[Federal Register Volume 80, Number 31 (Tuesday, February 17, 2015)]
[Notices]
[Pages 8369-8373]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-03098]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 31453; File No. 812-14334]


Exchange Traded Concepts, LLC et al.; Notice of Application

February 10, 2015.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under section 6(c) of the Investment 
Company Act of 1940 (``Act'') for an exemption from section 15(a) of 
the Act and rule 18f-2 under the Act, as well as from certain 
disclosure requirements.

-----------------------------------------------------------------------

Summary of Application: Applicants request an order that would permit 
them to enter into and materially amend subadvisory agreements with 
Wholly-Owned Sub-Advisers (as defined below) and non-affiliated sub-
advisers without shareholder approval and would grant relief from 
certain disclosure requirements.

Applicants: Exchange Traded Concepts Trust, Exchange Traded Concepts 
Trust II, Source ETF Trust and ETF Series Solutions (each, a ``Trust'') 
and Exchange Traded Concepts, LLC (the ``Initial Adviser'').

Filing Dates: The application was filed on July 17, 2014, and amended 
on December 29, 2014.

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 March 9, 2015, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Pursuant to rule 0-5 under Act, hearing 
requests should state the nature of the writer's interest, any facts 
bearing upon the desirability of a hearing on the matter, 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: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street NE., Washington, DC 20549-1090. Applicants, c/o Michael D. 
Barolsky, Esq. 615 E Michigan Street, Milwaukee, WI 53202.

FOR FURTHER INFORMATION CONTACT: Rachel Loko, Senior Counsel, at (202) 
551-6883, or Holly L. Hunter-Ceci, Branch Chief, at (202) 551-6825 
(Division of Investment Management, Chief Counsel's 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. Each Trust is organized as a Delaware statutory trust and is 
registered with the Commission as an open-end management investment 
company under the Act. Each Trust may offer one or more series of 
shares (each, a ``Fund'' and collectively the ``Funds'') with its own 
distinct investment

[[Page 8370]]

objectives, policies and restrictions.\1\ Currently, each Trust has 
registered several Funds, certain of which are operational. Applicants 
state that each Fund that has commenced operations to date operates as 
a passively-managed exchange-traded fund in reliance on a previously 
granted exemptive order.\2\ The Adviser is a limited liability company 
organized under the laws of the State of Oklahoma and is registered 
with the Commission as an investment adviser under the Investment 
Advisers Act of 1940 (the ``Advisers Act'').
---------------------------------------------------------------------------

    \1\ Future Funds may be operated as a master-feeder structure 
pursuant to section 12(d)(1)(E) of the Act. In such a structure, 
certain Funds (each, a ``Feeder Fund'') may invest substantially all 
of their assets in a Fund (a ``Master Fund'') pursuant to section 
12(d)(1)(E) of the Act. No Feeder Fund will engage any sub-advisers 
other than through approving the engagement of one or more of the 
Master Fund's sub-advisers.
    \2\ Exchange Traded Concepts, LLC, et al., Investment Company 
Act Release Nos. 30634 (July 29, 2013) (Notice) and 30674 (August 
26, 2013) (Order).
---------------------------------------------------------------------------

    2. Applicants request an order to permit the Adviser,\3\ subject to 
the approval of the board of trustees of the applicable Trust (the 
``Board''), including a majority of the trustees who are not 
``interested persons'' of the Funds or the Adviser as defined in 
section 2(a)(19) of the Act (the ``Independent Trustees''), to, without 
obtaining shareholder approval: (i) Select Sub-Advisers \4\ to manage 
all or a portion of the assets of a Fund and enter into Sub-Advisory 
Agreements (as defined below) with the Sub-Advisers, and (ii) 
materially amend Sub-Advisory Agreements with the Sub-Advisers.\5\ 
Applicants request that the relief apply to the named applicants, as 
well as to any future Fund and any other existing or future registered 
open-end management investment company or series thereof that is 
advised by the Adviser, uses the multi-manager structure described in 
the application, and complies with the terms and conditions set forth 
in the application (each, a ``Subadvised Funds'').\6\ The requested 
relief will not extend to any sub-adviser, other than a Wholly-Owned 
Sub-Adviser, who is an affiliated person, as defined in section 2(a)(3) 
of the Act, of the Subadvised Fund, of any Feeder Fund, or of the 
Adviser, other than by reason of serving as a sub-adviser to one or 
more of the Subadvised Funds (``Affiliated Sub-Adviser'').
---------------------------------------------------------------------------

    \3\ The term ``Adviser'' includes (i) the Initial Adviser and 
(ii) any entity controlling, controlled by or under common control 
with, the Initial Adviser or its successors that serves as 
investment adviser to the Funds. For purposes of the requested 
order, ``successor'' is limited to an entity that results from a 
reorganization into another jurisdiction or a change in the type of 
business organization.
    \4\ A ``Sub-Adviser'' for a Fund is (1) an indirect or direct 
``wholly owned subsidiary'' (as such term is defined in Section 
2(a)(43) of the Act) of the Adviser for that Fund, or (2) a sister 
company of the Adviser for that Fund that is an indirect or direct 
``wholly-owned subsidiary'' of the same company that, indirectly or 
directly, wholly owns the Adviser (each of (1) and (2) a ``Wholly-
Owned Sub-Adviser'' and collectively, the ``Wholly-Owned Sub-
Advisers''), or (3) not an ``affiliated person'' (as such term is 
defined in section 2(a)(3) of the Act) of the Fund, any Feeder Fund 
invested in a Master Fund, the Trust, or the Adviser, except to the 
extent that an affiliation arises solely because the Sub-Adviser 
serves as a sub-adviser to a Fund (each, a ``Non-Affiliated Sub-
Adviser'').
    \5\ Shareholder approval will continue to be required for any 
other sub-adviser changes (not otherwise permitted by rule or other 
action of the Commission or staff) and material amendments to an 
existing Sub-Advisory Agreement with any sub-adviser other than a 
Non-Affiliated Sub-Adviser or Wholly-Owned Sub-Adviser (all such 
changes referred to as ``Ineligible Sub-Adviser Changes'').
    \6\ All registered open-end investment companies that currently 
intend to rely on the requested order are named as applicants. All 
Funds that currently are, or that currently intend to be, Subadvised 
Funds are identified in the application. Any entity that relies on 
the requested order will do so only in accordance with the terms and 
conditions contained in the application. If the name of any 
Subadvised Fund contains the name of a Sub-Adviser, the name of the 
Adviser that serves as the primary adviser to the Subadvised Fund, 
or a trademark or trade name that is owned by or publicly used to 
identify that Adviser, will precede the name of the Sub-Adviser.
---------------------------------------------------------------------------

    3. The Adviser serves as the investment adviser to each Fund 
pursuant to an investment advisory agreement with the applicable Trust 
(each, an ``Investment Management Agreement''). Any other Adviser will 
be registered with the Commission as an investment adviser under the 
Advisers Act. Each Investment Management Agreement was approved by the 
respective Board, including a majority the Independent Trustees, and by 
the shareholders of each Fund in the manner required by sections 15(a) 
and 15(c) of the Act and rule 18f-2 thereunder. The terms of each 
Investment Management Agreement comply with section 15(a) of the Act. 
Each other investment management agreement with respect to a Fund 
(included in the term ``Investment Management Agreement'') will comply 
with section 15(a) of the Act and will be similarly approved.
    4. Pursuant to the terms of each Investment Management Agreement, 
the Adviser, subject to the supervision of the respective Board, 
provides continuous investment management of the assets of each Fund. 
The Adviser periodically reviews a Fund's investment policies and 
strategies and, based on the need of a particular Fund, may recommend 
changes to the investment policies and strategies of the Fund for 
consideration by the Board. For its services to each Fund under an 
Investment Management Agreement, the Adviser receives an investment 
management fee from that Fund. Consistent with the terms of each 
Investment Management Agreement, the Adviser may, subject to the 
approval of the Board, including a majority of the Independent 
Trustees, and the shareholders of the applicable Subadvised Fund (if 
required), delegate portfolio management responsibilities of all or a 
portion of the assets of a Subadvised Fund to one or more Sub-Advisers. 
The Adviser continues to have overall responsibility for the management 
and investment of the assets of each Subadvised Fund, and the Adviser's 
responsibilities include, for example, recommending the removal or 
replacement of Sub-Advisers and determining the portion of that 
Subadvised Fund's assets to be managed by any given Sub-Adviser and 
reallocating those assets as necessary from time to time.
    5. The Adviser has entered into sub-advisory agreements with 
various Sub-Advisers (``Sub-Advisory Agreements'') on behalf of the 
Subadvised Funds. The Adviser may also, in the future, enter into Sub-
Advisory Agreements on behalf of other Funds. The Sub-Advisory 
Agreements were approved by the respective Board, including a majority 
of the Independent Trustees, and the shareholders of the applicable 
Subadvised Fund in accordance with sections 15(a) and 15(c) of the Act 
and rule 18f-2 thereunder. In addition, the terms of each Sub-Advisory 
Agreement comply fully with the requirements of section 15(a) of the 
Act. The Sub-Advisers, subject to the supervision of the Adviser and 
oversight of the Board, determine the securities and other instruments 
to be purchased, sold or entered into by a Subadvised Fund's portfolio 
or a portion thereof, and place orders with brokers or dealers that 
they select. The Adviser will compensate each Sub-Adviser out of the 
fee paid to the Adviser under the Investment Management Agreement.
    6. Subadvised Funds will inform shareholders of the hiring of a new 
Sub-Adviser pursuant to the following procedures (``Modified Notice and 
Access Procedures''): (a) Within 90 days after a new Sub-Adviser is 
hired for any Subadvised Fund, that Subadvised Fund will send its 
shareholders \7\ either a Multi-manager Notice or a Multi-

[[Page 8371]]

manager Notice and Multi-manager Information Statement; \8\ and (b) the 
Subadvised Fund will make the Multi-manager Information Statement 
available on the Web site identified in the Multi-manager Notice no 
later than when the Multi-manager Notice (or Multi-manager Notice and 
Multi-manager Information Statement) is first sent to shareholders, and 
will maintain it on that Web site for at least 90 days. Applicants 
state that, in the circumstances described in the application, a proxy 
solicitation to approve the appointment of new Sub-Advisers provides no 
more meaningful information to shareholders than the proposed Multi-
manager Information Statement. Applicants also state that each Board 
would comply with the requirements of sections 15(a) and 15(c) of the 
Act before entering into or amending Sub-Advisory Agreements.
---------------------------------------------------------------------------

    \7\ If the Subadvised Fund is a Master Fund, for purposes of the 
Modified Notice and Access Procedures, ``shareholders'' include both 
the shareholders of the applicable Master Fund and the shareholders 
of its Feeder Funds.
    \8\ A ``Multi-manager Notice'' will be modeled on a Notice of 
Internet Availability as defined in rule 14a-16 under the Securities 
Exchange Act of 1934 (``Exchange Act''), and specifically will, 
among other things: (a) Summarize the relevant information regarding 
the new Sub-Adviser; (b) inform shareholders that the Multi-manager 
Information Statement is available on a Web site; (c) provide the 
Web site address; (d) state the time period during which the Multi-
manager Information Statement will remain available on that Web 
site; (e) provide instructions for accessing and printing the Multi-
manager Information Statement; and (f) instruct the shareholder that 
a paper or email copy of the Multi-manager Information Statement may 
be obtained, without charge, by contacting the Subadvised Fund.
    A ``Multi-manager Information Statement'' will meet the 
requirements of Regulation 14C, Schedule 14C and Item 22 of Schedule 
14A under the Exchange Act for an information statement. Multi-
manager Information Statements will be filed with the Commission via 
the EDGAR system.
---------------------------------------------------------------------------

    7. Applicants also request an order under section 6(c) of the Act 
exempting the Subadvised Funds from certain disclosure obligations that 
may require each Subadvised Fund to disclose fees paid by the Adviser 
to each Sub-Adviser. Applicants seek relief to permit each Subadvised 
Fund to disclose (as a dollar amount and a percentage of the Subadvised 
Fund's net assets): (a) The aggregate fees paid to the Adviser and any 
Wholly-Owned Sub-Advisers; (b) the aggregate fees paid to Non-
Affiliated Sub-Advisers; and (c) the fee paid to each Affiliated Sub-
Adviser (collectively, the ``Aggregate Fee Disclosure''). An exemption 
is requested to permit the Funds to include only the Aggregate Fee 
Disclosure. All other items required by sections 6-07(2)(a), (b) and 
(c) of Regulation S-X will be disclosed.

Applicants' Legal Analysis

    1. Section 15(a) of the Act states, in part, that it is unlawful 
for any person to act as an investment adviser to a registered 
investment company ``except pursuant to a written contract, which 
contract, whether with such registered company or with an investment 
adviser of such registered company, has been approved by the vote of a 
majority of the outstanding voting securities of such registered 
company.'' Rule 18f-2 under the Act provides that each series or class 
of stock in a series investment company affected by a matter must 
approve that matter if the Act requires shareholder approval.
    2. Form N-1A is the registration statement used by open-end 
investment companies. Item 19(a)(3) of Form N-1A requires a registered 
investment company to disclose in its statement of additional 
information the method of computing the ``advisory fee payable'' by the 
investment company, including the total dollar amounts that the 
investment company ``paid to the adviser (aggregated with amounts paid 
to affiliated advisers, if any), and any advisers who are not 
affiliated persons of the adviser, under the investment advisory 
contract for the last three fiscal years.''
    3. Rule 20a-1 under the Act requires proxies solicited with respect 
to a registered investment company to comply with Schedule 14A under 
the Exchange Act. Items 22(c)(1)(ii), 22(c)(1)(iii), 22(c)(8) and 
22(c)(9) of Schedule 14A, taken together, require a proxy statement for 
a shareholder meeting at which the advisory contract will be voted upon 
to include the ``rate of compensation of the investment adviser,'' the 
``aggregate amount of the investment adviser's fee,'' a description of 
the ``terms of the contract to be acted upon,'' and, if a change in the 
advisory fee is proposed, the existing and proposed fees and the 
difference between the two fees.
    4. Regulation S-X sets forth the requirements for financial 
statements required to be included as part of investment company 
registration statements and shareholder reports filed with the 
Commission. Sections 6-07(2)(a), (b) and (c) of Regulation S-X require 
registered investment companies to include in their financial 
statements information about investment advisory fees.
    5. Section 6(c) of the Act provides that the Commission by order 
upon application may conditionally or unconditionally exempt any 
person, security, or transaction or any class or classes of persons, 
securities, or transactions from any provisions of the Act, or from any 
rule thereunder, if 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. 
Applicants state that their requested relief meets this standard for 
the reasons discussed below.
    6. Applicants assert that the shareholders expect the Adviser, 
subject to the review and approval of the Board, to select the Sub-
Advisers who are in the best position to achieve the Subadvised Funds' 
investment objectives. Applicants assert that, from the perspective of 
the shareholder, the role of the Sub-Advisers is substantially 
equivalent to the role of the individual portfolio managers employed by 
an investment adviser to a traditional investment company. Applicants 
believe that permitting the Adviser to perform the duties for which the 
shareholders of the Subadvised Fund are paying the Adviser--the 
selection, supervision and evaluation of the Sub-Advisers--without 
incurring unnecessary delays or expenses is appropriate in the interest 
of the Subadvised Fund's shareholders and will allow such Subadvised 
Fund to operate more efficiently. Applicants state that the Investment 
Management Agreement will continue to be fully subject to section 15(a) 
of the Act and rule 18f-2 under the Act and approved by the Board, 
including a majority of the Independent Trustees, in the manner 
required by sections 15(a) and 15(c) of the Act. Applicants are not 
seeking an exemption with respect to the Investment Management 
Agreement.
    7. Applicants assert that disclosure of the individual fees that 
the Adviser would pay to the Sub-Advisers of Subadvised Funds that 
operate in the multi-manager structure described in the application 
does not serve any meaningful purpose. Applicants contend that the 
primary reasons for requiring disclosure of individual fees paid to 
Sub-Advisers are to inform shareholders of expenses to be charged by a 
particular Subadvised Fund and to enable shareholders to compare the 
fees to those of other comparable investment companies. Applicants 
believe that the requested relief satisfies these objectives because 
the advisory fee paid to the Adviser will be fully disclosed and, 
therefore, shareholders will know what the Subadvised Fund's fees and 
expenses are and will be able to compare the advisory fees a Subadvised 
Fund is charged to those of other investment companies. Applicants 
assert that the requested disclosure relief would benefit shareholders 
of the Subadvised Fund because it would improve the Adviser's ability 
to negotiate the fees paid to Sub-Advisers.

[[Page 8372]]

Applicants state that if the Adviser is not required to disclose the 
Sub-Advisers' fees to the public, the Adviser may be able to negotiate 
rates that are below a Sub-Adviser's ``posted'' amounts. Applicants 
assert that the relief will also encourage Sub-Advisers to negotiate 
lower sub-advisory fees with the Adviser if the lower fees are not 
required to be made public.
    8. Applicants submit that the requested relief meets the standards 
for relief under section 6(c) of the Act. Applicants state that each 
Subadvised Fund will be required to obtain shareholder approval to 
operate as a ``multiple manager'' fund as described in the application 
before relying on the requested order. Applicants assert that 
conditions 6, 10, and 11 are designed to provide the Board with 
sufficient independence and the resources and information it needs to 
monitor and address any conflicts of interest. Applicants state that, 
accordingly, they believe the requested relief 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.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions: \9\
---------------------------------------------------------------------------

    \9\ Applicants will only comply with conditions 7, 8, 9, and 12 
if they rely on the relief that would allow them to provide 
Aggregate Fee Disclosure.
---------------------------------------------------------------------------

    1. Before a Subadvised Fund may rely on the order requested in the 
application, the operation of the Subadvised Fund in the manner 
described in the application, including the hiring of Wholly-Owned Sub-
Advisers, will be approved by a majority of the Subadvised Fund's 
outstanding voting securities as defined in the Act, which in the case 
of a Master Fund will include voting instructions provided by 
shareholders of the Feeder Funds investing in such Master Fund or other 
voting arrangements that comply with section 12(d)(1)(E)(iii)(aa) of 
the Act or, in the case of a new Subadvised Fund whose public 
shareholders purchase shares on the basis of a prospectus containing 
the disclosure contemplated by condition 2 below, by the initial 
shareholder(s) before offering the Subadvised Fund's shares to the 
public.
    2. The prospectus for each Subadvised Fund, and in the case of a 
Master Fund relying on the requested relief, the prospectus for each 
Feeder Fund investing in such Master Fund, will disclose the existence, 
substance and effect of any order granted pursuant to the application. 
Each Subadvised Fund (and any such Feeder Fund) will hold itself out to 
the public as employing the multi-manager structure described in the 
application. Each prospectus will prominently disclose that the Adviser 
has the ultimate responsibility, subject to oversight by the Board, to 
oversee the Sub-Advisers and recommend their hiring, termination, and 
replacement.
    3. The Adviser will provide general management services to a 
Subadvised Fund, including overall supervisory responsibility for the 
general management and investment of the Subadvised Fund's assets. 
Subject to review and approval of the Board, the Adviser will (a) set a 
Subadvised Fund's overall investment strategies, (b) evaluate, select, 
and recommend Sub-Advisers to manage all or a portion of a Subadvised 
Fund's assets, and (c) implement procedures reasonably designed to 
ensure that Sub-Advisers comply with a Subadvised Fund's investment 
objective, policies and restrictions. Subject to review by the Board, 
the Adviser will (a) when appropriate, allocate and reallocate a 
Subadvised Fund's assets among Sub-Advisers; and (b) monitor and 
evaluate the performance of Sub-Advisers.
    4. A Subadvised Fund will not make any Ineligible Sub-Adviser 
Changes without such agreement, including the compensation to be paid 
thereunder, being approved by the shareholders of the applicable 
Subadvised Fund, which in the case of a Master Fund will include voting 
instructions provided by shareholders of the Feeder Fund investing in 
such Master Fund or other voting arrangements that comply with section 
12(d)(1)(E)(iii)(aa) of the Act.
    5. Subadvised Funds will inform shareholders, and if the Subadvised 
Fund is a Master Fund, shareholders of any Feeder Funds, of the hiring 
of a new Sub-Adviser within 90 days after the hiring of the new Sub-
Adviser pursuant to the Modified Notice and Access Procedures.
    6. At all times, at least a majority of the Board will be 
Independent Trustees, and the selection and nomination of new or 
additional Independent Trustees will be placed within the discretion of 
the then-existing Independent Trustees.
    7. Independent Legal Counsel, as defined in rule 0-1(a)(16) under 
the Act, will be engaged to represent the Independent Trustees. The 
selection of such counsel will be within the discretion of the then-
existing Independent Trustees.
    8. The Adviser will provide the Board, no less frequently than 
quarterly, with information about the profitability of the Adviser on a 
per Subadvised Fund basis. The information will reflect the impact on 
profitability of the hiring or termination of any sub-adviser during 
the applicable quarter.
    9. Whenever a sub-adviser is hired or terminated, the Adviser will 
provide the Board with information showing the expected impact on the 
profitability of the Adviser.
    10. Whenever a sub-adviser change is proposed for a Subadvised Fund 
with an Affiliated Sub-Adviser or a Wholly-Owned Sub-Adviser, the 
Board, including a majority of the Independent Trustees, will make a 
separate finding, reflected in the Board minutes, that such change is 
in the best interests of the Subadvised Fund and its shareholders, and 
if the Subadvised Fund is a Master Fund, the best interests of any 
applicable Feeder Funds and their respective shareholders, and does not 
involve a conflict of interest from which the Adviser or the Affiliated 
Sub-Adviser or Wholly-Owned Sub-Adviser derives an inappropriate 
advantage.
    11. No Trustee or officer of the Trust, a Fund or a Feeder Fund, or 
partner, director, manager or officer of the Adviser, will own directly 
or indirectly (other than through a pooled investment vehicle that is 
not controlled by such person) any interest in a Sub-Adviser except for 
(a) ownership of interests in the Adviser or any entity, except a 
Wholly-Owned Sub-Adviser, that controls, is controlled by, or is under 
common control with the Adviser, or (b) ownership of less than 1% of 
the outstanding securities of any class of equity or debt of any 
publicly traded company that is either a Sub-Adviser or an entity that 
controls, is controlled by, or under common control with a Sub-Adviser.
    12. Each Subadvised Fund and any Feeder Fund that invests in a 
Subadvised Fund that is a Master Fund will disclose the Aggregate Fee 
Disclosure in its registration statement.
    13. Any new Sub-Advisory Agreement or any amendment to a Subadvised 
Fund's existing Investment Management Agreement or Sub-Advisory 
Agreement that directly or indirectly results in an increase in the 
aggregate advisory fee rate payable by the Subadvised Fund will be 
submitted to the Subadvised Fund's shareholders for approval.
    14. In the event the Commission adopts a rule under the Act 
providing substantially similar relief to that requested in the 
application, the requested order will expire on the effective date of 
that rule.


[[Page 8373]]


    For the Commission, by the Division of Investment Management, 
under delegated authority.
Brent J. Fields,
Secretary.
[FR Doc. 2015-03098 Filed 2-13-15; 8:45 am]
BILLING CODE 8011-01-P