[Federal Register Volume 78, Number 206 (Thursday, October 24, 2013)]
[Notices]
[Pages 63522-63528]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-24919]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30747; 812-14175]
Syntax Analytics, LLC and Syntax ETF Trust; Notice of Application
October 18, 2013.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (``Act'') for an exemption from sections
2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act and rule 22c-1 under the
Act, under sections 6(c) and 17(b) of the Act for an exemption from
sections 17(a)(1) and (a)(2) of the Act, and under section 12(d)(1)(J)
of the Act for an exemption from sections 12(d)(1)(A) and (B) of the
Act.
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Applicants: Syntax Analytics, LLC (``Syntax'') and Syntax ETF Trust
(``Trust'').
Summary of Application: Applicants request an order that permits: (a)
Actively-managed series of certain open-end management investment
companies to issue shares (``Shares'') redeemable in large aggregations
only (``Creation Units''); (b) secondary market transactions in Shares
to occur at negotiated market prices; (c) certain series to pay
redemption proceeds, under certain circumstances, more than seven days
from the tender of Shares for redemption; (d) certain affiliated
persons of the series to deposit securities into, and receive
securities from, the series in connection with the purchase and
redemption of Creation Units; and (e) certain registered management
investment companies and unit investment trusts outside of the same
group of investment companies as the series to acquire Shares.
DATES: Filing Dates: The application was filed on July 9, 2013 and
amended on October 2, 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 November 12, 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,
110 East 59th Street, 33rd Floor, New York, NY 10022.
FOR FURTHER INFORMATION CONTACT: Jill Ehrlich, Senior Counsel, at (202)
551-6819 or David P. Bartels, Branch Chief, at (202) 551-6821 (Division
of Investment Management, 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 for an
applicant using the Company name box, at http://www.sec.gov/search/search.htm or by calling (202) 551-8090.
Applicants' Representations
1. The Trust will be registered as an open-end management
investment company under the Act and is a statutory trust organized
under the laws of Delaware. The Trust initially will offer a newly
created series (the ``Initial Fund''), which applicants state will seek
long-term capital appreciation by investing in U.S. equity securities.
2. Applicants state that Syntax, a Delaware limited liability
company, will be registered as an investment adviser under the
Investment Advisers Act of 1940 (``Advisers Act'') and will serve as
investment adviser to the Initial Fund. The Adviser (as defined below)
may retain investment advisers as sub-advisers (each, a ``Sub-
Adviser'') in connection with the Funds (as defined below). Any Adviser
will be registered under the Advisers Act, and any Sub-Adviser will be
registered or not subject to registration under the Advisers Act. The
principal underwriter and distributor (``Distributor'') for each of the
Funds will be a registered broker-dealer (``Broker'') under the
Securities Exchange Act of 1934 (``Exchange Act'').
3. Applicants request that the order apply to the Initial Fund as
well as to future series of the Trust and any future open-end
management investment companies or series thereof that would operate as
actively-managed exchange-traded funds (``Future Funds''). Any Future
Fund will (a) be advised by Syntax or an entity controlling, controlled
by, or under common control with Syntax (the ``Adviser'') and (b)
comply with the terms and conditions of the application.\1\ The Initial
Fund and Future Funds together are the ``Funds.'' \2\ Each Fund will
operate as an actively managed exchange-traded fund (``ETF'').
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\1\ All entities that currently intend to rely on the order are
named as applicants. Any other entity that relies on the order in
the future will comply with the terms and conditions of the
application.
\2\ Applicants further request that the order apply to any
future Distributor, which would be a Broker and would comply with
the terms and conditions of the application. Applicants state that a
Distributor may be an affiliated person of the Adviser.
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4. Applicants state that the Funds may invest in equity securities
(``Equity Funds'') and/or fixed income securities (``Fixed Income
Funds'') traded in the U.S. or non-U.S. markets or a combination of
equity and fixed income securities. Funds that invest in foreign equity
and/or fixed income securities are ``Foreign Funds.'' Foreign Funds may
also include Funds that invest in a combination of foreign and domestic
equity and/or fixed income securities. The Equity Funds and Fixed
Income Funds that invest in domestic equity and/or fixed income
securities together are ``Domestic Funds.'' Applicants state that the
Funds may also invest in a
[[Page 63523]]
broad variety of other instruments \3\ and that a Foreign Fund may
invest a significant portion of its assets in depositary receipts
representing foreign securities in which they seek to invest
(``Depositary Receipts'').\4\ Applicants further state that, in order
to implement each Fund's investment strategy, the Adviser and/or Sub-
Advisers of a Fund may review and change the securities, other assets
and other positions held by the Fund (``Portfolio Instruments'') daily.
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\3\ If a Fund invests in derivatives, then (a) the board of
trustees (``Board'') of the Fund will periodically review and
approve the Fund's use of derivatives and how the Adviser assesses
and manages risk with respect to the Fund's use of derivatives and
(b) the Fund's disclosure of its use of derivatives in its offering
documents and periodic reports will be consistent with relevant
Commission and staff guidance.
\4\ 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 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 bank for any Depositary
Receipts held by a Fund.
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5. With respect to section 12(d)(1), Applicants are requesting
relief (``Fund of Funds Relief'') to permit management investment
companies and unit investment trusts (``UITs'') registered under the
Act that are not part of the same ``group of investment companies,''
within the meaning of section 12(d)(1)(G)(ii) of the Act, as the Funds
(such registered management investment companies are referred to as
``Investing Management Companies,'' such UITs are referred to as
``Investing Trusts,'' and Investing Management Companies and Investing
Trusts are collectively referred to as ``Funds of Funds''), to acquire
Shares beyond the limitations in section 12(d)(1)(A) and to permit the
Funds, and any principal underwriter for the Funds, and any Broker, to
sell Shares beyond the limitations in section 12(d)(1)(B) to Funds of
Funds. Applicants request that any exemption under section 12(d)(1)(J)
from sections 12(d)(1)(A) and (B) apply to: (1) Each Fund that is
currently or subsequently part of the same ``group of investment
companies'' as the Initial Fund within the meaning of section
12(d)(1)(G)(ii) of the Act, as well as any principal underwriter for
the Funds and any Brokers selling Shares of a Fund to Funds of Funds;
and (2) each Fund of Funds that enters into a participation agreement
(``FOF Participation Agreement'') with a Fund. ``Funds of Funds'' do
not include the Funds. Each Investing Management Company's investment
adviser within the meaning of section 2(a)(20)(A) of the Act is the
``Fund of Funds Adviser.'' Similarly, each Investing Trust's sponsor is
the ``Sponsor.'' Applicants represent that each Fund of Funds Adviser
will be registered as an investment adviser under the Advisers Act and
that no Fund of Funds Adviser or Sponsor will control, be controlled
by, or be under common control with the Adviser.\5\
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\5\ A Fund of Funds may rely on the order only to invest in
Funds and not in any other registered investment company.
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6. Each Fund will issue, on a continuous offering basis, its Shares
in one or more groups of a fixed number of Shares (e.g., at least
25,000 Shares). Applicants believe that a conventional trading range
will be between $20-$100 per Share. All orders to purchase Creation
Units must be placed with the Distributor by or through a party that
has entered into a participant agreement with the Distributor and the
transfer agent of the Fund (``Authorized Participant'') with respect to
the creation and redemption of Creation Units. An Authorized
Participant is either: (a) A Broker or other participant in the
Continuous Net Settlement System of the National Securities Clearing
Corporation (``NSCC''), a clearing agency registered with the
Commission or (b) a participant in the Depository Trust Company, New
York, New York (``DTC,'' and such participant, ``DTC Participant'').
7. In order to keep costs low and permit each Fund to be as fully
invested as possible, Shares will be purchased and redeemed in Creation
Units and generally on an in-kind basis. Except where the purchase or
redemption will include cash under the limited circumstances specified
below, purchasers will be required to purchase Creation Units by making
an in-kind deposit of specified instruments (``Deposit Instruments''),
and shareholders redeeming their Shares will receive an in-kind
transfer of specified instruments (``Redemption Instruments'').\6\ On
any given Business Day \7\ the names and quantities of the instruments
that constitute the Deposit Instruments and the names and quantities of
the instruments that constitute the Redemption Instruments will be
identical, and these instruments may be referred to, in the case of
either a purchase or redemption, as the ``Creation Basket.'' In
addition, the Creation Basket will correspond pro rata to the positions
in a Fund's portfolio (including cash positions),\8\ except: (a) In the
case of bonds, for minor differences when it is impossible to break up
bonds beyond certain minimum sizes needed for transfer and settlement;
(b) for minor differences when rounding is necessary to eliminate
fractional shares or lots that are not tradeable round lots; \9\ or (c)
TBA Transactions,\10\ short positions and other positions that cannot
be transferred in kind \11\ will be excluded from the Creation
Basket.\12\ If there is a difference between NAV attributable to a
Creation Unit and the aggregate market value of the Creation Basket
exchanged for the Creation Unit, the party conveying instruments with
the lower value will also pay to the other an amount in cash equal to
that difference (the ``Balancing Amount'').
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\6\ The Funds must comply with the federal securities laws in
accepting Deposit Instruments and satisfying redemptions with
Redemption Instruments, including that the Deposit Instruments and
Redemption Instruments are sold in transactions that would be exempt
from registration under the Securities Act of 1933 (``Securities
Act''). In accepting Deposit Instruments and satisfying redemptions
with Redemption Instruments that are restricted securities eligible
for resale pursuant to rule 144A under the Securities Act, the Funds
will comply with the conditions of rule 144A.
\7\ Each Fund will sell and redeem Creation Units on any day the
Trust is open, including as required by section 22(e) of the Act
(each, a ``Business Day'').
\8\ The portfolio used for this purpose will be the same
portfolio used to calculate the Fund's net asset value (``NAV'') for
that Business Day.
\9\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
\10\ 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.
\11\ 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.
\12\ Because these instruments will be excluded from the
Creation Basket, their value will be reflected in the determination
of the Balancing Amount (as 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,
[[Page 63524]]
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.\13\
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\13\ A ``custom order'' is any purchase or redemption of Shares
made in whole or in part on a cash basis in reliance on clause
(e)(i) or (e)(ii).
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9. 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, 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. The Exchange will
disseminate every 15 seconds throughout the trading day an amount
representing, on a per Share basis, the sum of the current value of the
Portfolio Instruments that were publicly disclosed prior to the
commencement of trading in Shares on the Exchange.
10. Transaction expenses, including operational processing and
brokerage costs, may be incurred by a Fund when investors purchase or
redeem Creation Units ``in-kind'' and such costs have the potential to
dilute the interests of the Fund's existing Beneficial Owners.
Accordingly, applicants state that each Fund may impose purchase or
redemption transaction fees (``Transaction Fees'') in connection with
effecting such purchases or redemptions. Applicants further state that,
because the Transaction Fees are intended to defray the transaction
expenses, as well as to prevent possible shareholder dilution resulting
from the purchase or redemption of Creation Units, the Transaction Fees
will be borne only by purchasers or redeemers of Creation Units and
will be limited to amounts that have been determined appropriate by the
Fund.\14\ The Distributor will be responsible for delivering a Fund's
current prospectus (``Prospectus'') or Summary Prospectus, if
applicable, to purchasers of Shares in Creation Units and for
maintaining records of both the orders placed with it and the
confirmations of acceptance furnished by it.
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\14\ In those instances in which a Fund permits an ``in-kind''
purchaser to substitute cash in lieu of depositing one or more of
the requisite Deposit Instruments or Redemption Securities, the
purchaser or seller may be assessed a higher Transaction Fee on the
``cash in lieu'' portion of its investment to cover the cost of
purchasing the necessary securities, including operational
processing and brokerage costs, and part or all of the spread
between the expected bid and offer side of the market relating to
such Deposit Instruments or Redemption Instruments. In all cases,
such Transaction Fees will be limited in accordance with
requirements of the Commission applicable to management investment
companies offering redeemable securities.
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11. Shares will be listed and traded at negotiated prices on an
Exchange and traded in the secondary market. When NYSE Arca, Inc. is
the principal secondary market on which the Shares are listed and
traded (the ``Primary Listing Exchange''), it is expected that one or
more Exchange member firms will be designated by the Exchange to act as
a market maker (a ``Market Maker'').\15\ The price of Shares trading on
the Exchange will be based on a current bid/offer in the secondary
market. Transactions involving the purchases and sales of Shares on the
Exchange will be subject to customary brokerage commissions and
charges.
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\15\ If Shares are listed on The NASDAQ Stock Market LLC
(``Nasdaq'') or a similar electronic Exchange (including NYSE Arca,
Inc.), one or more member firms of that Exchange will act as Market
Maker and maintain a market for Shares trading on that Exchange. On
Nasdaq, no particular Market Maker would be contractually obligated
to make a market in Shares. However, the listing requirements on
Nasdaq, for example, stipulate that at least two Market Makers must
be registered in Shares to maintain a listing. In addition, on
Nasdaq and NYSE Arca, Inc., 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 a second-tier affiliate, of the Funds, except within section
2(a)(3)(A) or (C) of the Act due solely to ownership of Shares as
discussed below.
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12. Applicants expect that purchasers of Creation Units will
include institutional investors and arbitrageurs. Market Makers, acting
in their role to provide a fair and orderly secondary market for
Shares, also may purchase Creation Units for use in their own market
making activities. Applicants expect that secondary market purchasers
of Shares will include both institutional and retail investors.\16\
Applicants expect that arbitrage opportunities created by the ability
to continually purchase or redeem Creation Units should ensure that the
Shares will not trade at a material discount or premium in relation to
their NAV.
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\16\ Shares will be registered in book-entry form only. DTC or
its nominee will be the record or registered owner of all
outstanding Shares. Beneficial ownership of Shares will be shown on
the records of DTC or DTC Participants.
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13. Shares will not be individually redeemable, and only Shares
combined into Creation Units of a specified size will be redeemable.
Redemption requests must be placed by or through an Authorized
Participant.
14. Neither the Trust nor any Fund will be marketed or otherwise
held out as a ``mutual fund.'' Instead, each Fund will be marketed as
an ``actively-managed exchange-traded fund.'' In any advertising
material where features of obtaining, buying or selling Shares traded
on the Exchange are described there will be an appropriate statement to
the effect that Shares are not individually redeemable.
15. On each Business Day, before the commencement of trading in
Shares on the Fund's Primary Listing Exchange, the Fund will disclose
on the Trust's Web site (``Web site'') the identities and quantities of
the Portfolio Instruments that will form the basis of the Fund's
calculation of NAV at the end of the Business Day, the Fund's per Share
NAV and the market closing price or the midpoint of the bid/ask spread
at the time of the calculation of such NAV (``Bid/Ask Price''), and a
calculation of the premium or discount of the market closing price or
Bid/Ask Price against such NAV, all as of the prior Business Day.\17\
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\17\ Under accounting procedures followed by the Funds, trades
made on the prior Business Day (``T'') will be booked and reflected
in NAV on the current Business Day (``T+1''). Accordingly, the Funds
will be able to disclose at the beginning of the Business Day the
portfolio that will form the basis for the NAV calculation at the
end of the Business Day.
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Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the Act for an
exemption from sections 2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act
and rule 22c-1 under the Act, under sections 6(c) and 17(b) of the Act
for an exemption from sections 17(a)(1) and 17(a)(2) of the Act, and
under section 12(d)(1)(J) of the Act for an exemption from sections
12(d)(1)(A) and (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
[[Page 63525]]
transactions, from any provisions 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 to permit the Trust to register
as an open-end management investment company and issue Shares that are
redeemable in Creation Units only. Applicants state that investors may
purchase Shares in Creation Units from each Fund and redeem Creation
Units from each Fund. Applicants further state that, because of the
arbitrage possibilities created by the redeemability of Creation Units,
they expect that the market price of individual Shares will not deviate
materially from NAV.
Section 22(d) of the Act and Rule 22c-1 Under the Act
4. Section 22(d) of the Act, among other things, prohibits a dealer
from selling a redeemable security that is currently being offered to
the public by or through a principal underwriter, except at a current
public offering price described in the prospectus. Rule 22c-1 under the
Act generally requires that a dealer selling, redeeming, or
repurchasing a redeemable security do so only at a price based on its
NAV. Applicants state that secondary market trading in Shares will take
place at negotiated prices, 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 state 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) to prevent dilution caused by
certain riskless-trading schemes by principal underwriters and contract
dealers, (b) to prevent unjust discrimination or preferential treatment
among buyers and (c) to ensure an orderly distribution system of shares
by contract dealers by eliminating price competition from non-contract
dealers who could offer investors shares at less than the published
sales price and who could pay investors a little more than the
published redemption price.
6. Applicants assert that the protections intended to be afforded
by section 22(d) and rule 22c-1 are adequately addressed by the
proposed methods for creating, redeeming and pricing Creation Units and
pricing and trading Shares. 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 but do
not occur as a result of unjust or discriminatory manipulation.
Finally, applicants assert that competitive forces in the marketplace
should ensure that the margin between NAV and the price for the Shares
in the secondary market remains narrow.
Section 22(e) of the Act
7. Section 22(e) of the Act generally prohibits a registered
investment company from suspending the right of redemption or
postponing the date of payment of redemption proceeds for more than
seven days after the tender of a security for redemption. Applicants
observe that settlement of redemptions for Foreign Funds is contingent
not only on the settlement cycle of the U.S. securities markets but
also on the delivery cycles present in foreign markets in which those
Funds invest. Applicants have been advised that the delivery cycles for
transferring Redemption Instruments to redeeming investors, coupled
with local market holiday schedules, will require a delivery process
longer than seven calendar days. Applicants therefore request relief
from the requirement imposed by section 22(e) to provide payment or
satisfaction of redemptions within seven (7) calendar days following
the tender of a Creation Unit of such Funds.\18\
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\18\ Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations that it
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 state that section 22(e) was designed to prevent
unreasonable, undisclosed and unforeseen delays in the actual payment
of redemption proceeds. Applicants assert that the protections intended
to be afforded by Section 22(e) are adequately addressed by the
proposed method and securities delivery cycles for redeeming Creation
Units. Applicants state that allowing redemption payments for Creation
Units of a Fund to be made within a maximum of 14 calendar days would
not be inconsistent with the spirit and intent of section 22(e).
Applicants represent that each Fund's prospectus and/or statement of
additional information will identify those instances in a given year
where, due to local holidays, more than seven calendar days, up to a
maximum of fourteen (14) calendar days, will be needed to deliver
redemption proceeds and will list such holidays. Applicants are not
seeking relief from section 22(e) with respect to Foreign Funds that do
not effect redemptions in-kind.
Section 12(d)(1) of the Act
9. Section 12(d)(1)(A) of the Act prohibits a registered investment
company from acquiring shares of an investment company if the
securities represent more than 3% of the total outstanding voting stock
of the acquired company, more than 5% of the total assets of the
acquiring company, or, together with the securities of any other
investment companies, more than 10% of the total assets of the
acquiring company. Section 12(d)(1)(B) of the Act prohibits a
registered open-end investment company, its principal underwriter, or
any other broker or dealer from selling its shares to another
investment company if the sale will cause the acquiring company to own
more than 3% of the acquired company's voting stock, or if the sale
will cause more than 10% of the acquired company's voting stock to be
[[Page 63526]]
owned by investment companies generally.
10. Applicants request relief to permit Funds of Funds to acquire
Shares in excess of the limits in section 12(d)(1)(A) of the Act and to
permit the Funds, their principal underwriters and any Broker to sell
Shares to Funds of Funds in excess of the limits in section 12(d)(l)(B)
of the Act. 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.
11. Applicants submit that certain of their proposed conditions
address concerns about potential for undue influence. To limit the
control that a Fund of Funds may have over a Fund, applicants propose a
condition prohibiting the Fund of Funds Adviser, Sponsor, any person
controlling, controlled by, or under common control with the Fund of
Funds Adviser or Sponsor, and any investment company or issuer that
would be an investment company but for 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 an Investing Management
Company (``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'').
12. Applicants propose a condition to ensure that no Fund of Funds
or Fund of Funds Affiliate \19\ (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'').\20\
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\19\ A ``Fund of Funds Affiliate'' is any Fund of Funds Adviser,
Fund of Funds Sub-Adviser, Sponsor, promoter or principal
underwriter of a Fund of Funds, and any person controlling,
controlled by or under common control with any of these entities. A
``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.
\20\ 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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13. Applicants propose several conditions to address the potential
for layering of fees. Applicants note that the board of directors or
trustees 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 (``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 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.\21\
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\21\ 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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14. In order to address concerns about complexity, Applicants
propose condition B.12, which will prohibit Funds 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 a Fund to purchase
shares of other investment companies for short-term cash management
purposes.
15. Finally, each Fund of Funds must enter into an FOF
Participation Agreement with the respective Funds, which will include
an acknowledgement from the Fund of Funds that it may rely on the order
only to invest in a Fund and not in any other investment company.
Sections 17(a)(1) and (2) of the Act
16. 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'' to include any person directly or
indirectly owning, controlling, or holding with power to vote, 5% or
more of the outstanding voting securities of the other person and any
person directly or indirectly controlling, controlled by, or under
common control with, the other person. Section 2(a)(9) of the Act
defines ``control'' as the power to exercise a controlling influence
over the management or policies of a company and provides that a
control relationship will be presumed where one person owns more than
25% of another person's voting securities. Each Fund 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'').
17. 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 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 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.\22\ Applicants also request an
exemption in order to permit a Fund to sell its Shares to and redeem
its Shares from, and engage in the in-kind transactions that would
accompany such sales and redemptions with, certain Funds of Funds of
which the Funds are affiliated persons or second-tier affiliates.\23\
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\22\ 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 the Adviser, or
an entity controlling, controlled by or under common control with
the Adviser is also an investment adviser to the Fund of Funds.
\23\ 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. The requested relief is intended to
cover, however, transactions directly between Funds and Funds of
Funds.
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18. Applicants assert that no useful purpose would be served by
prohibiting such affiliated persons from making in-kind purchases or
in-kind redemptions
[[Page 63527]]
of Shares of a Fund in Creation Units. 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 Redemption Instruments will be valued in the
same manner as those Portfolio Instruments 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.
Applicants do not believe that in-kind purchases and redemptions will
result in abusive self-dealing or overreaching of the Fund.
19. Applicants also submit that the sale of Shares to and
redemption of Shares from a Fund of Funds meets 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 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\ The FOF Participation Agreement will require any Fund of
Funds that purchases Creation Units directly from a Fund to represent
that the purchase of Creation Units from a Fund by a Fund of Funds will
be accomplished in compliance with the investment restrictions of the
Fund of Funds and will be consistent with the investment policies set
forth in the Fund of Fund's registration statement. Applicants also
state that the relief requested is 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.
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\24\ 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
the 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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Applicants' Conditions
Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
A. ETF Relief
1. The requested relief to permit ETF operations will expire on the
effective date of any Commission rule under the Act that provides
relief permitting the operation of actively-managed ETFs.
2. As long as a Fund operates in reliance on the requested order,
the Shares of the Fund will be listed on an 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 the Shares are
not individually redeemable and that owners of the 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, 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 Primary Listing Exchange, the Fund will disclose
on the Web site the identities and quantities of the Portfolio
Instruments 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 within the meaning of section
2(a)(9) of the Act. The members of the Fund of Funds Sub-Advisory Group
will not control (individually or in the aggregate) a Fund within the
meaning of section 2(a)(9) of the Act. If, as a result of a decrease in
the outstanding voting securities of a Fund, the Fund of Funds Advisory
Group or the Fund of Funds Sub-Advisory Group, each in the aggregate,
becomes a holder of more than 25 percent of the outstanding voting
securities of a Fund, it will vote its Shares of the Fund in the same
proportion as the vote of all other holders of the Fund's Shares. This
condition does not apply to the Fund of Funds Sub-Advisory Group with
respect to a Fund for which the Fund of Funds Sub-Adviser or a person
controlling, controlled by or under common control with the Fund of
Funds Sub-Adviser acts as the investment adviser within the meaning of
section 2(a)(20)(A) of the Act.
2. No Fund of Funds or Fund of Funds Affiliate will cause any
existing or potential investment by the Fund of Funds in a Fund to
influence the terms of any services or transactions between the Fund of
Funds or a Fund of Funds Affiliate and the Fund or a Fund Affiliate.
3. The board of directors or trustees of an Investing Management
Company, including a majority of the independent directors or trustees,
will adopt procedures reasonably designed to ensure that the Fund of
Funds Adviser and any Fund of Funds Sub-Adviser are conducting the
investment program of the Investing Management Company without taking
into account any consideration received by the Investing Management
Company or a Fund of Funds Affiliate from a Fund or a Fund Affiliate in
connection with any services or transactions.
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,
including a majority of the independent Board members, will determine
that any consideration paid by the Fund to the Fund of Funds or a Fund
of Funds Affiliate in connection with any services or transactions: (i)
Is fair and reasonable in relation to the nature and quality of the
services and benefits received by the Fund; (ii) is within the range of
consideration that the Fund would be required to pay to another
unaffiliated entity in connection with the same services or
transactions; and (iii) does not involve overreaching on the part of
any person concerned. This condition does not apply with respect to any
services or transactions between a Fund and its investment adviser(s),
or any person controlling, controlled by or under common control with
such investment adviser(s).
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
pursuant to rule 12b-1 under the Act) received from a 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, in connection with the investment by the
Fund of Funds in the Fund. Any Fund of Funds Sub-Adviser
[[Page 63528]]
will waive fees otherwise payable to the Fund of Funds Sub-Adviser,
directly or indirectly, by the Investing Management Company in an
amount at least equal to any compensation received from a Fund by the
Fund of Funds Sub-Adviser, or an affiliated person of the Fund of Funds
Sub-Adviser, other than any advisory fees paid to the Fund of Funds
Sub-Adviser or its affiliated person by the Fund, in connection with
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)
will cause a Fund to purchase a security in an Affiliated Underwriting.
7. The Board, including a majority of the independent Board
members, will adopt procedures reasonably designed to monitor any
purchases of securities by the Fund in an Affiliated Underwriting, once
an investment by a Fund of Funds in the securities of the Fund exceeds
the limit of section 12(d)(1)(A)(i) of the Act, including any purchases
made directly from an Underwriting Affiliate. The Board will review
these purchases periodically, but no less frequently than annually, to
determine whether the purchases were influenced by the investment by
the Fund of Funds in the Fund. The Board will consider, among other
things: (i) Whether the purchases were consistent with the investment
objectives and policies of the Fund; (ii) how the performance of
securities purchased in an Affiliated Underwriting compares to the
performance of comparable securities purchased during a comparable
period of time in underwritings other than Affiliated Underwritings or
to a benchmark such as a comparable market index; and (iii) whether the
amount of securities purchased by the Fund in Affiliated Underwritings
and the amount purchased directly from an Underwriting Affiliate have
changed significantly from prior years. The Board will take any
appropriate actions based on its review, including, if appropriate, the
institution of procedures designed to ensure that purchases of
securities in Affiliated Underwritings are in the best interest of
beneficial owners of the Fund.
8. Each Fund will maintain and preserve permanently in an easily
accessible place a written copy of the procedures described in the
preceding condition, and any modifications to such procedures, and will
maintain and preserve for a period of not less than six years from the
end of the fiscal year in which any purchase in an Affiliated
Underwriting occurred, the first two years in an easily accessible
place, a written record of each purchase of securities in Affiliated
Underwritings once an investment by a Fund of Funds in the securities
of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act,
setting forth from whom the securities were acquired, the identity of
the underwriting syndicate's members, the terms of the purchase, and
the information or materials upon which the Board's determinations were
made.
9. Before investing in a Fund in excess of the limits in section
12(d)(1)(A), a Fund of Funds will execute a FOF Participation Agreement
with the Fund stating that their respective boards of directors or
trustees and their investment advisers, or trustee and Sponsor, as
applicable, understand the terms and conditions of the order, and agree
to fulfill their responsibilities under the order. At the time of its
investment in Shares of a Fund in excess of the limit in section
12(d)(1)(A)(i), a Fund of Funds will notify the Fund of the investment.
At such time, the Fund of Funds will also transmit to the Fund a list
of the names of each Fund of Funds Affiliate and Underwriting
Affiliate. The Fund of Funds will notify the Fund of any changes to the
list 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 directors or trustees of each Investing Management
Company, including a majority of the independent directors or trustees,
will find that the advisory fees charged under such contract are based
on services provided that will be in addition to, rather than
duplicative of, the services provided under the advisory contract(s) of
any Fund in which the 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 will acquire securities of an investment company or
company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of
the limits contained in section 12(d)(1)(A) of the Act, except to the
extent permitted by exemptive relief from the Commission permitting a
Fund to purchase shares of other investment companies for short-term
cash management purposes.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24919 Filed 10-23-13; 8:45 am]
BILLING CODE 8011-01-P