Document ID: SEC-2014-1895-0001
Agency: sec
Document Type: Notice
Title: Applications: Eaton Vance Management, et al.
Posted Date: 2014-11-13T05:00Z

[Federal Register Volume 79, Number 219 (Thursday, November 13, 2014)]
[Notices]
[Pages 67471-67479]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-26817]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 31333; 812-14139]

Eaton Vance Management, et al.; Notice of Application

November 6, 2014.
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:  Eaton Vance Management (``Eaton Vance''), Eaton Vance ETMF 
Trust (``ETMF Trust'') and Eaton Vance ETMF Trust II (``ETMF Trust 
II'').

SUMMARY: 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 the 
next-determined net asset value (``NAV'') plus or minus a market-
determined premium or discount (``premium/discount'') that may vary 
during the trading day (``NAV-based Trading''); (c) certain series to 
pay redemption proceeds, under certain circumstances, more than seven 
days from the tender of Shares for redemption; (d) certain affiliated 
persons of the series to deposit securities into, and receive 
securities from, the series in connection with the purchase and 
redemption of Creation Units; (e) certain registered management 
investment companies and unit investment trusts outside of the same 
group of investment companies as the series to acquire Shares; and (f) 
certain series to create and redeem Shares in kind in a master-feeder 
structure.

DATES: The application was filed on March 27, 2013 and amended on 
September 12, 2013, January 23, 2014, September 15, 2014, and September 
25, 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 December 1, 2014, 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 the 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: Frederick S. Marius, 
Esq., Eaton Vance Management, Two International Place, Boston, MA 
02110.

FOR FURTHER INFORMATION CONTACT: Jean E. Minarick, Senior Counsel, 
Daniele Marchesani, Branch Chief or Dalia Osman Blass, Assistant Chief 
Counsel, at (202) 551-6821 (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

    1. ETMF Trust and ETMF Trust II (each, a ``Trust'' and, together 
the ``Trusts'') will be registered as open-end management investment 
companies under the Act and are business trusts organized under the 
laws of Massachusetts. ETMF Trust and ETMF Trust II will initially 
offer ten and eightseries, respectively (the ``Initial ETMFs''). Each 
ETMF (as defined below) will invest in securities and other assets 
selected to pursue the ETMF's investment objective (``Portfolio 
Positions'').\1\
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    \1\ If an ETMF (or, in the case of an ETMF Feeder (as defined 
below), its Master Fund (as defined below)) invests in derivatives, 
then (a) the board of trustees (``Board'') of the ETMF will 
periodically review and approve the ETMF's (or, in the case of an 
ETMF Feeder, its Master Fund's) use of derivatives and how the 
ETMF's Adviser assesses and manages risk with respect to the ETMF's 
(or, in the case of an ETMF Feeder, its Master Fund's investment 
adviser's) use of derivatives and (b) the ETMF's disclosure of its 
(or in the case of an ETMF Feeder, its Master Fund's) use of 
derivatives in its offering documents and periodic reports will be 
consistent with relevant Commission and staff guidance.
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    2. Eaton Vance, a Massachusetts business trust, will serve as 
investment adviser to the Initial ETMFs. An Adviser (as defined below) 
will serve as investment adviser to each ETMF. Eaton Vance is, and any 
other Adviser will be, registered as an investment adviser under the 
Investment Advisers Act of 1940 (``Advisers Act''). The Adviser may 
retain one or more subadvisers (each a ``Subadviser'') to manage the 
portfolios of the ETMFs (as defined below). Any Subadviser will be 
registered, or not subject to registration, under the Advisers Act.

Applicants' Proposal

    3. Applicants seek an exemptive order that would permit them to 
offer

[[Page 67472]]

exchange-traded managed funds, a new kind of registered investment 
company that is a hybrid between traditional mutual funds and exchange-
traded funds (``exchange-traded managed funds'' or ETMFs, as defined 
below).\2\ Like exchange-traded funds (``ETFs''), ETMFs would: List and 
trade on a national securities exchange, as defined in section 2(a)(26) 
of the Act (``Exchange''); directly issue and redeem Shares only in 
Creation Units; impose fees on Creation Units issued and redeemed to 
Authorized Participants (as defined below) to offset the related costs 
to the ETMFs; and primarily utilize in-kind transfers of Portfolio 
Positions in issuing and redeeming Creation Units. Like mutual funds, 
ETMFs would be bought and sold at prices linked to NAV and would seek 
to maintain the confidentiality of their current Portfolio Positions. 
Applicants have structured the product in this manner to provide 
certain cost and tax efficiencies of ETFs to investors, while 
maintaining the confidentiality of current Portfolio Positions.\3\
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    \2\ In accordance with the conditions to the requested relief, 
neither the Trusts nor any ETMF would be marketed or otherwise held 
out as an ``open-end investment company,'' a ``mutual fund'' or 
``exchange-traded fund.'' Instead, each ETMF would be marketed as an 
``exchange-traded managed fund'' or ``ETMF.''
    \3\ Through in-kind redemptions (as described below), ETMFs 
would seek to achieve tax efficiencies for its shareholders by 
avoiding the tax consequences of selling portfolio positions to meet 
redemption requests in cash. ETMFs could also limit the costs 
associated with managing inflows and outflows (e.g., trading costs 
and ``cash drag''). By trading on an Exchange, ETMFs would greatly 
reduce their expenses for transfer agency services. (ETMF 
shareholders would still be able to receive comparable services 
through their brokers and would pay only for those services that 
they elect to receive.) Finally, applicants represent that ETMFs 
will not charge sales loads or pay any asset-based distribution or 
service fees.
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    4. Applicants request that the order apply to the Initial ETMFs and 
any future series of the Trusts as well as any other open-end 
management investment companies or series thereof that: (a) Are advised 
by Eaton Vance or an entity controlling, controlled by, or under common 
control with Eaton Vance (Eaton Vance and each such other entity, and 
any successor thereto, included in the term ``Adviser''); \4\ and (b) 
comply with the terms and conditions of the requested order (``Future 
ETMFs'').\5\ An ETMF would offer its Shares in Creation Units only; 
individual Shares would trade on an Exchange using NAV-based Trading. 
The Initial ETMFs and the Future ETMFs together are the ``ETMFs.'' \6\
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    \4\ For the purposes of the requested order, a ``successor'' is 
limited to an entity that results from a reorganization into another 
jurisdiction or a change in the type of business organization.
    \5\ Eaton Vance has obtained patents with respect to certain 
aspects of ETMF's NAV-based Trading. Applicants anticipate that 
Eaton Vance or an affiliate thereof will license the patents to 
other registered investment advisers (each a ``Licensed Adviser'') 
advising a trust that intends to launch new series that will operate 
as exchange-traded managed funds (the Licensed Adviser and such 
trust together, the ``Future Applicants''). Future Applicants will 
apply for a separate exemptive order that incorporates by reference 
all the terms and conditions of this requested order and any 
amendments thereto. Therefore, any future amendments to the 
requested order would become part of any separate exemptive orders 
granted to Future Applicants. Any separate order granted to Future 
Applicants also would contain a condition that the Future Applicants 
must ensure that they comply with any terms and conditions of the 
requested order and any amendments thereto.
    \6\ 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 
requested order.
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A. Exchange Trading and NAV-Based Trading

    5. Shares would be listed and traded on an Exchange (``Listing 
Exchange'').\7\ Shares would trade throughout the day at NAV \8\ plus 
or minus a premium/discount that may vary during the trading day.\9\ 
This premium/discount (solely by way of example, +$0.20/Share, -$0.30/
Share) would be quoted by Market Makers in Shares.\10\ Although Share 
prices would be quoted throughout the trading day relative to NAV 
(solely by way of example, NAV+$0.20/share, NAV-$0.30/share), there 
would not be a fixed relationship between Share trading prices and 
their NAVs. For each trade, the premium/discount (which may be zero) 
would be locked in at trade execution and the final transaction price 
(i.e., NAV plus or minus the premium/discount) would be determined at 
the end of the Business Day when the ETMF's NAV is calculated.\11\
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    \7\ Applicants currently expect that The NASDAQ Stock Market LLC 
(``Nasdaq'') will be the Listing Exchange for the Initial ETMFs. One 
or more member firms of the Listing Exchange will act as market 
maker (``Market Maker'') and maintain a market for Shares trading on 
the Listing Exchange.
    \8\ An ETMF's NAV will be determined at the end of each Business 
Day. A ``Business Day'' is any day the ETMF is open, including any 
day when it satisfies redemption requests as required by section 
22(e) of the Act. ETMFs may compute their NAV more than once each 
Business Day or once daily at times other than 4:00 p.m. ET, 
consistent with rule 22c-1 under the Act.
    \9\ Unlike other exchange-traded securities, there would not be 
an absolute dollar amount per Share until the end of the day. 
Accordingly, prior to the initial operations of ETMFs, the Exchanges 
and brokers would install systems for the entry of orders to buy and 
sell shares using NAV-based Trading. Applicants have been working 
with intermediaries and Nasdaq to ensure they are implementing 
appropriate operational arrangements to accommodate the unique 
pricing mechanism of ETMFs (e.g., the convention for reporting the 
intraday pricing of Shares on the consolidated tape). Applicants 
have also represented that they would establish and support a robust 
education program to ensure that investors and the marketplace 
understand, among other things, how to buy and sell Shares. 
Applicants would also provide related information in the ETMFs' 
registration statements, Web site and advertising and marketing 
materials.
    \10\ The amount of the premium/discount would depend on market 
factors, including the balance of supply and demand for Shares among 
investors, the Transaction Fees (as defined below) and other costs 
associated with creating and redeeming Creation Units, competition 
among Market Makers, Share inventory positions, inventory strategies 
of Market Makers, and the volume of Share trading. Premiums/
discounts on market transactions in Shares are not sales charges, 
and therefore would not be subject to the limitation applicable to 
sales charges under NASD Conduct Rule 2830 or any other set 
limitation. Any reference to NASD Conduct Rule 2830 includes any 
successor or replacement rule that may be adopted by the Financial 
Industry Regulatory Authority.
    \11\ Transactions involving the purchases and sales of Shares on 
the Exchange would also be subject to customary brokerage 
commissions and charges.
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    6. Accordingly, unlike ETFs, NAV-based Trading would not offer 
investors the opportunity to transact intraday at prices based on 
current (versus end-of-day) determinations of the Shares' value. 
Instead, like intraday orders to buy or sell shares of mutual funds, an 
ETMF investor would not know the NAV at the time the order is placed, 
but the levels of premium/discount would be fully transparent allowing 
investors to see the execution costs of buying or selling Shares.\12\ 
Market Makers and other dealers, in turn, would compete for 
transactions in Shares at a profitable premium/discount level.
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    \12\ Trading prices of Shares would be available intraday 
through market data services and on the ETMFs' Web site. Quotations, 
however, would be expressed relative to NAV (solely by way of 
example, NAV+$0.20/Share, NAV-$0.20/Share) rather than as absolute 
dollar prices like ETF prices. Historical information regarding 
levels of premiums/discounts also would be available on the ETMFs' 
Web site.
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B. Issuance and Redemption of Creation Units

    7. Shares would not be individually redeemable and owners of Shares 
may acquire those Shares from an ETMF, or tender such shares for 
redemption to the ETMF, in Creation Units only.\13\ Like ETFs, all 
orders to purchase Creation Units must be placed with a distributor 
(``Distributor'') that is a broker-dealer registered under the 
Securities Exchange Act of 1934 (``Exchange Act'') by or through a 
party (an ``Authorized Participant'') that has entered into a

[[Page 67473]]

participant agreement with the Distributor with respect to the creation 
and redemption of Creation Units.\14\
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    \13\ In any advertising material that describes the purchase or 
sale of Creation Units or refers to redeemability there would be an 
appropriate statement to the effect that Shares are not individually 
redeemable. The Adviser also would maintain a public Web site 
disclosing current ETMF information and containing links to the 
current prospectus and other ETMF documents. The Web site also would 
include the disclosure required by condition 3 under ETMF Relief.
    \14\ An Authorized Participant would be either: (a) A Broker (as 
defined below) 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 (``DTC'') (such participant, ``DTC 
Participant'').
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    8. Like ETFs, and to keep trading costs low and permit each ETMF to 
be as fully invested as possible, Shares would be purchased and 
redeemed in Creation Units and primarily on an in-kind basis. 
Authorized Participants would be required to purchase Creation Units by 
making an in-kind deposit of specified instruments (these instruments 
are referred to, in the case of either a purchase or redemption, as the 
``Basket Instruments,'' and, together as the ``Basket''), specified by 
the ETMF at the beginning of each Business Day and Authorized 
Participants redeeming their Shares would receive an in-kind transfer 
of Basket Instruments.\15\ The Basket would not necessarily include all 
Portfolio Positions of the applicable ETMF in order to protect the 
confidentiality of current Portfolio Positions.
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    \15\ ETMFs must comply with the federal securities laws in 
accepting Basket Instruments and satisfying redemptions with Basket 
Instruments, including that the Basket Instruments would be sold in 
transactions that would be exempt from registration under the 
Securities Act of 1933 (``Securities Act''). In accepting Basket 
Instruments and satisfying redemptions with Basket Instruments that 
are restricted securities eligible for resale pursuant to Rule 144A 
under the Securities Act, ETMFs would comply with the conditions of 
Rule 144A.
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    9. Each ETMF would process purchases and redemptions of Creation 
Units in a manner that would protect the ETMF from any investor who 
might seek advantageous treatment vis-[agrave]-vis other investors. 
Therefore, each Business Day, the Basket would be constructed in 
accordance with policies and procedures that: (a) Have been approved by 
the relevant ETMF's Board based on a determination that such policies 
and procedures are in the best interests of the ETMF; and (b) are 
administered in accordance with rule 38a-1 under the Act by the chief 
compliance officer designated by the ETMF under that rule. Moreover, 
the names and quantities of the instruments that constitute the Basket 
Instruments on a given Business Day would be identical for all 
purchasers and redeemers of an ETMF's Creation Units that day, except 
in certain limited circumstances.\16\
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    \16\ An ETMF's Basket could vary if the required policies and 
procedures of the ETMF allowed such differences by permitting an 
Authorized Participant to deposit cash in lieu of some or all of the 
Basket Instruments solely because: (a) Such Basket Instruments, in 
the case of a purchase of a Creation Unit, are not available in 
sufficient quantity; (b) such Basket Instruments are not eligible 
for trading by the Authorized Participant or the investor on whose 
behalf the Authorized Participant is acting; or (c) a holder of 
Shares of an ETMF investing in foreign instruments would be subject 
to unfavorable income tax treatment if the holder received 
redemption proceeds in kind. A ``custom order'' is any purchase or 
redemption of Shares made in whole or in part on a cash basis in 
reliance on clause (a) or (b). An ETMF may also determine, upon 
receiving a purchase or redemption order from an Authorized 
Participant, to require the purchase or redemption, as applicable, 
to be made entirely in cash.
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    10. To preserve the confidentiality of an ETMF's trading 
activities, the Basket would normally not be a pro rata slice of the 
Portfolio Positions. Instruments being acquired by the ETMF would 
generally be excluded from the Basket until their purchase is completed 
and Basket Instruments being sold may not be removed from the Basket 
until the sale program is substantially completed. Further, when deemed 
by the Adviser to be in the best interests of an ETMF and its 
shareholders, other Portfolio Positions would be excluded from the 
Basket. Whenever Portfolio Positions are excluded from the Basket, the 
Basket may include proportionately more cash than is in the portfolio. 
Furthermore, if there is a difference between the NAV attributable to a 
Creation Unit and the aggregate market value of the Basket exchanged 
for the Creation Unit, the party conveying a Basket with the lower 
value would also pay to the other an amount in cash equal to that 
difference (the ``Balancing Amount'').
    11. Each Business Day, before the open of trading on the Listing 
Exchange, the Adviser would cause to be published through the NSCC the 
names and quantities of the Basket Instruments, as well as the 
estimated Balancing Amount (if any), for that day. The published Basket 
would apply until a new Basket is announced on the following Business 
Day, and there would be no intraday changes to the Basket except to 
correct errors in the published Basket.\17\
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    \17\ ETMFs would arrange for an independent third party to 
disseminate every 15 minutes an amount representing, on a per Share 
basis, the intraday indicative value (``IIV'') of the ETMFs' Shares 
throughout the regular trading session of the Listing Exchange each 
Business Day. An investor may use the IIV to estimate the number of 
Shares to buy or sell based on the dollar amount the investor wants 
to transact in. Applicants note that unlike for ETFs, IIVs for ETMFs 
would not provide pricing signals for market intermediaries or other 
buyers or sellers of Shares seeking to estimate the difference 
between the current value of the ETMF's portfolio and the price at 
which Shares are currently trading. With ETMF's NAV-based Trading, 
market intermediaries and other buyers or sellers of Shares assume 
no intraday market risk in their Share inventory positions and 
therefore would not need to estimate any such difference.
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    12. Any purchasers or redeemers of Creation Units are expected to 
incur a transaction fee (``Transaction Fee'') to cover the estimated 
cost to the ETMF of processing the transaction, including the costs of 
clearance and settlement charged to it by NSCC or DTC, and the 
estimated trading costs incurred in converting the Basket to the 
desired Portfolio Positions. The Transaction Fee would be borne only by 
purchasers and redeemers of Creation Units and would be limited to 
amounts that have been authorized by the Board and determined 
appropriate by the Adviser to defray the transaction expenses that 
would be incurred by an ETMF when an investor purchases or redeems 
Creation Units.\18\ With respect to ETMFs operating in a master-feeder 
structure (as discussed below), the Transaction Fee may be paid to the 
Master Fund as a Master Fund Transaction Fee.\19\
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    \18\ Where an ETMF permits an in-kind purchaser to deposit cash 
in lieu of depositing one or more Basket Instruments, the purchaser 
may be assessed a higher Transaction Fee to offset the cost to the 
ETMF of buying those particular Basket Instruments. In all cases, 
the Transaction Fee and the Master Fund Transaction Fee (as defined 
below) will be limited in accordance with the requirements of the 
Commission applicable to open-end management investment companies 
offering redeemable securities.
    \19\ Applicants believe that, to treat investors fairly and 
consistently, a Master Fund with two or more Feeder Funds should 
transact with each Feeder Fund on a basis that protects the Master 
Fund (and, indirectly, other Feeder Funds) against the costs of 
accommodating the Feeder Fund's inflows and outflows. In the 
proposed structure, the Master Fund would accomplish this by 
imposing a fee (``Master Fund Transaction Fee'') on Feeder Fund 
inflows and outflows, sized to cover the estimated cost to the 
Master Fund of, in connection with a sale of its interests, 
converting the cash and/or other instruments it receives to the 
desired Portfolio Positions and, in connection with a redemption of 
its interests, converting Portfolio Positions to cash and/or other 
instruments to be distributed. The Master Fund Transaction Fee would 
be applied to all Feeder Funds in the same manner so as to avoid 
discrimination by the Master Fund among Feeder Funds.
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C. The Role of Market Intermediaries and Portfolio Transparency

    13. Applicants assert that in light of NAV-based Trading, daily 
portfolio transparency is not necessary for ETMFs. Applicants recognize 
that contemporaneous portfolio holdings disclosure has been viewed as 
necessary for effective arbitrage and efficient secondary market 
trading of ETFs.\20\ In particular, applicants note that in ETF 
trading, tight bid-ask spreads and narrow premiums/discounts cannot be 
assured unless Market Makers have

[[Page 67474]]

sufficient knowledge of portfolio holdings to enable them to 
effectively arbitrage differences between an ETF's market price and its 
underlying portfolio value and to hedge the intraday market risk they 
assume as they take inventory positions in connection with their 
market-making activities. According to applicants, in NAV-based 
Trading, by contrast, Market Makers do not engage in arbitrage and 
assume no intraday market risk in their Share inventory positions 
because all trading prices are linked to NAV.\21\ Applicants state that 
no intraday market risk means no need for Market Makers to engage in 
intraday hedging activity, and therefore no associated requirement for 
current portfolio holdings disclosure to maintain a tight relationship 
between Share trading prices and NAV.\22\ Accordingly, applicants 
maintain that because Share transaction prices would be based on end-
of-day NAV, ETMFs can be expected to trade at consistently narrow 
premiums/discounts to NAV and tight bid-ask spreads even in the absence 
of full portfolio holdings disclosure.
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    \20\ See Exchange-Traded Funds, Investment Company Act Release 
No. 28193 (Mar. 11, 2008) at text following note 29; ICI, 2014 
INVESTMENT COMPANY FACT BOOK (2014) (``ICI Fact Book''), at 59, 
available at www.ici.org/pdf/2014_factbook.pdf.
    \21\ Applicants state that Market Makers would realize a profit 
to the extent the premium/discount exceeded their cost in entering 
into these transactions. Applicants assert that these costs would 
include, indirectly if the Market Maker is not an Authorized 
Participant, the Transaction Fees paid to an ETMF and the cost of 
purchasing or selling the Basket Instruments exchanged with the 
ETMF. According to applicants, these costs would not include a cost 
of hedging an intraday position in Shares. Applicants assert that 
the cost of intermediation would be lower with respect to ETMFs than 
for ETFs and profits would be relatively more predictable, which 
should foster intermediary participation in the market for Shares 
and therefore the competition necessary to limit the levels of the 
premium/discount.
    \22\ Applicants believe that Market Makers will generally seek 
to minimize their exposure to price risk in Shares by holding little 
or no overnight inventory. ETMFs also will have smaller creation 
unit sizes than ETFs. Applicants also believe that these smaller 
creation unit sizes will support secondary market trading efficiency 
by facilitating tighter market maker inventory management because it 
facilitates closing out positions at the end of each trading day. To 
the extent that Market Makers hold small positions in Shares 
overnight, applicants expect them to aggregate such holdings with 
any other risk positions that they are holding and transact at or 
near the market close to buy or sell offsetting positions in 
appropriate, broad-based hedging instruments, such as S&P 500 and 
other index futures and ETFs.
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    14. Applicants claim that ETMFs, not being required to provide 
daily portfolio transparency, have the potential for providing 
investors with access to a broad range of active strategies in a 
structure that provides the cost and tax efficiencies and shareholder 
protections of an ETF.

Requested Exemptive Relief

    15. 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.
    16. Applicants' request for relief is novel only under section 
22(d) and rule 22c-1 under the Act with respect to NAV-based Trading. 
In all other respects, applicants are seeking the same relief that the 
Commission has previously granted to permit the operation of ETFs. As 
discussed above, the requested relief would be available to any 
existing or future investment company that is an ETMF operating in 
compliance with the terms and conditions of the order and that is 
advised by an Adviser. In support of future ETMF relief, applicants 
assert that Future ETMFs raise no legal or policy questions different 
from those presented by the Initial ETMFs and that the arguments for 
exemptive relief are equally valid regardless of the type of assets or 
investment strategy utilized by a specific ETMF. The Commission 
preliminarily agrees with these assertions.
    17. 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 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 purposes 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.

A. Novel Relief Under Section 22(d) and Rule 22c-1

    18. 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 other than 
at a current public offering price described in the fund's prospectus. 
Rule 22c-1 under the Act requires open-end funds, their principal 
underwriters, and dealers in fund shares (and certain others) to sell 
and redeem fund shares at a price based on the current NAV next 
computed after receipt of an order to buy or redeem. Together, these 
provisions are designed to prevent dilution caused by riskless trading 
schemes, require that shareholders are treated equitably when buying 
and selling fund shares, and assure an orderly distribution system of 
investment company shares.
    19. Applicants request relief from these provisions to permit NAV-
based Trading of Shares. Because of ETMFs' NAV-based Trading, the need 
for exemptive relief from section 22(d) and rule 22c-1 for ETMFs arises 
due to the portion of the trading price that is the negotiated amount 
(i.e., premium/discount).
    20. Applicants assert that the concerns underlying section 22(d) of 
the Act and rule 22c-1 under the Act with respect to pricing are 
addressed by the NAV-based Trading of 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 riskless-trading 
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 
system of investment company shares by eliminating price competition 
from brokers offering shares at less than the published sales price and 
repurchasing shares at more than the published redemption price.
    21. Applicants believe that none of these purposes would be 
thwarted by permitting NAV-based Trading of Shares. Applicants state 
that NAV-based Trading in Shares would not cause dilution of the 
shareholders' beneficial interests in ETMFs because secondary market 
trading in Shares would not involve the ETMF's portfolio. Applicants 
assert that NAV-Based Trading responds to concerns of unjust price 
discrimination among purchasers and preserving an orderly distribution 
of Shares. Shares would trade on an Exchange, a regulated venue, at 
market-determined premiums/discounts. The current and historical 
premiums/discounts also would be transparent to investors and 
intermediaries.

[[Page 67475]]

Applicants assert that transparent pricing on an Exchange should foster 
competition among market intermediaries, which would create downward 
pressure on intermediaries' profits embedded in the premium/discount 
and therefore on the total amount of any such premium/discount. 
Accordingly, applicants contend that the mechanics of the distribution 
of Shares and competitive market forces on an Exchange would work to 
limit the premium/discount and allow contemporaneous investors to buy 
or sell Shares at approximately the same intraday price.
    22. The relief from section 22(d) and rule 22c-1 requested by 
applicants is significantly different from the relief previously 
granted by the Commission to actively managed ETFs. ETFs require relief 
from these provisions because certain investors may purchase and sell 
individual ETF shares on the secondary market at current market prices; 
i.e., at prices other than those described in the ETF's prospectus or 
based on the ETF's NAV. Among other things, the market prices are 
affected by changes in the value of the underlying portfolio positions 
of the ETF.
    23. Historically, in making the findings necessary to grant 
exemptive relief from section 22(d) and rule 22c-1, the Commission has 
relied on representations by ETF sponsors that an arbitrage mechanism 
functions to keep the market price of the ETF's shares at or close to 
the NAV per share of the ETF. The close tie between the market price 
and the NAV per share of the ETF is the foundation for why the prices 
at which retail investors buy and sell shares are similar to the prices 
at which Authorized Participants are able to buy and redeem shares 
directly from the ETF at NAV.
    24. ETMF trading prices, as discussed above, would be directly tied 
to NAV. Unlike ETFs, ETMFs' need for relief arises because their 
trading price deviate from NAV only with respect to the execution costs 
of buying and selling ETMF Shares (i.e., the premium/discount). In 
contrast, ETFs need relief because of differences related to the value 
of the underlying portfolio positions. Therefore, because ETMF Shares' 
trading prices are directly tied to NAV, an arbitrage mechanism that 
would keep market price close to or at NAV is not necessary.
    25. Accordingly, the Commission preliminarily agrees that any 
amount of premium or discount will be limited in the manner explained 
by applicants and that the concerns underlying section 22(d) and rule 
22c-1 thereunder are addressed by the NAV-based Trading of Shares 
proposed by the applicants. Any differences from the ETMF proposed 
model, however, would not necessarily address those concerns.

B. Other Relief \23\
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    \23\ This other relief is the same relief that the Commission 
has previously granted to permit the operation of ETFs, as stated 
above.
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Sections 5(a)(1) and 2(a)(32) of the Act
    26. 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 would not be individually redeemable, 
applicants request an order that would permit the Trusts to register as 
open-end investment companies and each ETMF to redeem Shares in 
Creation Units only.\24\ Applicants state that investors may purchase 
Shares in Creation Units from each ETMF and redeem Creation Units from 
each ETMF. Applicants further state all investors would have the 
ability to buy and sell Shares throughout the day using NAV-based 
Trading at trading prices that are directly linked to NAV and that can 
be expected to reflect narrow premium/discounts to NAV.
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    \24\ The Master Funds will not require relief from sections 
2(a)(32) and 5(a)(1) because the Master Funds will operate as 
traditional mutual funds and issue individually redeemable 
interests.
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Section 22(e) of the Act
    27. 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 of Creation Units of ETMFs 
holding Portfolio Positions traded on global markets (``Global ETMFs'') 
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 ETMFs invest. Applicants represent that, under certain 
circumstances, the delivery cycles for transferring foreign-traded 
Basket Instruments to redeeming investors, coupled with local market 
holiday schedules, would require a delivery process of up to 14 
calendar days. Applicants therefore request relief from section 22(e) 
in order to provide payment or satisfaction of redemptions within the 
maximum number of calendar days required for such payment or 
satisfaction in the principal local markets where transactions in the 
foreign-traded Basket Instruments of each Global ETMF customarily clear 
and settle, but in all cases no later than 14 calendar days following 
the tender of a Creation Unit.\25\
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    \25\ Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) would affect any obligations that 
applicants may otherwise have under rule 15c6-1 under the Exchange 
Act. Rule 15c6-1 requires that most securities transactions be 
settled within three business days of the trade date. Mutual Fund 
Feeders (as defined below) may need to separately seek relief from 
section 22(e) if they intend to permit or require their shareholders 
to redeem in kind. Mutual Fund Feeders are not seeking, and would 
not rely on, the section 22(e) relief requested herein.
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    28. Applicants state that section 22(e) was designed to prevent 
unreasonable, undisclosed and unforeseen delays in the actual payment 
of redemption proceeds. Applicants state that allowing redemption 
payments in kind for Creation Units of a Global ETMF to be made within 
a maximum of 14 calendar days would not be inconsistent with the spirit 
and intent of section 22(e). Applicants state each ETMF's statement of 
additional information (``SAI'') would 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 kind in seven calendar days and the maximum number of days 
(not to exceed 14 calendar days) needed to deliver the proceeds in kind 
for each affected ETMF. Applicants are not seeking relief from section 
22(e) with respect to Global ETMFs that do not effect redemptions in 
kind.
Section 12(d)(1) of the Act
    29. 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

[[Page 67476]]

will cause more than 10% of the acquired company's voting stock to be 
owned by investment companies generally.
    30. Applicants are seeking relief so that an ETMF may be an 
acquired fund in a fund of funds structure. In particular, applicants 
request that pursuant to section 12(d)(1)(J) of the Act the order 
permit Acquiring Funds (as defined below) to acquire Shares of an ETMF 
beyond the limitations in section 12(d)(1)(A) and permit an ETMF, any 
principal underwriter for the ETMFs,\26\ and any Brokers (as defined 
below) to sell Shares to Acquiring Funds beyond the limitations in 
section 12(d)(1)(B) (``Section 12(d)(1) Relief''). Applicants request 
that the Section 12(d)(1) Relief apply to each management investment 
company or unit investment trust registered under the Act that is not 
part of the same ``group of investment companies'' as an ETMF within 
the meaning of section 12(d)(1)(G)(ii) of the Act and that enters into 
an Acquiring Fund Agreement (as defined below) with an ETMF (such 
management investment companies, ``Acquiring Management Companies,'' 
such unit investment trusts, ``Acquiring Trusts,'' and Acquiring 
Management Companies and Acquiring Trusts together, ``Acquiring 
Funds'').\27\ Acquiring Funds do not include the ETMFs.\28\ 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.
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    \26\ Applicants further request that the order apply to any 
future distributor and principal underwriter of the ETMFs (included 
in the term ``Distributor''), which would be a registered broker-
dealer under the Exchange Act (any registered broker-dealers, 
``Brokers'') and would comply with the terms and conditions of the 
requested order. The Distributor of any ETMF may be an affiliated 
person of the Adviser.
    \27\ Under condition 11, the Section 12(d)(1) Relief would 
generally not apply to any ETMF that is, either directly or through 
a master-feeder structure, 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 in section 12(d)(1)(A) of the Act.
    \28\ An Acquiring Fund may rely on the order only to invest in 
ETMFs and not in any other registered investment companies.
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    31. Applicants submit that their proposed conditions address any 
concerns regarding the potential for undue influence. To limit the 
control that an Acquiring Fund may have over an ETMF, applicants 
propose a condition prohibiting the adviser of an Investing Management 
Company (``Acquiring Fund Adviser''), sponsor of an Acquiring Trust 
(``Sponsor''), any person controlling, controlled by, or under common 
control with the Acquiring Fund Adviser or Sponsor, and any investment 
company or issuer that would be an investment company but for sections 
3(c)(1) or 3(c)(7) of the Act that is advised or sponsored by the 
Acquiring Fund Adviser, the Sponsor, or any person controlling, 
controlled by, or under common control with the Acquiring Fund Adviser 
or Sponsor (``Acquiring Fund's Advisory Group'') from controlling 
(individually or in the aggregate) an ETMF within the meaning of 
section 2(a)(9) of the Act. The same prohibition would apply to any 
sub-adviser to an Acquiring Management Company (``Acquiring Fund Sub-
Adviser''), any person controlling, controlled by or under common 
control with the Acquiring Fund 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 Acquiring Fund Sub-Adviser or any person 
controlling, controlled by or under common control with the Acquiring 
Fund Sub-Adviser (``Acquiring Fund's Sub-Advisory Group'').
    32. To limit undue influence, applicants propose a condition to 
ensure that no Acquiring Fund or Acquiring Fund Affiliate \29\ (except 
to the extent it is acting in its capacity as an investment adviser to 
an ETMF) will cause an ETMF (or, in the case of an ETMF Feeder, its 
Master 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''). An ``Underwriting Affiliate'' is a principal 
underwriter in any underwriting or selling syndicate that is an 
officer, director, member of an advisory board, Acquiring Fund Adviser, 
Acquiring Fund Sub-Adviser, Sponsor, or employee of the Acquiring Fund, 
or a person of which any such officer, director, member of an advisory 
board, Acquiring Fund Adviser, Acquiring Fund Sub-Adviser, Sponsor, or 
employee is an affiliated person (except any person whose relationship 
to the ETMF is covered by section 10(f) of the Act is not an 
Underwriting Affiliate).
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    \29\ An ``Acquiring Fund Affiliate'' is any Acquiring Fund 
Adviser, Acquiring Fund Sub-Adviser, Sponsor, promoter and principal 
underwriter of an Acquiring Fund, and any person controlling, 
controlled by or under common control with any of these entities. 
``ETMF Affiliate'' is an investment adviser, promoter, or principal 
underwriter of an ETMF (or, in the case of an ETMF Feeder, its 
Master Fund) and any person controlling, controlled by or under 
common control with any of these entities.
---------------------------------------------------------------------------

    33. Applicants propose several conditions to address the potential 
for layering of fees. Applicants note that the board of directors or 
trustees of any Acquiring 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 (``disinterested directors or 
trustees''), would be required to find that the advisory fees charged 
under the Acquiring Management Company's advisory contract are based on 
services provided that would be in addition to, rather than duplicative 
of, services provided under the advisory contract of any ETMF (or, in 
the case of an ETMF Feeder, its Master Fund) in which the Acquiring 
Management Company may invest. Applicants also state that any sales 
charges and/or service fees charged with respect to shares of an 
Acquiring Fund will not exceed the limits applicable to a fund of funds 
as set forth in NASD Conduct Rule 2830.
    34. Applicants submit that the proposed arrangement would not 
create an overly complex fund structure. Applicants note that an ETMF 
(and, in the case of an ETMF Feeder, the Master Fund) would be 
prohibited 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 that the ETMF acquires such securities in compliance with 
section 12(d)(1)(E) of the Act or this order or the ETMF (or, in the 
case of an ETMF Feeder, the Master Fund): (a) Receives securities of 
another investment company as a dividend or as a result of a plan of 
reorganization of a company (other than a plan devised for the purpose 
of evading section 12(d)(1) of the Act); or (b) acquires (or is deemed 
to have acquired) securities of another investment company pursuant to 
exemptive relief from the Commission permitting the ETMF (or in the 
case of a ETMF Feeder, the Master Fund) to (i) acquire securities of 
one or more investment companies for short-term cash management 
purposes or (ii) engage in interfund borrowing and lending 
transactions.
    35. To ensure that an Acquiring Fund is aware of the terms and 
conditions of the requested order, the Acquiring Fund must enter into 
an agreement with the respective ETMFs (``Acquiring Fund Agreement''). 
The Acquiring Fund Agreement will include an acknowledgement from the 
Acquiring Fund that it may rely on the order only

[[Page 67477]]

to invest in an ETMF and not in any other investment company.
    36. Applicants further request relief to permit an ETMF to be a 
feeder (an ``ETMF Feeder'') in a master-feeder structure alongside one 
or more other registered open-end investment companies advised by the 
same Adviser (each such other open-end investment company, a ``Mutual 
Fund Feeder,'' and together with any ETMF Feeder, the ``Feeder 
Funds''). The requested relief would permit the ETMF Feeder to acquire 
shares of another registered investment company in the same group of 
investment companies having substantially the same investment 
objectives as the ETMF Feeder (a ``Master Fund'') beyond the 
limitations in section 12(d)(1)(A) of the Act and permit the Master 
Fund, and any principal underwriter for the Master Fund, to sell shares 
of the Master Fund to the ETMF Feeder beyond the limitations in section 
12(d)(1)(B) of the Act (``Master-Feeder Relief'').\30\ There would be 
no ability by shareholders to exchange Shares of ETMF Feeders for 
shares of another Feeder Fund of the Master Fund or vice versa.
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    \30\ Applicants may structure certain ETMFs as ETMF Feeders to 
generate economies of scale for shareholders of all Feeder Funds of 
the Master Fund that could not be otherwise realized. Operating in a 
master-feeder structure could also impose costs on an ETMF Feeder 
and reduce its tax efficiency. In determining whether an ETMF would 
operate in a master-feeder structure, the Board would weigh the 
potential advantages and disadvantages of such a structure for the 
ETMF. In a master-feeder structure, the Master Fund--rather than the 
ETMF Feeder--would invest the portfolio in compliance with the 
order.
---------------------------------------------------------------------------

    37. Applicants are seeking the Master-Feeder Relief to permit ETMF 
Feeders to create and redeem in kind Shares with their Master Funds. 
Applicants assert that this structure is substantially identical to 
traditional master-feeder structures permitted pursuant to the 
exception provided in section 12(d)(1)(E) of the Act. Section 
12(d)(1)(E) provides that the percentage limitations of sections 
12(d)(1)(A) and (B) will not apply to a security issued by an 
investment company (in this case, the shares of the applicable Master 
Fund) if, among other things, that security is the only investment 
security held in the investing fund's portfolio (in this case, the ETMF 
Feeder's portfolio). Applicants believe the proposed master-feeder 
structure complies with section 12(d)(1)(E) because each ETMF Feeder 
would hold only investment securities issued by its corresponding 
Master Fund; however, the ETMF Feeders may receive securities other 
than securities of its corresponding Master Fund if an ETMF Feeder 
accepts an in-kind creation. To the extent that an ETMF Feeder may be 
deemed to be holding both shares of the Master Fund and other 
securities, applicants request relief from sections 12(d)(1)(A) and 
(B). The ETMF Feeders would operate in compliance with all other 
provisions of section 12(d)(1)(E).
Sections 17(a)(1) and (2) of the Act
    38. 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 ETMF may be deemed to 
be controlled by an Adviser and hence affiliated persons of each other. 
In addition, the ETMFs may be deemed to be under common control with 
any other registered investment company (or series thereof) advised by 
an Adviser (an ``Affiliated Fund'').
    39. 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 ETMFs 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 ETMFs; (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.\31\ Applicants also request an 
exemption in order to permit an ETMF 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, an Acquiring Fund of which 
the ETMF is an affiliated person or a second-tier affiliate.\32\
---------------------------------------------------------------------------

    \31\ Applicants are not seeking relief from section 17(a) for, 
and the requested relief will not apply to, transactions where an 
ETMF could be deemed an affiliated person, or an affiliated person 
of an affiliated person, of an Acquiring Fund because the Adviser to 
the ETMF is also an investment adviser to an Acquiring Fund.
    \32\ To the extent that purchases and sales of Shares occur in 
the secondary market and not through principal transactions directly 
between an Acquiring Fund and an ETMF, relief from section 17(a) 
would not be necessary. The requested relief is intended to cover, 
however, transactions directly between an Acquiring Fund and an 
ETMF.
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    40. Applicants assert that no useful purpose would be served by 
prohibiting such affiliated persons from making in-kind purchases or 
in-kind redemptions of Shares of an ETMF in Creation Units. Absent the 
limited circumstances discussed in the application, the Basket 
Instruments available for an ETMF would be the same for all purchasers 
and redeemers, respectively. The deposit procedures for in-kind 
purchases of Creation Units and the redemption procedures for in-kind 
redemptions would be the same for all purchases and redemptions. All 
Basket Instruments would be valued in the same manner as they are 
valued for purposes of calculating the ETMF's NAV, and such valuation 
would be made in the same manner regardless of the identity of the 
purchaser or redeemer. Applicants do not believe that in-kind purchases 
and redemptions would result in abusive self-dealing or overreaching of 
the ETMF.
    41. Applicants also submit that the sale of Shares to and 
redemption of Shares from an Acquiring Fund 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 an ETMF would be based on the NAV of the ETMF in 
accordance with policies and procedures set forth in the ETMF's 
registration statement.\33\ The Acquiring Fund Agreement will require 
any Acquiring Fund that purchases Creation Units directly from an ETMF 
to represent that the purchase of Creation Units from an ETMF by an 
Acquiring Fund will be accomplished in compliance with the investment 
restrictions of the Acquiring Fund and will be consistent with the 
investment policies set forth in the Acquiring Fund's registration 
statement. Applicants also state that the proposed transactions are 
consistent with the general purposes of the Act and appropriate in the 
public interest.
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    \33\ Applicants acknowledge that the receipt of compensation by 
(a) an affiliated person of an Acquiring Fund, or a second-tier 
affiliate, for the purchase by the Acquiring Fund of Shares of the 
ETMF or (b) an affiliated person of an ETMF, or a second-tier 
affiliate, for the sale by the ETMF of its Shares to an Acquiring 
ETMF, may be prohibited by section 17(e)(1) of the Act. The 
Acquiring Fund Agreement also will include this acknowledgment.
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    42. To the extent that an ETMF operates in a master-feeder 
structure,

[[Page 67478]]

applicants also request relief permitting the ETMF Feeders to engage in 
in-kind creations and redemptions with the applicable Master Fund. 
Applicants state that the customary section 17(a)(1) and 17(a)(2) 
relief would not be sufficient to permit such transactions because the 
ETMF Feeders and the applicable Master Fund could also be affiliated by 
virtue of having the same investment adviser.
    However, applicants believe that in-kind creations and redemptions 
between an ETMF Feeder and a Master Fund advised by the same investment 
adviser do not involve ``overreaching'' by an affiliated person. Such 
transactions would occur only at the ETMF Feeder's proportionate share 
of the Master Fund's net assets, and the Basket Instruments would be 
valued in the same manner as they are valued for the purposes of 
calculating the applicable Master Fund's NAV. Further, all such 
transactions would be effected with respect to the Basket and on the 
same terms with respect to all investors. Finally, such transactions 
would only occur as a result of, and to effectuate, a creation or 
redemption transaction between the ETMF Feeder and a third party 
investor. Applicants believe that the terms of the proposed 
transactions are reasonable and fair and do not involve overreaching on 
the part of any person concerned and that the transactions are 
consistent with the general purposes of the Act.

Applicants' Conditions

    Applicants agree that any order of the Commission granting the 
requested relief will be subject to the following conditions:

A. ETMF Relief

    1. As long as an ETMF operates in reliance on the requested order, 
its Shares will be listed on an Exchange.
    2. Neither the Trusts nor any ETMF will be advertised or marketed 
as an open-end investment company, a mutual fund or an ETF. Any 
advertising material that describes the purchase or sale of Creation 
Units or refers to redeemability will prominently disclose that Shares 
are not individually redeemable and that owners of Shares may acquire 
those Shares from an ETMF and tender those Shares for redemption to the 
ETMF in Creation Units only.
    3. The Web site for the ETMFs, which will be publicly accessible at 
no charge, will contain, on a per Share basis, for each ETMF, the prior 
Business Day's NAV; intraday high, low, average and closing trading 
prices (expressed as premiums/discounts to NAV); the midpoint of the 
highest bid and lowest offer prices as of the close of Exchange trading 
(``Closing Bid/Ask Midpoint'') (expressed as a premium/discount to 
NAV); and the spread between the highest bid and lowest offer prices as 
of the close of Exchange trading (``Closing Bid/Ask Spread''). The Web 
site for the ETMFs also will contain charts showing the frequency 
distribution and range of values of trading prices, Closing Bid/Ask 
Midpoints and Closing Bid/Ask Spreads over time.
    4. The Adviser or any Subadviser, directly or indirectly, will not 
cause any Authorized Participant (or any investor on whose behalf an 
Authorized Participant may transact with the ETMF) to acquire any 
Basket Instrument for the ETMF through a transaction in which the ETMF 
could not engage directly.

B. Section 12(d)(1) Relief

    1. The members of an Acquiring Fund's Advisory Group will not 
control (individually or in the aggregate) an ETMF (or, in the case of 
an ETMF Feeder, its Master Fund) within the meaning of section 2(a)(9) 
of the Act. The members of an Acquiring Fund's Subadvisory Group will 
not control (individually or in the aggregate) an ETMF (or, in the case 
of an ETMF Feeder, its Master 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 the ETMF, the Acquiring Fund's Advisory Group or 
the Acquiring Fund's Subadvisory Group, each in the aggregate, becomes 
a holder of more than 25 percent of the outstanding voting securities 
of an ETMF, it will vote its Shares of the ETMF in the same proportion 
as the vote of all other holders of such Shares. This condition does 
not apply to the Acquiring Fund's Subadvisory Group with respect to an 
ETMF (or, in the case of an ETMF Feeder, its Master Fund) for which the 
Acquiring Fund Subadviser or a person controlling, controlled by or 
under common control with the Acquiring Fund Subadviser acts as the 
investment adviser within the meaning of section 2(a)(20)(A) of the 
Act.
    2. No Acquiring Fund or Acquiring Fund Affiliate will cause any 
existing or potential investment by the Acquiring Fund in an ETMF to 
influence the terms of any services or transactions between the 
Acquiring Fund or an Acquiring Fund Affiliate and the ETMF (or, in the 
case of an ETMF Feeder, its Master Fund) or an ETMF Affiliate.
    3. The board of directors or trustees of an Acquiring Management 
Company, including a majority of the disinterested directors or 
trustees, will adopt procedures reasonably designed to ensure that the 
Acquiring Fund Adviser and any Acquiring Fund Subadviser are conducting 
the investment program of the Acquiring Management Company without 
taking into account any consideration received by the Acquiring 
Management Company or an Acquiring Fund Affiliate from an ETMF (or, in 
the case of an ETMF Feeder, its Master Fund) or an ETMF Affiliate in 
connection with any services or transactions.
    4. Once an investment by an Acquiring Fund in the Shares of an ETMF 
exceeds the limit in section 12(d)(1)(A)(i) of the Act, the Board of 
the ETMF, including a majority of the disinterested directors or 
trustees, will determine that any consideration paid by the ETMF (or, 
in the case of an ETMF Feeder, its Master Fund) to an Acquiring Fund or 
an Acquiring Fund Affiliate in connection with any services or 
transactions: (i) Is fair and reasonable in relation to the nature and 
quality of the services and benefits received by the ETMF (or, in the 
case of an ETMF Feeder, its Master Fund); (ii) is within the range of 
consideration that the ETMF (or, in the case of an ETMF Feeder, its 
Master 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 to any services or transactions between an 
ETMF (or, in the case of an ETMF Feeder, its Master Fund) and its 
investment adviser(s), or any person controlling, controlled by or 
under common control with such investment adviser(s).
    5. No Acquiring Fund or Acquiring Fund Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to an ETMF 
(or, in the case of an ETMF Feeder, its Master Fund)) will cause an 
ETMF (or, in the case of an ETMF Feeder, its Master Fund) to purchase a 
security in an Affiliated Underwriting.
    6. The Board of an ETMF (or, in the case of an ETMF Feeder, its 
Master Fund), including a majority of the disinterested directors or 
trustees, will adopt procedures reasonably designed to monitor any 
purchases of securities by the ETMF (or, in the case of an ETMF Feeder, 
its Master Fund) in an Affiliated Underwriting, once an investment by 
an Acquiring Fund in the securities of the ETMF 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

[[Page 67479]]

determine whether the purchases were influenced by the investment by 
the Acquiring Fund in the ETMF. The Board will consider, among other 
things: (i) Whether the purchases were consistent with the investment 
objectives and policies of the ETMF (or, in the case of an ETMF Feeder, 
its Master 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 ETMF (or, in the case of an ETMF Feeder, 
its Master Fund) in Affiliated Underwritings and the amount purchased 
directly from an Underwriting Affiliate have changed significantly from 
prior years. The Board will take any appropriate actions based on its 
review, including, if appropriate, the institution of procedures 
designed to assure that purchases of securities in Affiliated 
Underwritings are in the best interest of shareholders of the ETMF.
    7. Each ETMF (or, in the case of an ETMF Feeder, its Master Fund) 
will maintain and preserve permanently in an easily accessible place a 
written copy of the procedures described in the preceding condition, 
and any modifications to such procedures, and will maintain and 
preserve for a period of not less than six years from the end of the 
fiscal year in which any purchase in an Affiliated Underwriting 
occurred, the first two years in an easily accessible place, a written 
record of each purchase of securities in Affiliated Underwritings, once 
an investment by an Acquiring Fund in the securities of the ETMF 
exceeds the limit of section 12(d)(1)(A)(i) of the Act, setting forth 
from whom the securities were acquired, the identity of the 
underwriting syndicate's members, the terms of the purchase, and the 
information or materials upon which the determinations of the Board 
were made.
    8. Before investing in an ETMF in excess of the limits in section 
12(d)(1)(A), an Acquiring Fund and the ETMF will execute an Acquiring 
Fund Agreement stating that their 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 an ETMF in excess of the limit in section 12(d)(1)(A)(i), 
an Acquiring Fund will notify the ETMF of the investment. At such time, 
the Acquiring Fund will also transmit to the ETMF a list of the names 
of each Acquiring Fund Affiliate and Underwriting Affiliate. The 
Acquiring Fund will notify the ETMF of any changes to the list of the 
names as soon as reasonably practicable after a change occurs. The ETMF 
and the Acquiring Fund will maintain and preserve a copy of the order, 
the Acquiring Fund Agreement, and the list with any updated information 
for the duration of the investment and for a period of not less than 
six years thereafter, the first two years in an easily accessible 
place.
    9. The Acquiring Fund Adviser, or Trustee or Sponsor, as 
applicable, will waive fees otherwise payable to it by the Acquiring 
Fund in an amount at least equal to any compensation received from an 
ETMF (or, in the case of an ETMF Feeder, its Master Fund) by the 
Acquiring Fund Adviser, or Trustee, or Sponsor, or an affiliated person 
of the Acquiring Fund Adviser, or Trustee, or Sponsor, other than any 
advisory fees paid to the Acquiring Fund Adviser, or Trustee, or 
Sponsor, or its affiliated person by the ETMF (or, in the case of an 
ETMF Feeder, its Master Fund), in connection with the investment by the 
Acquiring Fund in the ETMF. Any Acquiring Fund Subadviser will waive 
fees otherwise payable to the Acquiring Fund Subadviser, directly or 
indirectly, by the Acquiring Management Company in an amount at least 
equal to any compensation received from an ETMF (or, in the case of an 
ETMF Feeder, its Master Fund) by the Acquiring Fund Subadviser, or an 
affiliated person of the Acquiring Fund Subadviser, other than any 
advisory fees paid to the Acquiring Fund Subadviser or its affiliated 
person by the ETMF (or, in the case of an ETMF Feeder, its Master 
Fund), in connection with any investment by the Acquiring Management 
Company in the ETMF made at the direction of the Acquiring Fund 
Subadviser. In the event that the Acquiring Fund Subadviser waives 
fees, the benefit of the waiver will be passed through to the Acquiring 
Management Company.
    10. Any sales charges and/or service fees charged with respect to 
shares of an Acquiring Fund will not exceed the limits applicable to a 
fund of funds as set forth in NASD Conduct Rule 2830.
    11. No ETMF (or, in the case of an ETMF Feeder, its Master Fund) 
relying on the Section 12(d)(1) relief will acquire 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 that the ETMF acquires such securities in 
compliance with section 12(d)(1)(E) of the Act or acquires shares of a 
Master Fund; or the ETMF (or, in the case of an ETMF Feeder, its Master 
Fund) (a) Receives securities of another investment company as a 
dividend or as a result of a plan of reorganization of a company (other 
than a plan devised for the purpose of evading section 12(d)(1) of the 
Act), or (b) acquires securities of another investment company pursuant 
to exemptive relief from the Commission permitting such ETMF (or, in 
the case of an ETMF Feeder, its Master Fund) to (i) Acquire securities 
of one or more investment companies for short-term cash management 
purposes or (ii) engage in interfund borrowing and lending 
transactions.
    12. Before approving any advisory contract under section 15 of the 
Act, the board of each Acquiring Management Company, including a 
majority of the disinterested directors or trustees, will find that the 
advisory fees charged under such advisory contract are based on 
services provided that will be in addition to, rather than duplicative 
of, the services provided under the advisory contracts of any ETMF (or, 
in the case of an ETMF Feeder, its Master Fund) in which the Acquiring 
Management Company may invest. These findings and their basis will be 
recorded fully in the minute books of the appropriate Acquiring 
Management Company.

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-26817 Filed 11-12-14; 8:45 am]
BILLING CODE 8011-01-P