Federal Register / Vol. 77, No. 56 / Thursday, March 22, 2012 / Notices 16873 

1All 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. 

2Pursuant to a prior order, Applicants may 

operate actively managed exchange-traded funds 

that invest primarily in equity securities. First Trust 

Advisors L.P., et al., Investment Co. Act Release 

Nos. 28421 (Sep. 29, 2008) (notice) and 28468 (Oct. 

27, 2008) (order). In addition, applicants have prior 

orders to operate index based exchange-traded 

funds that invest primarily in equity securities. First 

Trust Exchange-Traded Fund et al., Investment Co. 

Act Release Nos. 27051 (Aug. 26, 2005) (notice) and 

27068 (Sep. 20, 2005) (order) as amended by 

Investment Co. Act Release Nos. 27772 (Mar. 30, 

2007) (notice) and 27784 (Apr. 25, 2007) (order). 

SECURITIES AND EXCHANGE 

COMMISSION 

[Investment Company Act Release No. 

29983; File No. 812–13795] 

First Trust Exchange-Traded Fund, et 

al.; Notice of Application 

March 15, 2012. 

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 (a)(2) of the Act. 

APPLICANTS: First Trust ExchangeTraded Fund (the ‘‘Initial Trust’’), First 

Trust Exchange-Traded Fund II (‘‘Trust 

II’’), First Trust Exchange-Traded Fund 

III (‘‘Trust III’’), First Trust ExchangeTraded Fund IV (‘‘Trust IV’’), First Trust 

Exchange-Traded AlphaDEX® Fund 

(‘‘AlphaDEX Trust’’), First Trust 

Exchange-Traded AlphaDEX® Fund II 

(‘‘AlphaDEX Trust II’’ and, together with 

the Initial Trust, Trust II, Trust III, Trust 

IV and the AlphaDEX Trust, ‘‘Existing 

Trusts’’), First Trust Advisors L.P. (the 

‘‘Advisor’’), and First Trust Portfolios 

L.P. (the ‘‘Distributor’’). 

SUMMARY: Summary of Application: 

Applicants request an order that 

permits: (a) Series of certain actively 

managed 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 after the tender of 

Shares for redemption; and (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. 

DATES: Filing Dates: The application was 

filed on July 15, 2010, and amended on 

January 7, 2011, September 9, 2011, and 

March 12, 2012. 

HEARING OR NOTIFICATION OF HEARING: An 

order granting the requested relief will 

be issued unless the Commission orders 

a hearing. Interested persons may 

request a hearing by writing to the 

Commission’s Secretary and serving 

applicants with a copy of the request, 

personally or by mail. Hearing requests 

should be received by the Commission 

by 5:30 p.m. on April 9, 2012, and 

should be accompanied by proof of 

service on applicants, in the form of an 

affidavit or, for lawyers, a certificate of 

service. Hearing requests should state 

the nature of the writer’s interest, the 

reason for the request, and the issues 

contested. Persons who wish to be 

notified of a hearing may request 

notification by writing to the 

Commission’s Secretary. 

ADDRESSES: Elizabeth M. Murphy, 

Secretary, U.S. Securities and Exchange 

Commission, 100 F Street NE., 

Washington, DC 20549–1090. 

Applicants: 120 East Liberty Drive, 

Suite 400, Wheaton, IL 60187, Attn: W. 

Scott Jardine. 

FOR FURTHER INFORMATION CONTACT: 

Laura L. Solomon, Senior Counsel, at 

(202) 551–6915, or Janet M. Grossnickle, 

Assistant Director, at (202) 551–6821 

(Division of Investment Management, 

Office of Investment Company 

Regulation). 

SUPPLEMENTARY INFORMATION: The 

following is a summary of the 

application. The complete application 

may be obtained via the Commission’s 

Web site by searching for the file 

number, or an applicant using the 

Company name box, at http:// 

www.sec.gov/search/search.htm or by 

calling (202) 551–8090. 

Applicants’ Representations 

1. The Existing Trusts are each openend management investment companies 

registered under the Act and organized 

as Massachusetts business trusts. Trust 

IV will offer one series which will be a 

Fixed Income Fund as defined below 

(the ‘‘Initial Fund’’). Applicants intend 

to name the Initial Fund the First Trust 

Senior Loan Fund. The Initial Fund’s 

investment objective will be to provide 

high current income. The Initial Fund is 

expected to invest at least 80% of its net 

assets (including investment 

borrowings) in senior loans, which may 

include loan interests that are not 

secured by any specific collateral of the 

borrower, loan interests that have a 

lower than first lien priority on 

collateral of the borrower, loans to 

foreign borrowers, loans in foreign 

currencies and other loans with 

characteristics that the Advisor believes 

qualify as senior loans. 

2. The Advisor is registered as an 

investment adviser under the 

Investment Advisers Act of 1940 

(‘‘Advisers Act’’) and it or an entity 

controlling, controlled by or under 

common control with the Advisor will 

serve as the investment adviser to the 

Funds (as defined below). The Advisor 

may in the future retain one or more 

subadvisers (‘‘Fund Subadvisors’’) to 

manage the Funds’ portfolios. Any Fund 

Subadvisor will be registered under the 

Advisers Act. The Distributor is, or 

another entity (a ‘‘Future Distributor’’), 

will be a broker-dealer registered under 

the Securities Exchange Act of 1934 

(‘‘Exchange Act’’), and will serve as the 

principal underwriter and distributor 

for the Funds.1

3. Applicants request that the order 

apply to the Existing Trusts, the Initial 

Fund, and to any other open-end 

management investment company 

existing or created in the future 

(together with the Existing Trusts, the 

‘‘Trusts’’ and each a ‘‘Trust’’) and any 

existing or future series of the Trusts 

that may utilize active management 

investment strategies and invest (i) in 

fixed income securities (including 

without limitation exchange-traded 

notes and senior loans) (such securities, 

‘‘Fixed Income Securities’’ and each 

such series, a ‘‘Fixed Income Fund’’) or 

(ii) in a combination of equity securities 

(which may include shares of other 

exchange-traded funds, money market 

mutual funds or other investment 

companies) and Fixed Income Securities 

(each such series, a ‘‘Balanced Fund’’) 

(collectively, ‘‘Future Funds’’, together 

with the Initial Fund, the ‘‘Funds’’).2

Any Future Fund will be (a) advised by 

the Advisor or an entity controlling, 

controlled by, or under common control 

with the Advisor, and (b) comply with 

the terms and conditions of the 

application. Fixed Income Funds that 

invest all or a portion of their assets in 

securities not traded in the U.S. markets 

are each an ‘‘International Fixed Income 

Fund.’’ International Fixed Income 

Funds and Balanced Funds that invest 

all or a portion of their assets in 

securities not traded in U.S. markets are 

referred to as ‘‘International Funds.’’ 

Applicants anticipate that certain 

International Funds may invest a 

portion of their assets in depositary 

receipts representing foreign securities 

in which they seek to invest 


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16874 Federal Register / Vol. 77, No. 56 / Thursday, March 22, 2012 / Notices 

3A Fund will not invest in any Depositary 

Receipts that the Advisor or any Fund 

Subadvisor(s) deems to be illiquid or for which 

pricing information is not readily available. No 

affiliated persons of applicants will serve as the 

depositary bank for any Depositary Receipts held by 

a Fund. 

4The 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. 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. 

5A Trust will issue, sell and redeem Creation 

Units of the applicable Fund on any day that the 

Trust is open for business, including as required by 

section 22(e) of the Act (each, a ‘‘Business Day’’). 

6A tradeable round lot for a security will be the 

standard unit of trading in that particular type of 

security in its primary market. 

7A 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. 

8This 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. 

9Because these instruments will be excluded 

from the Creation Basket, their value will be 

reflected in the determination of the Cash Amount 

(defined below). 

10A ‘‘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). 

11Where a Fund permits an in-kind purchaser to 

substitute cash in lieu of depositing a portion of the 

Deposit Instruments, the purchaser may be assessed 

a higher Transaction Fee to cover the cost of 

purchasing those securities. 

(‘‘Depositary Receipts’’).3 The Funds 

will not invest in options contracts, 

futures contracts or swap agreements. 

Each Fund will operate as an activelymanaged exchange-traded fund (‘‘ETF’’). 

4. Shares of the Initial Fund will be 

sold at a price of between $20 and $200 

per Share in Creation Units of at least 

25,000 Shares. All orders to purchase 

Creation Units must be placed with the 

Distributor by or through an 

‘‘Authorized Participant,’’ which is 

either: (a) a broker-dealer or other 

participant in the National Securities 

Clearing Corporation (‘‘NSCC Process’’), 

or (b) a participant in the Depository 

Trust Company (‘‘DTC,’’ such 

participant, ‘‘DTC Participant’’, and 

facilities of the DTC (the ‘‘DTC 

Process’’)), which in either case has 

executed an agreement with the 

Distributor and the Transfer Agent, with 

respect to purchases and redemptions of 

Creation Units. 

5. 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 5 the names and quantities of the 

instruments that constitute the Deposit 

Instruments and the names and 

quantities of the instruments that 

constitute the Redemption Instruments 

will be identical, and these instruments 

may be referred to, in the case of either 

a purchase or a redemption, as the 

‘‘Creation Basket.’’ In addition, the 

Creation Basket will correspond pro rata 

to the positions in the Fund’s portfolio 

(including cash positions) as of the end 

of the prior Business Day, 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; 6 or (c) TBA 

Transactions,7 short positions and other 

positions that cannot be transferred in 

kind 8 will be excluded from the 

Creation Basket.9 If there is a difference 

between the net asset value (‘‘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 ‘‘Cash Amount’’). 

6. 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 Cash Amount, as described above; (b) 

if, on a given Business Day, the Fund 

announces before the open of trading 

that all purchases, all redemptions or all 

purchases and redemptions on that day 

will be made entirely in cash; (c) if, 

upon receiving a purchase or 

redemption order from an Authorized 

Participant, the Fund determines to 

require the purchase or redemption, as 

applicable, to be made entirely in cash; 

(d) if, on a given Business Day, the Fund 

requires all Authorized Participants 

purchasing or redeeming Shares on that 

day to deposit or receive (as applicable) 

cash in lieu of some or all of the Deposit 

Instruments or Redemption Instruments, 

respectively, solely because: (i) Such 

instruments are not eligible for transfer 

through either the NSCC Process or DTC 

Process; or (ii) in the case of 

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 the Fund permits 

an Authorized Participant to deposit or 

receive (as applicable) cash in lieu of 

some or all of the Deposit Instruments 

or Redemption Instruments, 

respectively, solely because: (i) Such 

instruments are, in the case of the 

purchase of a Creation Unit, not 

available in sufficient quantity; (ii) such 

instruments are not eligible for trading 

by an Authorized Participant or the 

investor on whose behalf the 

Authorized Participant is acting; or (iii) 

a holder of Shares of an International 

Fund would be subject to unfavorable 

income tax treatment if the holder 

receives redemption proceeds in kind.10

7. Each Business Day, before the open 

of trading on the national securities 

exchange as defined in section 2(a)(26) 

of the Act (‘‘Stock Exchange’’) upon 

which its Shares are listed and traded, 

the 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 Cash 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 Stock Exchange or a major 

market data vendor 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 Deposit Instruments and the 

estimated Cash Amount. 

8. An investor purchasing a Creation 

Unit from a Fund will be charged a fee 

(‘‘Transaction Fee’’) to prevent the 

dilution of the interests of the remaining 

shareholders resulting from costs in 

connection with the purchase of 

Creation Units.11 Orders to purchase 

Creation Units will be placed with the 

Distributor by or through an Authorized 

Participant and it will be the 

Distributor’s responsibility to transmit 

such orders to the Funds. The 

Distributor also will be responsible for 

maintaining records of both the orders 

placed with it and the confirmations of 

acceptance furnished by it. 

9. Purchasers of Shares in Creation 

Units may hold such Shares or may sell 

such Shares into the secondary market. 

Shares will be listed and traded on a 

Stock Exchange. One or more Stock 

Exchange specialists or market makers 

(together, ‘‘Market Makers’’) will be 

assigned to the Shares. If Shares are 


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Federal Register / Vol. 77, No. 56 / Thursday, March 22, 2012 / Notices 16875 

12 If Shares are listed on Nasdaq, no particular 

Market Maker would be contractually obligated to 

make a market in Shares. However, the listing 

requirements on Nasdaq, stipulate that at least two 

Market Makers must be registered in Shares to 

maintain a listing. Registered Market Makers are 

required to make a continuous two-sided market or 

subject themselves to regulatory sanctions. No 

Market Maker will be an affiliated person, or an 

affiliated person of an affiliated person, of the 

Funds, except within section 2(a)(3)(A) or (C) of the 

Act due to ownership of Shares. 

13Shares will be registered in book-entry form 

only. DTC or its nominee will be the registered 

owner of all outstanding Shares. DTC or DTC 

Participants will maintain records reflecting 

beneficial owners of Shares. 

14All Transaction Fees will be limited in 

accordance with requirements of the Commission 

applicable to management investment companies 

offering redeemable securities. 

15Under 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. 

listed on the NASDAQ Stock Market 

LLC (‘‘Nasdaq’’) or a similar electronic 

Stock Exchange (including NYSE Arca, 

Inc.), one or more member firms of that 

Stock Exchange will act as a Market 

Maker and maintain a market for Shares 

trading on that Stock Exchange.12 Prices 

of Shares trading on a Stock Exchange 

will be based on the current bid/offer 

market. Shares sold in the secondary 

market will be subject to customary 

brokerage commissions and charges. 

10. Applicants expect that purchasers 

of Creation Units will include 

institutional investors and arbitrageurs 

(which could include institutional 

investors). The Market Maker, in 

providing a fair and orderly secondary 

market for the Shares, also may 

purchase Creation Units for use in its 

market-making activities. Applicants 

expect that secondary market 

purchasers of Shares will include both 

institutional investors and retail 

investors.13 Applicants expect that the 

price at which the Shares trade will be 

disciplined by arbitrage opportunities 

created by the ability to continually 

purchase or redeem Creation Units at 

their NAV, which should ensure that 

the Shares will not trade at a material 

discount or premium in relation to their 

NAV. 

11. Shares will not be individually 

redeemable, and owners of Shares may 

acquire those Shares from a Fund, or 

tender such Shares for redemption to 

the Fund, in Creation Units only. To 

redeem, an investor will have to 

accumulate enough Shares to constitute 

a Creation Unit. Redemption orders 

must be placed by or through an 

Authorized Participant. As discussed 

above, redemptions of Creation Units 

will generally be made on an in-kind 

basis, subject to certain specified 

exceptions under which redemptions 

may be made in whole or in part on a 

cash basis. A redeeming investor may 

pay a Transaction Fee, calculated in the 

same manner as a Transaction Fee 

payable in connection with the 

purchase of a Creation Unit.14

12. Neither a Trust nor any individual 

Fund will be marketed or otherwise 

held out as an ‘‘open-end investment 

company’’ or a ‘‘mutual fund.’’ Instead, 

each Fund will be marketed as an 

‘‘actively-managed exchange-traded 

fund.’’ All marketing materials that 

describe the method of obtaining, 

buying or selling Shares, or refer to 

redeemability, will prominently 

disclose that Shares are not individually 

redeemable and that the owners of 

Shares may purchase or redeem Shares 

from a Fund in Creation Units only. 

13. The Distributor’s Web site, which 

will be publicly available prior to the 

public offering of Shares, will include 

the current Prospectus and Summary 

Prospectus (if any) for each Fund. The 

Web site for the Funds which is and 

will be publicly accessible will contain, 

on a per Share basis for each Fund, the 

prior Business Day’s NAV and the 

market closing price or the mid-point of 

the bid/ask spread at the time of 

calculation of such NAV (the ‘‘Bid/Ask 

Price’’), and a calculation of the 

premium or discount of the market 

closing price or Bid/Ask Price against 

such NAV. On each Business Day, 

before the commencement of trading in 

Shares on the Stock Exchange, each 

Fund will disclose on the Web site the 

identities and quantities of the 

securities (‘‘Portfolio Securities’’) and 

other assets held by the Fund that will 

form the basis for the Fund’s calculation 

of NAV at the end of the Business Day.15

Applicants’ Legal Analysis 

1. Applicants request an order under 

section 6(c) of the Act granting an 

exemption from sections 2(a)(32), 

5(a)(1), 22(d) and 22(e) of the Act and 

rule 22c–1 under the Act; and under 

sections 6(c) and 17(b) of the Act 

granting an exemption from sections 

17(a)(1) and (a)(2) 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. 

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 his 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 each Fund, as a series of an 

open-end management investment 

company, to issue Shares that are 

redeemable in Creation Units only. 

Applicants state that investors may 

purchase Shares in Creation Units from 

each Fund and that Creation Units 

always redeemable in accordance with 

the provisions of the Act. Applicants 

further state that because the market 

price of Shares will be disciplined by 

arbitrage opportunities, investors should 

be able to sell Shares in the secondary 

market at prices that do not vary 

substantially from their NAV. 

Section 22(d) of the Act and Rule 22c– 

1 Under the Act 

4. Section 22(d) of the Act, among 

other things, prohibits a dealer from 

selling a redeemable security, which is 

currently being offered to the public by 

or through 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 


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16876 Federal Register / Vol. 77, No. 56 / Thursday, March 22, 2012 / Notices 

16 In the past, settlement in certain countries, 

including Russia, has extended to 15 calendar days. 

17Rule 15c6–1 under the Exchange Act requires 

that most securities transactions be settled within 

three business days of the trade. Applicants 

acknowledge that no relief obtained from the 

requirements of section 22(e) will affect any 

obligations applicants may have under rule 15c6– 

1. 

comply with section 22(d) of the Act 

and rule 22c–1 under the Act. 

Applicants request an exemption under 

section 6(c) from these provisions. 

5. Applicants assert that the concerns 

sought to be addressed by section 22(d) 

of the Act and rule 22c–1 under the Act 

with respect to pricing are equally 

satisfied by the proposed method of 

pricing Shares. Applicants maintain that 

while there is little legislative history 

regarding section 22(d), its provisions, 

as well as those of rule 22c–1, appear to 

have been designed to (a) prevent 

dilution caused by certain risklesstrading schemes by principal 

underwriters and contract dealers, (b) 

prevent unjust discrimination or 

preferential treatment among buyers 

resulting from sales at different prices, 

and (c) assure an orderly distribution of 

investment company shares by 

eliminating price competition from 

dealers offering shares at less than the 

published sales price and repurchasing 

shares at more than the published 

redemption price. 

6. Applicants believe that none of 

these purposes will be thwarted by 

permitting Shares to trade in the 

secondary market at negotiated prices. 

Applicants state that (a) secondary 

market trading in Shares does not 

involve the Funds as parties and cannot 

result in dilution of an investment in 

Shares, and (b) to the extent different 

prices exist during a given trading day, 

or from day to day, such variances occur 

as a result of third-party market forces, 

such as supply and demand. Therefore, 

applicants assert that secondary market 

transactions in Shares will not lead to 

discrimination or preferential treatment 

among purchasers. Finally, applicants 

contend that the proposed distribution 

system will be orderly because arbitrage 

activity will ensure that the difference 

between the market price of Shares and 

their NAV remains narrow. 

Section 22(e) of the Act 

7. Section 22(e) generally prohibits a 

registered investment company from 

suspending the right of redemption or 

postponing the date of payment of 

redemption proceeds for more than 

seven days after the tender of a security 

for redemption. Applicants state that 

settlement of redemptions for the 

International Funds is contingent not 

only on the settlement cycle of the 

United States markets, but also on 

currently practicable delivery cycles in 

local markets for underlying foreign 

securities held by the International 

Funds. Applicants state that local 

market delivery cycles for transferring 

Redemption Instruments to investors 

redeeming Creation Units, together with 

local market holiday schedules, will 

under certain circumstances require a 

delivery process in excess of seven 

calendar days for the International 

Funds. Applicants request relief under 

section 6(c) of the Act from section 22(e) 

to allow International Funds that deliver 

Redemption Instruments in-kind to pay 

redemption proceeds up to a maximum 

of 15 calendar days after the tender of 

a Creation Unit for redemption.16 At all 

other times and except as disclosed in 

the relevant Statement of Additional 

Information (‘‘SAI’’), applicants expect 

that each International Fund will be 

able to deliver redemption proceeds 

within seven days.17

8. Applicants state that section 22(e) 

was designed to prevent unreasonable, 

undisclosed and unforeseen delays in 

the payment of redemption proceeds. 

Applicants assert that the requested 

relief will not lead to the problems that 

section 22(e) was designed to prevent. 

Applicants state that the SAI for each 

International Fund will disclose those 

local holidays (over the period of at 

least one year following the date of the 

SAI), if any, that are expected to prevent 

the delivery of redemption proceeds in 

seven calendar days, and the maximum 

number of days, up to a maximum of 15 

calendar days, needed to deliver the 

proceeds for the relevant International 

Fund. Applicants are seeking relief from 

section 22(e) only for those International 

Funds that create and redeem in-kind. 

Sections 17(a)(1) and (2) of the Act 

9. Section 17(a)(1) and (2) of the Act 

generally prohibit 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 

provides that a control relationship will 

be presumed where one person owns 

more than 25% of another person’s 

voting securities. The Funds may be 

deemed to be controlled by the Advisor 

or an entity controlling, controlled by or 

under common control with the Advisor 

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 Advisor or an entity controlling, 

controlled by or under common control 

with the Advisor (an ‘‘Affiliated Fund’’). 

10. Applicants request an exemption 

from section 17(a), under sections 6(c) 

and 17(b), to permit in-kind purchases 

and redemptions by persons that are 

affiliated persons or second tier 

affiliates of the Funds solely by virtue 

of one or more of the following: (1) 

Holding 5% or more, or more than 25%, 

of the outstanding Shares of the 

respective Trust or one or more Funds; 

(2) an affiliation with a person with an 

ownership interest described in (1); or 

(3) holding 5% or more, or more than 

25%, of the shares of one or more 

Affiliated Funds. 

11. Applicants contend that no useful 

purpose would be served by prohibiting 

these affiliated persons or second tier 

affiliates of a Fund from purchasing or 

redeeming Creation Units through ‘‘inkind’’ transactions. The deposit 

procedure for in-kind purchases and the 

redemption procedure for in-kind 

redemptions will be the same for all 

purchases and redemptions. The 

composition of a Creation Basket will be 

the same and will be valued under the 

same objective standards applied to 

valuing the Portfolio Securities. 

Therefore, applicants state that in-kind 

purchases and redemptions will afford 

no opportunity for the affiliated persons 

and second tier affiliates described 

above to effect a transaction detrimental 

to the other holders of Shares. 

Applicants also believe that in-kind 

purchases and redemptions will not 

result in abusive self-dealing or 

overreaching by these persons of the 

Fund. 

Applicants’ Conditions 

The applicants agree that any order of 

the Commission granting the requested 

relief will be subject to the following 

conditions: 

1. As long as the Funds operate in 

reliance on the requested order, the 

Shares of the Funds will be listed on a 

Stock Exchange. 

2. Neither the Trusts 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 


tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 56 / Thursday, March 22, 2012 / Notices 16877 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(3)(A)(ii). 

4 17 CFR 240.19b–4(f)(2). 

5Note that BOX does not route broker-dealer 

proprietary orders and thus does not assess them 

any routing fees. Based on BOX market data, BOX 

believes certain Participants are intentionally 

submitting orders to BOX when limited liquidity is 

on BOX at the national best bid or offer (‘‘NBBO’’). 

This limited liquidity is not enough to fill the 

orders submitted, and thus, BOX is required, in 

accordance with its obligations to customer orders 

under the national market system plan for Options 

Order Protection, to route such orders to a market 

that is displaying liquidity at the NBBO. 

6For the purposes of the discussion in this 

proposed rule change, these non-Professional, 

Public Customer Orders will be referred to as Public 

Customer Orders. 

acquire those Shares from the Fund and 

tender those Shares for redemption to 

the 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 Bid/Ask Price, and a calculation of 

the premium or discount of the market 

closing price or Bid/Ask Price against 

such NAV. 

4. On each Business Day, before 

commencement of trading in Shares on 

the Stock Exchange, the Fund will 

disclose on its Web site the identities 

and quantities of the Portfolio Securities 

and other assets held by the Fund that 

will form the basis for the Fund’s 

calculation of NAV at the end of the 

Business Day. 

5. The Advisor or Fund Subadvisor (if 

any), directly or indirectly, will not 

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. The requested order will expire on 

the effective date of any Commission 

rule under the Act that provides relief 

permitting the operation of actively 

managed exchange-traded funds. 

For the Commission, by the Division of 

Investment Management, under delegated 

authority. 

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–6865 Filed 3–21–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66615; File No. SR–BX– 

2012–019] 

Self-Regulatory Organizations; 

NASDAQ OMX BX, Inc.; Notice of Filing 

and Immediate Effectiveness of 

Proposed Rule Change To Amend the 

BOX Fee Schedule 

March 16, 2012. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on March 12, 

2012, NASDAQ OMX BX, Inc. (the 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared by the Exchange. The 

Exchange filed the proposed rule change 

pursuant to Section 19(b)(3)(A)(ii) of the 

Act,3 and Rule 19b–4(f)(2) thereunder,4

which renders the proposal effective 

upon filing with the Commission. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend the 

Fee Schedule of the Boston Options 

Exchange Group, LLC (‘‘BOX’’). The 

changes to the BOX Fee Schedule 

pursuant to this proposal will be 

effective upon filing for March 2012; 

Participants will only be assessed any 

applicable routing fee for orders on the 

effective date and thereafter. The text of 

the proposed rule change is available 

from the principal office of the 

Exchange, at the Commission’s Public 

Reference Room and also on the 

Exchange’s Internet Web site at http:// 

nasdaqomxbx.cchwallstreet.com/ 

NASDAQOMXBX/Filings/. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

self-regulatory organization included 

statements concerning the purpose of, 

and basis for, the proposed rule change 

and discussed any comments it received 

on the proposed rule change. The text 

of these statements may be examined at 

the places specified in Item IV below. 

The self-regulatory organization has 

prepared summaries, set forth in 

Sections A, B, and C below, of the most 

significant aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange proposes to implement 

a change to the BOX routing fees. BOX 

believes the proposed structure will 

provide an incentive to BOX Options 

Participants (‘‘Participants’’) to submit 

their customer orders for execution on 

BOX and will discourage potentially 

abusive and predatory order routing 

practices to evade fees on other 

exchanges.5 BOX proposes to continue 

to provide routing to away exchanges at 

no charge to Participants that execute 

more than 40% of their nonProfessional, Public Customer 

transactions 6 on BOX, rather than those 

orders being executed at other 

exchanges after BOX routes them to an 

away exchange. 

If BOX does not have sufficient 

liquidity at the NBBO to execute Public 

Customer Orders on BOX, such orders 

are routed to an away exchange for 

execution. Currently, BOX does not 

assess any fee to Participants for doing 

so. BOX, however, believes that 

exempting all outbound Public 

Customer Orders from routing fees is 

resulting in some Participants sending 

an increasing amount of orders to BOX 

when BOX is not at the NBBO, so that 

the orders will be routed to an away 

exchange; and BOX believes this 

activity pattern is designed to evade 

transaction fees on other exchanges. In 

order to curtail this activity that BOX 

believes is designed to take advantage of 

BOX routing Public Customer order at 

no charge, BOX proposes a routing fee 

structure that provides an incentive to 

Participants whom execute their Public 

Customer transactions on BOX. The 

proposed change will have no effect on 

the billing of orders of non-Participants, 

including any orders routed to BOX 

from away exchanges. 

The Exchange proposes that BOX will 

continue to route Public Customer 

Orders to an away exchange without 

imposing any fee, to the extent that 

more than 40% of the Participants’ 

Public Customer Orders sent to BOX 

each month execute on BOX. Executions 

on BOX would include orders executing 

on the BOX Book, or through any other 

BOX mechanism that may be available 

to execute Public Customer Orders (e.g., 

Price Improvement Period, Solicitation 

or Facilitation Auction Mechanisms). If 

60% or more of a Participants’ Public 

Customer Orders executed through BOX 

each month are routed to and executed 

at an away exchange, BOX will assess a 

$0.50 per contract routing fee to all of 

a Participants’ Public Customer orders 

routed to an away exchange for 

execution for the month. BOX will 

calculate the percentage of contracts 

executed on BOX compared to the 


tkelley on DSK3SPTVN1PROD with NOTICES