[Federal Register Volume 78, Number 191 (Wednesday, October 2, 2013)]
[Notices]
[Pages 60929-60937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-24024]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30735; 812-14137]
Guinness Atkinson Asset Management, Inc., et al.; Notice of
Application
September 26, 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, 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: Guinness Atkinson Asset Management, Inc. (``GAAM''),
SmartX ETF Trust (the ``Trust'') and Foreside Fund Services, LLC
(``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; (e) certain series to issue Shares in
less than Creation Unit size to investors participating in a
distribution reinvestment program (``Distribution Reinvestment
Program''); and (f) 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 March 22, 2013, and
amended on September 11, 2013 and September 18, 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. October 21, 2013, and should be accompanied by proof of
service on applicants, in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090. Applicants, c/
o Alexandra Alberstadt,
[[Page 60930]]
Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New
York, NY 10036.
FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at
(202) 551-6817 or Daniele Marchesani, 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, a Delaware statutory trust, is registered under the
Act as an open-end management investment company. Applicants request
that the order apply to the initial series of the Trust, SmartX NASDAQ
Quality Dividend Index ETF (``Initial Fund''), and future series of the
Trust and future open-end management investment companies and series
thereof advised by GAAM or an entity controlling, controlled by or
under common control with GAAM (each, an ``Adviser'') that comply with
the terms and conditions of the application (each such company or
series, a ``Future Fund,'' and collectively with the Initial Fund, the
``Funds'').\1\ The Initial Fund and the Future Funds will each track
the performance of a specified equity or fixed income securities index
(``Underlying Index'').\2\ Certain Future Funds will be based on
Underlying Indexes comprised solely of equity and/or fixed income
securities issued by (i) domestic issuers (``Domestic Funds'') or (ii)
foreign issuers (``International Funds''). Other Future Funds may be
based on Underlying Indexes that include foreign and domestic equity or
fixed income securities (``Global Funds'').
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\1\ All existing entities that intend to rely on the requested
order have been named as applicants. Any other existing or future
entity that subsequently 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 a Fund and
not in any other registered investment company.
\2\ The Underlying Index for the Initial Fund is NASDAQ SmartX
Quality Dividend Index.
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2. GAAM or another Adviser will serve as the investment adviser to
the Funds. GAAM and each other Adviser will be registered as an
investment adviser under the Investment Advisers Act of 1940
(``Advisers Act''). The Adviser may enter into subadvisory agreements
with investment advisers to act as subadvisers with respect to any Fund
(each, a ``Subadviser''). Any Subadviser to a Fund will be registered
under the Advisers Act or not subject to registration. The Distributor,
a broker-dealer registered under the Securities Exchange Act of 1934
(``Broker'') and an affiliate of the Adviser, will act as the
distributor and principal underwriter of Creation Units of Shares. In
the future, another Broker may act as distributor and principal
underwriter. No Distributor will be affiliated with any Exchange (as
defined below) or any Index Provider (as defined below).
3. Each Fund will consist of a portfolio of securities and other
assets and positions (``Portfolio Positions'') selected to correspond
generally to the price and yield performance of an Underlying Index. 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 or a Fund, a promoter, the Adviser, a
Subadviser, or a Distributor.
4. The investment objective of each Fund will be to provide
investment returns that closely correspond, before fees and expenses,
to the price and yield performance of its Underlying Index.\3\ Each
Fund will sell and redeem Creation Units on a ``Business Day,'' which
is defined to include any day that the Trust is open for business as
required by section 22(e) of the Act. The Adviser and/or Subadviser may
utilize a replication or a representative sampling strategy to track
its Underlying Index. A Fund using a replication strategy will invest
in substantially all of the Component Securities in its Underlying
Index in the same approximate proportions as in the Underlying Index. A
Fund using a representative sampling strategy generally will hold a
significant number, but not necessarily all, of the Component
Securities of its Underlying Index. Applicants state that if
representative sampling is used, a Fund will not be expected to track
its Underlying Index with the same degree of accuracy as a Fund
employing the replication strategy. Applicants expect that each Fund
will have a tracking error relative to the performance of its
Underlying Index of no more than five percent.
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\3\ Applicants represent that at least 80% of each Fund's total
assets will be invested in the constituent securities of its
respective Underlying Index (``Component Securities''), TBA
Transactions (as defined below) representing Component Securities,
and Depositary Receipts (as defined below) representing Component
Securities. Each Fund also may invest the remaining 20% of its total
assets in instruments not included in its Underlying Index, which
the Adviser or Subadviser believes will assist the Fund in tracking
the performance of its Underlying Index.
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5. Applicants anticipate that the price of a Share will range from
$15 to $25, and that Creation Units will consist of at least 10,000
Shares. All orders to purchase and redeem Creation Units must be placed
with the Distributor by or through an ``Authorized Participant,'' which
is either: (a) a ``participating party,'' i.e., 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 and affiliated with the Depository Trust
Company (``DTC''), or (b) a participant in the DTC (``DTC
Participant''), which in any case, has executed an agreement with the
Distributor. The Distributor will transmit all purchase orders to the
relevant Fund.
6. The Shares will be purchased and redeemed in Creation Units and
generally on an in-kind basis. Except where the purchase or redemption
will include cash under the limited circumstances specified below,
purchasers will be required to purchase Creation Units by making an in-
kind deposit of specified instruments (``Deposit Instruments''), and
shareholders redeeming their Shares will receive an in-kind transfer of
specified instruments (``Redemption Instruments'').\4\ 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 the Redemption Instruments will
each correspond pro rata to the positions in a Fund's portfolio
(including cash positions),\5\ 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
[[Page 60931]]
differences when rounding is necessary to eliminate fractional shares
or lots that are not tradeable round lots; \6\ (c) ``to be announced''
transactions (``TBA Transactions''),\7\ derivatives and other positions
that cannot be transferred in kind \8\ will be excluded from the
Deposit Instruments and the Redemption Instruments; \9\ (d) to the
extent the Fund determines, on a given Business Day, to use a
representative sampling of the Fund's portfolio; \10\ or (e) for
temporary periods, to effect changes in the Fund's portfolio as a
result of the rebalancing of its Underlying Index (any such change, a
``Rebalancing''). If there is a difference between the net asset value
(``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 (the ``Balancing Amount'').
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\4\ 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.
\5\ The portfolio used for this purpose will be the same
portfolio used to calculate the Fund's NAV for that Business Day.
\6\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
\7\ 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. The actual pools delivered generally are determined two
days prior to the settlement date.
\8\ This includes instruments that can be transferred in kind
only with the consent of the original counterparty to the extent the
Fund does not intend to seek such consents.
\9\ Because these instruments will be excluded from the Deposit
Instruments and the Redemption Instruments, their value will be
reflected in the determination of the Balancing Amount (defined
below).
\10\ A Fund may only use sampling for this purpose if the
sample: (i) Is designed to generate performance that is highly
correlated to the performance of the Fund's portfolio; (ii) consists
entirely of instruments that are already included in the Fund's
portfolio; and (iii) is the same for all Authorized Participants on
a given Business Day.
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7. 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; \11\ (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 Global Funds and International Funds, such
instruments are not eligible for trading due to local trading
restrictions, local restrictions on securities transfers or other
similar circumstances; or (e) if 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 Global Fund or
International Fund would be subject to unfavorable income tax treatment
if the holder receives redemption proceeds in kind.\12\
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\11\ In determining whether a particular Fund will sell or
redeem Creation Units entirely on a cash or in kind basis (whether
for a given day or a given order), the key consideration will be the
benefit that would accrue to the Fund and its investors. For
instance, in bond transactions, the Adviser may be able to obtain
better execution than Share purchasers because of the Adviser's
size, experience and potentially stronger relationships in the fixed
income markets. Purchases of Creation Units either on an all cash
basis or in kind are expected to be neutral to the Funds from a tax
perspective. In contrast, cash redemptions typically require selling
portfolio holdings, which may result in adverse tax consequences for
the remaining Fund shareholders that would not occur with an in kind
redemption. As a result, tax considerations may warrant in kind
redemptions.
\12\ A ``custom order'' is any purchase or redemption of Shares
made in whole or in part on a cash basis in reliance on clause
(e)(i) or (e)(ii).
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8. Each Business Day, before the open of trading on a national
securities exchange, as defined in section 2(a)(26) of the Act
(``Exchange'') on which 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.\13\ 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. The
intra-day indicative value of Shares, which will represent on a per
Share basis the sum of the current value of the Portfolio Positions,
will be published on the Consolidated Tape every 15 seconds throughout
the regular trading hours of the Primary Listing Exchange.
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\13\ If the Fund is Rebalancing, it may need to announce two
estimated Balancing Amounts for that day, one for deposits and one
for redemptions.
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9. Each Fund may recoup settlement costs charged by NSCC and DTC by
imposing a transaction fee on investors purchasing or redeeming
Creation Units (``Transaction Fee''). The Transaction Fee will be borne
only by purchasers and redeemers of Creation Units and will be limited
to amounts that have been determined appropriate by the Adviser to
defray the transaction expenses that will be incurred by a Fund when an
investor purchases or redeems Creation Units.\14\ All orders to
purchase Creation Units will be placed with the Distributor by or
through an Authorized Participant and the Distributor will transmit all
purchase orders to the relevant Fund. The Distributor will furnish a
prospectus and a confirmation to Authorized Participants placing
purchase orders and will maintain a record of the instructions given to
a Fund to implement delivery of its Shares.
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\14\ Where a Fund permits an in-kind purchaser to substitute
cash-in-lieu of depositing one or more Deposit Instruments, the
purchaser may be assessed a higher Transaction Fee to cover the cost
of purchasing those particular Deposit Instruments. In all cases,
the Transaction Fee will be limited in accordance with the
requirements of the Commission applicable to open-end management
investment companies offering redeemable securities.
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10. Shares of each Fund will be listed on an Exchange. The
principal secondary market for the Shares will be the Primary Listing
Exchange. It is expected that one or more member firms of the Primary
Listing Exchange will be designated to act as a specialist or market
maker and maintain a market for the Shares trading on the Primary
Listing Exchange. The price of Shares will be based on a current bid/
offer in the secondary market. Transactions involving the purchases or
sales of Shares on an Exchange will be subject to customary brokerage
fees and charges.
11. Applicants expect that purchasers of Creation Units will
include institutional investors and arbitrageurs. Authorized
Participants 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 and retail
investors.\15\ The price at which Shares
[[Page 60932]]
trade will be disciplined by arbitrage opportunities created by the
ability to purchase or redeem Creation Units at NAV, which applicants
believe should ensure that Shares similarly do not trade at a material
premium or discount in relation to NAV.
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\15\ 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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12. Shares will not be individually redeemable and owners of Shares
may acquire those Shares from a Fund (other than pursuant to a
Distribution Reinvestment Program) 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.
13. Neither the Trust nor any Fund will be marketed or otherwise
held out as a traditional open-end investment company or a ``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 being listed and
traded on an Exchange, or refer to redeemability, will prominently
disclose that Shares are not individually redeemable shares and will
disclose that the owners of Shares may acquire those Shares from the
Fund (other than pursuant to a Distribution Reinvestment Program) or
tender such Shares for redemption to the Fund only in Creation Units.
Copies of annual and semi-annual shareholder reports will also be
provided to the DTC Participants for distribution to Beneficial Owners
(defined below) of Shares.
14. The Web site for the Funds (the ``Web site''), 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
midpoint of the bid-ask spread at the time of the calculation of the
NAV (``Bid/Ask Price''), and a calculation of the premium or discount
of the market closing price or Bid/Ask Price against such NAV.
15. The requested order would also permit the Funds to operate the
``Distribution Reinvestment Program,'' as described below. The Trust
will make the DTC Dividend Reinvestment Service available for use by
the beneficial owners of Shares (``Beneficial Owners'') through DTC
Participants for reinvestment of their cash dividends.\16\ DTC
Participants whose customers participate in the program will have the
distributions of their customers automatically reinvested in additional
whole Shares issued by the applicable Fund at NAV per Share. Shares
will be issued at NAV under the DTC Dividend Reinvestment Service
regardless of whether the Shares are trading in the secondary market at
a premium or discount to NAV as of the time NAV is calculated. Thus,
Shares may be purchased through the DTC Dividend Reinvestment Service
at prices that are higher (or lower) than the contemporaneous secondary
market trading price. Applicants state that the DTC Dividend
Reinvestment Service differs from dividend reinvestment services
offered by broker-dealers in two ways. First, in dividend reinvestment
programs typically offered by broker-dealers, the additional shares are
purchased in the secondary market at current market prices at a date
and time determined by the broker-dealer at its discretion. Shares
purchased through the DTC Dividend Reinvestment Service are purchased
directly from the fund on the date of the distribution at the NAV per
share on such date. Second, in dividend reinvestment programs typically
offered by broker-dealers, shareholders are typically charged a
brokerage or other fee in connection with the secondary market purchase
of shares. Applicants state that brokers typically do not charge
customers any fees for reinvesting distributions through the DTC
Dividend Reinvestment Service.
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\16\ Some DTC Participants may not elect to utilize the DTC
Dividend Reinvestment Service. Beneficial Owners will be encouraged
to contact their broker to ascertain the availability of the DTC
Dividend Reinvestment Service through such broker.
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16. Applicants state that the DTC Dividend Reinvestment Service
will be operated by DTC in exactly the same way it runs such service
for other open-end management investment companies. The initial
decision to participate in the DTC Dividend Reinvestment Service is
made by the DTC Participant. Once a DTC Participant elects to
participate in the DTC Dividend Reinvestment Service, it offers its
customers the option to participate. Beneficial Owners will have to
make an affirmative election to participate by completing an election
notice. Before electing to participate, Beneficial Owners will receive
disclosure describing the terms of the DTC Dividend Reinvestment
Service and the consequences of participation. This disclosure will
include a clear and concise explanation that under the Distribution
Reinvestment Program, Shares will be issued at NAV, which could result
in such Shares being acquired at a price higher or lower than that at
which they could be sold in the secondary market on the day they are
issued (this will also be clearly disclosed in the Prospectus). Brokers
providing the DTC Dividend Reinvestment Service to their customers will
determine whether to charge Beneficial Owners a fee for this service.
17. The Prospectus will make clear to Beneficial Owners that the
Distribution Reinvestment Program is optional and that its availability
is determined by their broker, at its own discretion. Broker-dealers
are not required to utilize the DTC Dividend Reinvestment Service, and
may instead offer a dividend reinvestment program under which Shares
are purchased in the secondary market at current market prices or no
dividend reinvestment program at all.
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, 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.
[[Page 60933]]
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 to
issue Shares in Creation Units only. Applicants state 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 materially from their NAV per Share.
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 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 the purchase and sale of Shares of a Fund will not be
accomplished at an offering price described in the Fund's prospectus,
as required by section 22(d), nor will sales and repurchases be made at
a price based on the current NAV next computed after receipt of an
order, as required by rule 22c-1. Applicants request an exemption under
section 6(c) from these provisions.
5. Applicants believe that the concerns sought to be addressed by
section 22(d) of the Act and rule 22c-1 under the Act with respect to
pricing are equally satisfied by the proposed method of pricing Shares.
Applicants maintain that, while there is little legislative history
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been intended 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 contract dealers by eliminating price competition from non-contract
dealers who could offer investors shares at less than the published
sales price and who could pay investors a little more than the
published redemption price.
6. Applicants believe that none of these purposes will be thwarted
by permitting Shares to trade in the secondary market at negotiated
prices. Applicants state that secondary market transactions in Shares
would not cause dilution for owners of such Shares, because such
transactions do not directly involve Fund assets. Similarly, secondary
market trading in Shares should not create unjust discrimination or
preferential treatment among buyers to the extent different prices
exist during a given trading day, or from day to day. Applicants state
that such variances occur as a result of third-party market forces,
such as supply and demand, but do not occur as a result of unjust or
discriminatory manipulation. Finally, applicants contend that the
proposed distribution system will be orderly because arbitrage activity
will ensure that the Shares do not trade at a material discount or
premium in relation to their NAV.
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
observe that the settlement of redemptions of Creation Units of the
Global and International Funds is contingent not only on the settlement
cycle of the U.S. securities markets but also on the delivery cycles
present in foreign markets in which those Funds invest. Applicants have
been advised that, under certain circumstances, the delivery cycles for
transferring Portfolio Positions to redeeming investors, coupled with
local market holiday schedules, will require a delivery process of up
to fourteen (14) calendar days. Applicants request relief under section
6(c) of the Act from section 22(e) to allow Global and International
Funds to pay redemption proceeds up to 14 calendar days after the
tender of the Creation Units. With respect to Future Funds based on a
global or an international Underlying Index, applicants seek the same
relief from section 22(e) only to the extent that similar circumstances
exist. Except as disclosed in the relevant Global Fund's or
International Fund's SAI, applicants expect that the Global Funds and
International Funds will be able to deliver redemption proceeds within
seven days.\17\
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\17\ Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations that
applicants may otherwise have under rule 15c6-1 under the Exchange
Act. Rule 15c6-1 requires that most securities transactions be
settled within three business days of the trade date.
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8. Applicants submit that Congress adopted section 22(e) to prevent
unreasonable, undisclosed 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 will disclose those local holidays
(over the period of at least one year following the date thereof), 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 Global
Fund and International Fund.
9. Applicants are not seeking relief from section 22(e) for Global
or International Funds that do not effect redemptions of Creation Units
in-kind.
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 the investment company's shares
to another investment company if the sale would cause the acquiring
company to own more than 3% of the acquired company's voting stock, or
if the sale would cause more than 10% of the acquired company's voting
stock to be owned by investment companies generally.
11. 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
advised or sponsored by 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 beyond the limits of section 12(d)(1)(A). In
addition, applicants seek relief to permit each Fund, the Distributor
and/or a Broker to
[[Page 60934]]
sell Shares to Acquiring Funds in excess of the limits of section
12(d)(1)(B).
12. Each investment adviser to an Acquiring Management Company
within the meaning of section 2(a)(20)(A) of the Act (``Acquiring Fund
Adviser'') will be registered as an investment adviser under the
Advisers Act. An ``Acquiring Fund Subadviser'' is any investment
advisor within the meaning of section 2(a)(20)(B) of the Act to an
Acquiring Management Company. Each Acquiring Trust's sponsor is the
``Sponsor.''
13. 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.
14. Applicants believe that neither an Acquiring Fund nor an
Acquiring Fund Affiliate would be able to exert undue influence over a
Fund.\18\ Condition 5 limits the ability of an Acquiring Fund's
Advisory Group \19\ or an Acquiring Fund's Subadvisory Group \20\ to
control a Fund within the meaning of section 2(a)(9) of the Act.
Applicants propose other conditions to limit the potential for undue
influence over the Funds, including that no Acquiring Fund or Acquiring
Fund Affiliate 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'').\21\
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\18\ An ``Acquiring Fund Affiliate'' is defined as the Acquiring
Fund Adviser, Acquiring Fund Subadviser(s), any 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 defined as the Adviser,
Subadviser(s), promoter or principal underwriter of a Fund and any
person controlling, controlled by or under common control with any
of these entities.
\19\ An ``Acquiring Fund's Advisory Group'' is defined as 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 or issuer that would be an
investment company but for section 3(c)(l) or 3(c)(7) of the Act,
that is advised or sponsored by the Acquiring Fund Adviser, Sponsor
or any person controlling, controlled by or under common control
with the Acquiring Fund Adviser or Sponsor.
\20\ An ``Acquiring Fund's Subadvisory Group'' is defined as any
Acquiring Fund Subadviser, any person controlling, controlled by, or
under common control with the Acquiring Fund Subadviser, and any
investment company or issuer that would be an investment company but
for section 3(c)(l) or 3(c)(7) of the Act (or portion of such
investment company or issuer) advised or sponsored by the Acquiring
Fund Subadviser or any person controlling, controlled by or under
common control with the Acquiring Fund Subadviser.
\21\ An ``Underwriting Affiliate'' is defined as a principal
underwriter in any underwriting or selling syndicate that is an
officer, director, member of an advisory board, Acquiring Fund
Adviser, Acquiring Fund Subadviser, Sponsor, or employee of the
Acquiring Fund, or a person of which any such officer, director,
member of an advisory board, Acquiring Fund Adviser, Acquiring Fund
Subadviser, Sponsor, or employee is an affiliated person, except any
person whose relationship to the Fund is covered by section 10(f) of
the Act is not an Underwriting Affiliate.
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15. Applicants do not believe that the proposed arrangement will
involve excessive layering of fees. With respect to Acquiring
Management Companies, applicants note that the board of directors or
trustees, including a majority of the independent directors or trustees
within the meaning of section 2(a)(19) of the Act, of any Acquiring
Fund, will find that any fees charged under the Acquiring Management
Company's advisory contract(s) are based on services provided that will
be in addition to, rather than duplicative of, services provided under
the advisory contract(s) of any Fund in which the Acquiring Management
Company may invest. Under condition 13, the Acquiring Fund Adviser, or
trustee of any Acquiring Trust (``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 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, in connection
with the investment by the Acquiring Fund in the Fund. Applicants also
state that any sales charges 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.\22\
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\22\ Any references to NASD Conduct Rule 2830 include any
successor or replacement rule that may be adopted by the Financial
Industry Regulatory Authority.
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16. Applicants submit that the proposed arrangement will not create
an overly complex fund structure. Applicants note that no Fund will
acquire securities of any investment company or company relying on
section 3(c)(l) or 3(c)(7) of the Act in excess of the limits contained
in section 12(d)(l)(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 the Acquiring Funds understand and will comply
with the terms and conditions of the requested order, any Acquiring
Fund will be required to enter into a written agreement with the Fund
(the ``Acquiring Fund Agreement''). The Acquiring Fund Agreement will
include an acknowledgment from the Acquiring Fund that it may rely on
the order only to invest in a Fund and not in any other investment
company.
17. Applicants note that a Fund may choose to reject any direct
purchase of 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 an Acquiring Fund 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 purchasing any security from the company. Section 2(a)(3) of the Act
defines ``affiliated person'' of another person to include any person
directly or indirectly owning, controlling, or holding with power to
vote 5% or more of the outstanding voting securities of the other
person and any person directly or indirectly controlling, controlled
by, or under common control with, the other person. Section 2(a)(9) of
the Act defines ``control'' as the power to exercise a controlling
influence over the management or policies of a company, and provides
that a control relationship will be presumed where one person owns more
than 25% of a company's voting securities. The Funds may be deemed to
be controlled by 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''). Applicants believe
there exists a possibility that, with respect to one or more Funds and
the Trust, a large institutional investor could own more than 5% of a
Fund or the Trust, or in excess of 25% of the outstanding Shares of a
Fund or the Trust, making that investor a first-tier affiliate of each
Fund under section 2(a)(3)(A) or section 2(a)(3)(C) of the Act. In
addition, a large institutional investor could own 5% or more of, or in
excess of 25% of the outstanding shares of one or more Affiliated
Funds, making that investor a second-tier affiliate of a Fund.
[[Page 60935]]
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 persons that are affiliated persons or second-tier affiliates of
the Funds solely by virtue of (a) holding 5% or more, or in excess of
25% of the outstanding 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, to effectuate purchases and redemptions in-kind.
Applicants also request an exemption in order to permit a Fund to sell
Shares to, and purchase Shares from, and to engage in any accompanying
in-kind transactions with, an Acquiring Fund of which the Fund is an
affiliated person or a second-tier affiliate.\23\
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\23\ To the extent that purchases and sales 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. 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 a second-tier affiliate of an Acquiring Fund
because the Adviser provides investment advisory services to that
Acquiring Fund.
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20. Applicants assert 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 and Redemption Instruments will be valued in the same
manner as those Portfolio Positions currently held by the relevant
Funds, and the valuation of the Deposit Instruments and Redemption
Instruments will be made in the same manner and on the same terms for
all, regardless of the identity of the purchaser or redeemer. Deposit
Instruments, Redemption Instruments, and the Balancing Amount, except
for any permitted cash-in-lieu amounts consistent with the terms of the
application, will be the same regardless of the identity of the
purchaser or redeemer. Therefore, applicants state that in-kind
purchases and redemptions create no opportunity for affiliated persons
or applicants to effect a transaction detrimental to the other holders
of Shares of that Fund. Applicants also believe that in-kind purchases
and redemptions will not result in abusive self-dealing or overreaching
of the Fund. Applicants believe that an exemption is appropriate under
sections 17(b) and 6(c) because the proposed arrangement meets the
standards for relief in those sections. 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 Fund in accordance with
policies and procedures set forth in the Fund's registration
statement.\24\ 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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\24\ Applicants acknowledge that the receipt of compensation by
(a) an affiliated person of an Acquiring Fund, or a second-tier
affiliate, for the purchase by the Acquiring Fund of Shares or (b)
an affiliated person of a Fund, or a second-tier affiliate, for the
sale by the Fund of its Shares to an Acquiring Fund, may be
prohibited by section 17(e) of the Act. The Acquiring Fund Agreement
also will include this acknowledgment.
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Distribution Reinvestment Relief
21. Applicants also seek an order to permit the Funds to operate
the Distribution Reinvestment Program. Applicants state that the
Distribution Reinvestment Program is reasonable and fair because it is
voluntary and each Beneficial Owner will have in advance accurate and
explicit information that makes clear the terms of the Distribution
Reinvestment Program and the consequences of participation. The
Distribution Reinvestment Program does not involve any overreaching on
the part of any person concerned because it operates the same for each
Beneficial Owner who elects to participate, and is structured in the
public interest because it is designed to give those Beneficial Owners
who elect to participate a convenient and efficient method to reinvest
distributions without paying a brokerage commission. In addition,
although brokers providing the Distribution Reinvestment Program could
charge a fee, applicants represent that typically brokers do not charge
for this service.
22. Applicants do not believe that the issuance of Shares under the
Distribution Reinvestment Program will have a material effect on the
overall operation of the Funds, including on the efficiency of the
arbitrage mechanism inherent in ETFs. In addition, applicants do not
believe that providing Beneficial Owners with an added optional benefit
(the ability to reinvest in Shares at NAV) will change the Beneficial
Owners' expectations about the Funds or the fact that individual Shares
trade at secondary market prices. Applicants believe that Beneficial
Owners (other than Authorized Participants) generally expect to buy and
sell individual Shares only through secondary market transactions at
market prices and that such owners will not be confused by the
Distribution Reinvestment Program. Therefore, applicants believe that
the Distribution Reinvestment Program meets the standards for relief
under section 6(c) of the Act.
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 relief
to permit ETF operations, 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 Units 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 (other than pursuant to the Distribution
Reinvestment Program) and tender those Shares for redemption to a Fund
in Creation Units only.
3. The Web site for the Funds, which is and will be publicly
accessible at no charge, will contain, on a per Share basis for each
Fund, the prior Business Day's NAV and the market closing price or the
Bid/Ask Price, and a calculation of the premium or discount of the
market closing price or 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.
12(d)(1) Relief
5. The members of the Acquiring Fund's 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 an Acquiring Fund's
Subadvisory Group will not control (individually or in the aggregate) a
Fund within the meaning of section 2(a)(9) of the Act. If, as a result
of a decrease in the outstanding voting securities of a Fund, the
Acquiring Fund's Advisory Group or the Acquiring Fund's Subadvisory
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 Shares
in the same proportion as the vote of all other holders of the Shares.
This condition does not apply to an
[[Page 60936]]
Acquiring Fund Subadvisory Group with respect to a Fund for which the
Acquiring Fund Subadviser or a person controlling, controlled by, or
under common control with the Acquiring Fund Subadviser acts as the
investment adviser within the meaning of section 2(a)(20)(A) of the
Act.
6. No Acquiring Fund or Acquiring Fund 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 Fund 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 Subadviser 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 Shares exceeds the
limits in section 12(d)(1)(A)(i) of the Act, the board of trustees of
the Trust (``Board''), including a majority of the disinterested
directors/trustees, will determine that any consideration paid by the
Fund to an Acquiring Fund or an Acquiring Fund Affiliate in connection
with any services or transactions: (i) Is fair and reasonable in
relation to the nature and quality of the services and benefits
received by the Fund; (ii) is within the range of consideration that
the Fund would be required to pay to another unaffiliated entity in
connection with the same services or transactions; and (iii) does not
involve overreaching on the part of any person concerned. This
condition does not apply with respect to any services or transactions
between a Fund and its investment adviser(s), or any person
controlling, controlled by or under common control with such investment
adviser(s).
9. No Acquiring Fund or Acquiring Fund 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.
10. The Board, including a majority of the independent trustees,
will adopt procedures reasonably designed to monitor any purchases of
securities by the Fund in an Affiliated Underwriting, 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, 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: (i) Whether the purchases were consistent with the investment
objectives and policies of the Fund; (ii) how the performance of
securities purchased in an Affiliated Underwriting compares to the
performance of comparable securities purchased during a comparable
period of time in underwritings other than Affiliated Underwritings or
to a benchmark such as a comparable market index; and (iii) whether the
amount of securities purchased by the Fund in Affiliated Underwritings
and the amount purchased directly from an Underwriting Affiliate have
changed significantly from prior years. The Board will take any
appropriate actions based on its review, including, if appropriate, the
institution of procedures designed to assure that purchases of
securities in Affiliated Underwritings are in the best interest of
shareholders of the Fund.
11. 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
determinations of the Board were made.
12. Before investing in Shares in excess of the limits in section
12(d)(1)(A), each Acquiring Fund and the Fund will execute an Acquiring
Fund Agreement stating, without limitation, that their boards of
directors or trustees and their investment adviser(s), or their
Sponsors or Trustee, 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 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 the 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 Acquiring Fund 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.
13. An Acquiring Fund Adviser, Trustee or Sponsor, as applicable,
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 under rule 12b-1 under the Act) received
from the 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 Subadviser will waive fees otherwise payable to the
Acquiring Fund Subadviser, directly or indirectly, by the Acquiring
Management Company in an amount at least equal to any compensation
received from a Fund by the Acquiring Fund Subadviser, or an affiliated
person of the Acquiring Fund Subadviser, other than any advisory fees
paid to the Acquiring Fund Subadviser 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
Subadviser. In the event that the Acquiring Fund Subadviser waives
fees, the benefit of the waiver will be passed through to the Acquiring
Management Company.
14. 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.
15. No Fund will acquire securities of any other 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
[[Page 60937]]
of other investment companies for short-term cash management purposes.
16. 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.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24024 Filed 10-1-13; 8:45 am]
BILLING CODE 8011-01-P