[Federal Register Volume 86, Number 133 (Thursday, July 15, 2021)]
[Notices]
[Pages 37391-37393]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-15015]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 34326; 812-15175]


Fidelity Beach Street Trust, et al.

July 9, 2021.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application to amend a prior order for exemptive 
relief.

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Summary of Application:  Applicants request an order (``Amended 
Order'') that would amend a prior order to permit the Funds, as defined 
below, to use Creation Baskets (as defined below) that include 
instruments that are not included, or are included with different 
weightings, in the Fund's Tracking Basket (as defined below).

Applicants:  Fidelity Beach Street Trust (``Beach Street''), Fidelity 
Management & Research Company LLC (``FMR''), Fidelity Distributors 
Company LLC (``FDC'') and Fidelity Covington Trust (``New Applicant'' 
and, together with Beach Street, FMR and FDC, the ``Applicants'').

Filing Dates:  The application was filed on October 30, 2020, and 
amended on April 2, 2021, June 11, 2021 and June 30, 2021.

Hearing or Notification of Hearing:  An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may

[[Page 37392]]

request a hearing by emailing the Commission's Secretary at <a href="/cdn-cgi/l/email-protection#8cdfe9effee9f8edfef5ffa1c3eaeae5efe9ccffe9efa2ebe3fa"><span class="__cf_email__" data-cfemail="e7b4828495829386959e94caa881818e8482a7948284c9808891">[email protected]</span></a> and serving Applicants with a copy of the request by 
email. Hearing requests should be received by the Commission by 5:30 
p.m. on August 3, 2021 and should be accompanied by proof of service on 
the Applicants, in the form of an affidavit, or, for lawyers, a 
certificate of service. Pursuant to rule 0-5 under the Investment 
Company Act of 1940 (``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 emailing to the Commission's Secretary at <a href="/cdn-cgi/l/email-protection#fdae989e8f98899c8f848ed0b29b9b949e98bd8e989ed39a928b"><span class="__cf_email__" data-cfemail="7724121405120316050e045a3811111e14123704121459101801">[email protected]</span></a>.

ADDRESSES: The Commission: <a href="/cdn-cgi/l/email-protection#4c1f292f3e29382d3e353f61032a2a252f290c3f292f622b233a"><span class="__cf_email__" data-cfemail="0c5f696f7e69786d7e757f21436a6a656f694c7f696f226b637a">[email protected]</span></a>. Applicants: 
<a href="/cdn-cgi/l/email-protection#1c7f65726874757d327073327e796f6f796868795c7a716e327f7371"><span class="__cf_email__" data-cfemail="bad9c3d4ced2d3db94d6d594d8dfc9c9dfcecedffadcd7c894d9d5d7">[email protected]</span></a>, with copies to <a href="/cdn-cgi/l/email-protection#69030601074706010807050607290d0c0a010c1b1d470a0604"><span class="__cf_email__" data-cfemail="076d686f6929686f66696b6869476362646f6275732964686a">[email protected]</span></a>, 
<a href="/cdn-cgi/l/email-protection#76171a1a1f0519185810031b171f361213151e1304025815191b"><span class="__cf_email__" data-cfemail="17767b7b7e6478793971627a767e577372747f7265633974787a">[email protected]</span></a> and <a href="/cdn-cgi/l/email-protection#91e2e5f4e1f9f0fff8f4bff2f0e1f8e2e5e3feffd1f5f4f2f9f4e3e5bff2fefc"><span class="__cf_email__" data-cfemail="b8cbccddc8d0d9d6d1dd96dbd9c8d1cbcccad7d6f8dcdddbd0ddcacc96dbd7d5">[email protected]</span></a>.

FOR FURTHER INFORMATION CONTACT: Marc Mehrespand, Senior Counsel; Trace 
Rakestraw, 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 website 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.

I. Introduction

    1. On December 10, 2019, the Commission issued an order (``Prior 
Order'') \1\ to Beach Street, FMR Co., Inc.,\2\ Fidelity Management & 
Research Company \3\ and Fidelity Distributors Corporation \4\ (the 
``Prior Applicants'') 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 12(d)(1)(B) of the Act.\5\ The Prior Order permitted 
Prior Applicants to introduce a novel type of actively-managed 
exchange-traded fund (``ETF'') that is not required to disclose its 
portfolio holdings on a daily basis (each, a ``Fund''). Rather, 
pursuant to the Prior Order, each Business Day \6\ a Fund publishes a 
basket of securities and cash that, while different from the Fund's 
portfolio, is designed to closely track its daily performance (the 
``Tracking Basket'').
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    \1\ See Fidelity Beach Street Trust, et al., Investment Company 
Act Release No. 33683 (Nov. 14, 2019) (notice) and Investment 
Company Act Release No. 33712 (Dec. 10, 2019) (order). Except as 
specifically noted in the application, all representations and 
conditions contained in the application previously submitted with 
the Commission (File No. 812-14364), as amended and restated, and 
filed with the Commission on November 8, 2019 (the ``Prior 
Application'') remain applicable to the operation of the Funds and 
will apply to any Funds relying on the Amended Order.
    \2\ On January 1, 2020, each of FMR Co., Inc. and certain other 
Fidelity investment adviser entities merged with and into Fidelity 
Management & Research Company. Thereafter, Fidelity Management & 
Research Company redomiciled as a Delaware limited liability company 
and was renamed Fidelity Management & Research Company LLC. As FMR 
Co., Inc. no longer exists, it is no longer an applicant.
    \3\ As described in note 2, Fidelity Management & Research 
Company has redomiciled as a Delaware limited liability company and 
been renamed Fidelity Management & Research Company LLC.
    \4\ On January 1, 2020, Fidelity Distributors Corporation merged 
with and into Fidelity Investments Institutional Services Company, 
Inc. (``FIISC''). Thereafter, FIISC redomiciled as a Delaware 
limited liability company and was renamed Fidelity Distributors 
Company LLC. As Fidelity Distributors Corporation no longer exists, 
it is no longer an applicant.
    \5\ The relief granted in the Prior Order under section 
12(d)(1)(J) of the Act for an exemption from sections 12(d)(1)(A) 
and 12(d)(1)(B) of the 1940 Act (the ``Section 12(d)(1) Relief''), 
and relief 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 relating to the 
Section 12(d)(1) Relief, will expire one year from the effective 
date of rule 12d1-4, except as necessary to allow a Fund's receipt 
of Representative ETFs included in its Tracking Basket solely for 
purposes of effecting transactions in Creation Units, according to 
the terms of the Prior Application and notwithstanding the limits of 
Rule 12d1-4(b)(3). See Fund of Funds Arrangements, Investment 
Company Act Rel. No. 10871 (Oct. 7, 2020), at III.
    \6\ All capitalized terms not otherwise defined in this notice 
have the meanings ascribed to them in the Prior Application.
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    2. Pursuant to the Prior Order, a Fund sells and redeems its shares 
(``Shares'') only in Creation Units and generally on an in-kind basis. 
Purchasers are required to purchase Creation Units by making a deposit 
of Deposit Instruments and shareholders redeeming their Shares receive 
a transfer of Redemption Instruments.\7\ Under the Prior Order, the 
names and quantities of the instruments that constitute the Deposit 
Instruments and the Redemption Instruments for a Fund (collectively, 
the ``Creation Basket'') are the same as the Fund's Tracking Basket, 
except to the extent purchases and redemptions are made entirely or in 
part on a cash basis.
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    \7\ Deposit Instruments and Redemption Instruments may include 
cash and/or securities.
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    3. The New Applicant is organized as a business trust under the 
laws of The Commonwealth of Massachusetts and is registered with the 
Commission as an open-end management investment company. The New 
Applicant consents to, and will comply with, the terms and conditions 
of the Prior Order, as amended by the requested Order, to the same 
extent as Beach Street, FMR and FDC.
    4. Applicants now seek to amend the Prior Order to, in effect, give 
the Funds the same flexibility with respect to Creation Basket 
composition as afforded to ETFs relying on rule 6c-11.\8\ More 
specifically, Applicants have requested that the Funds be allowed to 
use Creation Baskets that include instruments that are not included, or 
are included with different weightings, in the Fund's Tracking Basket.
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    \8\ The Funds are not be able to operate in reliance on rule 6c-
11 because they do not disclose their portfolio holdings on a daily 
basis as required by the rule. See rule 6c-11(c)(1)(i) (requiring an 
ETF to disclose prominently on its website, publicly available and 
free of charge, the portfolio holdings that will form the basis for 
each calculation of NAV per share).
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II. The Application

A. Applicants' Proposal

    5. Upon amending the Prior Order, the names and quantities of the 
instruments that may constitute a Creation Basket will generally be the 
same as the Fund's Tracking Basket, but a Fund may accept Creation 
Baskets that differ from the Tracking Basket. Each Business Day, before 
the open of trading on the Exchange where a Fund is listed, the Fund 
will publish on its website the composition of any Creation Basket 
exchanged with an AP on the previous Business Day that differed from 
such Business Day's Tracking Basket other than with respect to cash.
    6. Applicants represent that, for portfolio management or other 
reasons, the Funds may determine that it is desirable to use Creation 
Baskets that differ from the Tracking Basket \9\ (beyond cash 
substitutions). For example, a Fund may want to use a Creation Basket 
that contains instruments that are not included in a Fund's Tracking 
Basket if the Adviser or Sub-Adviser seeks to add an instrument to the 
Fund's actual portfolio) without incurring transaction costs associated 
with the purchase of the instrument for cash. Similarly, if the Adviser 
or Sub-Adviser decides to sell an instrument from a Fund's actual 
portfolio, the

[[Page 37393]]

instrument may be included in a Creation Basket with the expectation 
that the Fund will deliver it in-kind during a redemption transaction.
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    \9\ The Prior Applicants represented in the Prior Application 
that a Fund's Tracking Basket will solely consist of a combination 
of Strategy Components, Representative ETFs, and cash and cash 
equivalents. Applicants note that a Fund's Tracking Basket may also 
consist of select securities from the universe from which that 
Fund's investments are selected, such as a broad-based market index.
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    7. The Funds will use the requested basket flexibility only in 
circumstances under which Applicants believe there will be no harm to 
the Funds or their shareholders, and in order to benefit the Funds and 
their shareholders by reducing costs, increasing efficiency and 
improving trading.
    8. Pursuant to condition A.10 herein, each Fund will adopt and 
implement written policies and procedures regarding the construction of 
its Creation Baskets in accordance with rule 6c-11 under the Act. For 
purposes of the requirement to comply with the policies and procedures 
provision in rule 6c-11, only Creation Baskets that differ from a 
Fund's Tracking Basket will be treated as a ``custom basket'' under 
rule 6c-11(c)(3).
    9. Furthermore, pursuant to condition A.9 herein, each Fund will 
comply with the recordkeeping requirements of rule 6c-11.\10\ For 
purposes of the requirement to comply with the recordkeeping provision 
in rule 6c-11, only Creation Baskets different from a Fund's Tracking 
Basket will be treated as a ``custom basket'' under rule 6c-
11(d)(2)(ii).
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    \10\ Pursuant to condition A.9, each Fund will also maintain and 
preserve a copy of the Tracking Basket published on the Fund's 
website for each Business Day and a copy of each Creation Basket 
made available.
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B. Considerations Relating to the Requested Relief

    9. Applicants represent that the ability to utilize a Creation 
Basket that includes instruments that are not included, or are included 
with different weightings, in a Fund's Tracking Basket, or are included 
in different weightings, does not raise any new policy concerns about 
reverse engineering of a Fund's portfolio, self-dealing or 
overreaching, or selective disclosure beyond those concerns addressed 
in connection with the Prior Order.
    10. Reverse Engineering. Applicants acknowledge that, by using a 
Creation Basket that includes instruments that are not included in a 
Fund's Tracking Basket, or are included in different percentages, and 
by publishing such Creation Basket on its website, the Fund would 
provide market participants with additional information about which 
instruments it adds or removes from the Fund's actual portfolio. 
However, Applicants represent that they will operate the Funds in a 
manner designed to minimize the risk of reverse engineering and, for 
the reasons set forth in the application, believe successful front-
running or free-riding is highly unlikely.
    11. Self-Dealing or Overreaching. Applicants state that APs and 
other market participants will not have the ability to disadvantage the 
Funds by manipulating or influencing the composition of Creation 
Baskets, including those that differ from the Tracking Basket. Like the 
basket and custom basket policies and procedures required of ETFs by 
rule 6c-11, the Funds will adopt and implement written policies and 
procedures that govern the construction of Creation Baskets and the 
process that will be used for the acceptance of Creation Baskets to 
safeguard the best interests of the Funds and their shareholders.\11\
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    \11\ See Exchange-Traded Funds, Investment Company Act Release 
No. 33646 (Sept. 25, 2019) (``ETF Adopting Release''), at 80-94 
(discussion of rule 6c-11 requirement for ETF policies and 
procedures concerning basket construction and acceptance and 
heightened policies and procedures for custom baskets).
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    12. Selective Disclosure. The Funds and each person acting on 
behalf of the Funds will continue to be required to comply with 
Regulation Fair Disclosure as if it applied to them (except that the 
exemptions provided in rule 100(b)(2)(iii) therein shall not apply). 
Applicants believe that the new Creation Basket flexibility being 
sought by the Applicants does not raise any new concerns about 
selective disclosure of non-public material information. First, a 
Fund's use of, or conversations with APs about, Creation Baskets that 
would result in such disclosure would effectively be limited by the 
Funds' obligation to comply with Regulation Fair Disclosure. Second, as 
noted above, each Business Day, before the open of trading on the 
Exchange where a Fund is listed, the Fund will publish on its website 
the composition of any basket accepted by the Fund on the previous 
Business Day that differed from such Business Day's Tracking Basket 
other than with respect to cash.

III. Requested Exemptive Relief

    For the reasons stated above, Applicants believe that the Prior 
Order, as amended, continues to meet the relevant standards for relief 
pursuant to 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, and 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 
12(d)(1)(B) of the Act.\12\
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    \12\ See supra note 4.
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IV. Applicants' Conditions

    Applicants agree that the Amended Order granting the requested 
relief will be subject to all of the conditions in the Prior Order, 
except that condition A.9 of the Prior Order is deleted in its entirety 
and replaced with the conditions A.9-A.10 as follows:
    9. Each Fund will comply with the recordkeeping requirements of 
rule 6c-11 under the Act, as amended, except that for purposes of this 
condition, only Creation Baskets different from the Fund's Tracking 
Basket will be treated as a ``custom basket'' under rule 6c-
11(d)(2)(ii). In addition, each Fund will maintain and preserve, for a 
period of not less than five years, in an easily accessible place, (i) 
a copy of the Tracking Basket published on the Fund's website for each 
Business Day; and (ii) a copy of each Creation Basket made available.
    10. Each Fund will adopt and implement written policies and 
procedures that govern the construction of Creation Baskets, as 
required under rule 6c-11(c)(3) under the Act, as amended, except that 
for purposes of this condition, only Creation Baskets different from 
the Fund's Tracking Basket will be treated as a ``Custom Basket''. The 
Fund's basket policies and procedures will be covered by the Fund's 
compliance program and other requirements under rule 38a-1 under the 
Act, as amended.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-15015 Filed 7-14-21; 8:45 am]
BILLING CODE 8011-01-P


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