directly
from an Underwriting Affiliate have changed significantly from prior
years. The Board will take any appropriate actions based on its review,
including, if appropriate, the institution of procedures designed to
ensure that purchases of securities in Affiliated Underwritings are in
the best interest of the owners of beneficial interests in Shares of
the Fund.
8. Each Fund (or its respective Master Fund) will maintain and
preserve permanently in an easily accessible place a written copy of
the procedures described in the preceding condition, and any
modifications to such procedures, and will maintain and preserve for a
period of not less than six years from the end of the fiscal year in
which any purchase in an Affiliated Underwriting occurred, the first
two years in an easily accessible place, a written record of each
purchase of securities in Affiliated Underwritings once an investment
by a Fund of Funds in the securities of the Fund exceeds the limit of
section 12(d)(1)(A)(i) of the Act, setting forth from whom the
securities were acquired, the identity of the underwriting syndicate's
members, the terms of the purchase, and the information or materials
upon which the Board's determinations were made.
9. Before investing in the Shares of a Fund in excess of the limits
in section 12(d)(1)(A), a Fund of Funds will execute a FOF
Participation Agreement with the Fund stating that their respective
boards of directors or trustees and their investment advisers, or
trustee and Sponsor, as applicable, understand the terms and conditions
of the requested order, and agree to fulfill their responsibilities
under the requested order. At the time of its investment in Shares of a
Fund in excess of the limit in section 12(d)(1)(A)(i), a Fund of Funds
will notify the Fund of the investment. At such time, the Fund of Funds
will also transmit to the Fund a list of the names of each Fund of
Funds' Affiliate and Underwriting Affiliate. The Fund of Funds will
notify the Fund of any changes to the list as soon as reasonably
practicable after a change occurs. The Fund and the Fund of Funds will
maintain and preserve a copy of the order, the FOF Participation
Agreement, and the list with any updated information for the duration
of the investment and for a period of not less than six years
thereafter, the first two years in an easily accessible place.
10. Before approving any advisory contract under section 15 of the
Act, the Board of each Investing Management Company including a
majority of the Independent Board Members, will find that the advisory
fees charged under such contract are based on services provided that
will be in addition to, rather than duplicative of, the services
provided under the advisory contract(s) of any Fund (or its respective
Master Fund) in which the Investing Management Company may invest.
These findings and their basis will be recorded fully in the minute
books of the appropriate Investing Management Company.
11. Any sales charges and/or service fees charged with respect to
shares of a Fund of Funds will not exceed the limits applicable to a
fund of funds as set forth in NASD Conduct Rule 2830.
12. No Fund (or its respective Master 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 that (i) the Fund (or its
respective Master Fund) acquires securities of another investment
company pursuant to exemptive relief from the Commission permitting the
Fund (or its respective Master Fund) to acquire securities of one or
more investment companies for short-term cash management purposes, or
(ii) the Fund acquires securities of the Master Fund pursuant to the
Master-Feeder Relief.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-16025 Filed 7-2-13; 8:45 am]
BILLING CODE 8011-01-P