Document ID: SEC-2020-1815-0001
Agency: sec
Document Type: Notice
Title: Application: Invesco Capital Management, LLC, et al.
Posted Date: 2020-11-13T05:00Z

[Federal Register Volume 85, Number 220 (Friday, November 13, 2020)]
[Notices]
[Pages 72712-72715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25050]

[[Page 72712]]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 34087; 812-15070]

Invesco Capital Management LLC, et al.; Notice of Application

November 6, 2020.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for exemptive relief.

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    Summary of Application: Applicants request an order under section 
6(c) of the Investment Company Act of 1940 (``Act'') for an exemption 
from sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of the Act and rule 
22c-1 under the Act, and under sections 6(c) and 17(b) of the Act for 
an exemption from sections 17(a)(1) and 17(a)(2) of the Act. If 
granted, the requested order would permit registered open-end 
investment companies that are exchange-traded funds (``ETFs'') and are 
actively managed to operate without being subject to a daily portfolio 
transparency condition.
    Applicants: Invesco Capital Management LLC (``Invesco''), Invesco 
Distributors, Inc. (the ``Distributor'') and Invesco Actively Managed 
Exchange-Traded Fund Trust (the ``Trust'').
    Filing Dates: The application was filed on September 25, 2019, and 
amended on February 28, 2020, May 29, 2020, July 20, 2020, August 26, 
2020, and November 6, 2020.
    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 emailing to the 
Commission's Secretary at Secretarys-Office@sec.gov 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 December 1, 2020, 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 emailing to the Commission's Secretary at Secretarys-Office@sec.gov.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 
Secretarys-Office@sec.gov; Applicants: Anna Paglia, Esq., Invesco 
Capital Management LLC, anna.paglia@invesco.com.

FOR FURTHER INFORMATION CONTACT: Kay M. Vobis, Senior Counsel, at (202) 
551-6728 or Trace W. 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. Applicants seek to operate actively-managed ETFs that would not 
be required to disclose its portfolio holdings on a daily basis (each, 
a ``Fund''). Since the Funds would not disclose their portfolio 
holdings on a daily basis they would not be able to operate in reliance 
on rule 6c-11 under the Act, which requires that ETFs disclose their 
portfolio holdings on a daily basis.\1\ Accordingly, Applicants seek 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 
thereunder; and under sections 6(c) and 17(b) of the Act granting an 
exemption from sections 17(a)(1) and 17(a)(2) of the Act. The requested 
order would permit: (a) The Funds to issue shares (``Shares'') 
redeemable in large aggregations only (``creation units''); (b) 
secondary market transactions in Shares to occur at negotiated market 
prices rather than at net asset value (``NAV''); (c) certain Funds to 
pay redemption proceeds, under certain circumstances, more than seven 
days after the tender of Shares for redemption; and (d) certain 
affiliated persons of a Fund to deposit securities into, and receive 
securities from, the Fund in connection with the purchase and 
redemption of creation units.
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    \1\ 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). See generally Exchange Traded Funds, Investment 
Company Act Release No. 33646 (Sept. 25, 2019) (``ETF Rule Adopting 
Release'').
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    2. In 2019 the Commission began issuing orders granting relief to 
actively managed ETFs that, like the Funds, do not disclose their 
complete portfolio holdings on a daily basis.\2\ In issuing this 
relief, the Commission recognized that an arbitrage mechanism 
alternative to full portfolio transparency can work in an efficient 
manner to maintain secondary market prices at or close to the NAV of an 
ETF.\3\
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    \2\ See, e.g., T. Rowe Price Associates, Inc. and T. Rowe Price 
Equity Series, Investment Company Act Release Nos. 33685 (Nov. 14, 
2019) (notice) (``T. Rowe Price Notice'') and 33713 (Dec. 10, 2019) 
(order) (``T. Rowe Price Order''); Natixis ETF Trust II, et al., 
Investment Company Act Release Nos. 33684 (Nov. 14, 2019) (notice) 
and 33711 (Dec. 10, 2019) (order); Fidelity Beach Street Trust, et 
al., Investment Company Act Release Nos. 33683 (Nov. 14, 2019) 
(notice) and 33712 (Dec. 10, 2019) (order); Blue Tractor ETF Trust 
and Blue Tractor Group, LLC, Investment Company Act Release Nos. 
33682 (Nov. 14, 2019) (notice) and 33710 (Dec. 10, 2019) (order). 
See also Precidian ETFs Trust, et al., Investment Company Act 
Release No. 33440 (Apr. 8, 2019) and 33477 (May 20, 2019) (order).
    \3\ See, e.g., T. Rowe Price Notice, supra note 2, at n.32 and 
accompanying discussion.
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II. The Application 4
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    \4\ Capitalized terms not otherwise defined herein shall have 
the same meaning as in the application.
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A. The Applicants

    3. The Trust is organized as a statutory trust under the laws of 
the State of Delaware and is registered with the Commission as an open-
end management investment company. Invesco is a Delaware limited 
liability corporation registered as an investment adviser under the 
Investment Advisers Act of 1940 (``Advisers Act''), and would serve as 
the investment adviser to the initial Fund. The Distributor, a Delaware 
corporation, is a registered broker-dealer under the Securities 
Exchange Act of 1934, as amended (``Exchange Act''), and will act as 
distributor and principal underwriter of the Funds.

B. The Funds

    4. Applicants seek exemptive relief under section 6(c) to operate 
actively-managed Funds that would not disclose their portfolio holdings 
on a daily basis.\5\ Applicants maintain that operating the Funds as 
fully-transparent actively-managed ETFs would make the Funds 
susceptible to ``front running'' and ``free riding'' by other investors 
and/or managers, which can harm the Funds and their shareholders. 
Applicants believe that the Funds would allow investors to access 
active

[[Page 72713]]

investment strategies while also taking advantage of the traditional 
benefits of ETFs (e.g., lower fund costs, tax efficiencies and intraday 
liquidity).
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    \5\ Applicants request that the order apply to the series of the 
Trust identified and described in the application as well as to 
additional series of the Trust and any other open-end management 
investment company or series thereof that seek to rely on the relief 
requested in the application, each of which will operate as an 
actively-managed ETF. Any Fund will: (a) Be advised by Invesco or an 
investment adviser controlling, controlled by, or under common 
control with Invesco (each such entity and any successor thereto 
collectively referred to as the ``Adviser'') and (b) comply with the 
terms and conditions of the application. The Adviser may retain one 
or more subadvisers (each a ``Subadviser'') for the Funds. Any 
Subadviser will be registered under the Advisers Act. For purposes 
of the requested order, the term ``successor'' is limited to an 
entity that results from a reorganization into another jurisdiction 
or a change in the type of business organization.
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    a. Substitute Basket. Each day a Fund would publish a basket of 
securities and cash that, while different from the Fund's portfolio, is 
designed to closely track its daily performance (the ``Substitute 
Basket'').\6\ In addition, every day the Fund would disclose the 
percentage weight overlap between the holdings of the prior Business 
Day's Substitute Basket compared to the holdings of the Fund that 
formed the basis for the Fund's calculation of NAV at the end of the 
prior Business Day (the ``Basket Overlap'').\7\ Such number would help 
market participants evaluate the risk that the performance of the 
Substitute Basket may deviate from the performance of the portfolio 
holdings of a Fund.
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    \6\ The Funds would, at a minimum, provide the quarterly 
portfolio disclosures required for mutual funds. See rule 30b1-9 
under the Act and Form N-PORT.
    \7\ Applicants state that each Fund may strike and publish its 
NAV additional times during each Business Day at intervals 
determined by the Adviser in order to further reduce market 
participants' risk and to provide intraday price certainty. For 
example, the Fund may strike a NAV once during normal trading at 
12:00 p.m. Eastern Time (``Intra-Day NAV'') and again at the close 
of trading at 4:00 p.m. Eastern Time (``End of Day NAV'').
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    Applicants state that the Substitute Basket would serve as a 
pricing and hedging tool for market participants to identify and take 
advantage of arbitrage opportunities. Because the Substitute Basket 
would be designed to closely track the daily performance of the Fund's 
holdings, the Substitute Basket would serve to estimate the value of 
those holdings. For the same reason, trading the Substitute Basket 
would allow market participants to get exposure to the performance of 
the Fund's holdings, so that a Fund's Substitute Basket could serve to 
hedge a position in the Fund's Shares. Further, the Substitute Basket 
would generally serve as the creation/redemption basket when Authorized 
Participants exchange creation units with the Fund.\8\ Also in order to 
facilitate arbitrage, each Fund's portfolio and Substitute Basket will 
only include certain securities that trade on an exchange 
contemporaneously with the Fund's Shares.\9\ Because the securities 
would be exchange traded, market participants would be able to 
accurately price and readily trade the securities in the Substitute 
Basket for purposes of assessing the intraday value of the Fund's 
portfolio holdings and to hedge their positions in the Fund's shares.
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    \8\ Large broker-dealers that have contractual arrangements with 
an ETF (each, an ``Authorized Participant'') purchase and redeem ETF 
shares directly from the ETF, but only in blocks called ``creation 
units.'' After purchasing a creation unit, the Authorized 
Participant may sell the component ETF shares in secondary market 
transactions. The redemption process is the reverse of the purchase 
process.
    \9\Each fund may invest only in ETFs, Exchange-trade noted, 
Exchange-traded common stocks, common stocks listed on a foreign 
exchange that trade on such exchange synchronously with the Shares, 
Exchange-traded preferred stocks, Exchange-traded American 
depositary receipts, Exchange-traded real estate investments trusts, 
Exchange-traded commodity pools, Exchange-traded metals trusts, 
Exchange-traded currency trusts, and exchange-traded futures that 
trade contemporaneously with the Shares, as well as cash and cash 
equivalents. For purposes of the application, exchange-traded 
futures are U.S. listed futures contracts where the futures 
contract's reference asset is an asset that the Fund could invest in 
directly. All futures contracts that a Fund may invest in will be 
traded on a U.S. futures exchange. For these purposes, an 
``Exchange'' is a national securities exchange as defined in section 
2(a)(26) of the Act. No Fund will invest in a ``penny stock'' as 
defined in Exchange Act Rule 3a51-1, borrow for investment purposes, 
hold short positions, or purchase any security that is illiquid at 
the time of purchase. The Substitute Basket will be subject to the 
same limitations.
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    b. Arbitrage Transactions in the Funds. Applicants state that, 
given the correlation between a Fund's Substitute Basket and its 
portfolio holdings, the Substitute Basket would serve as a pricing 
signal to identify arbitrage opportunities when its value and the 
secondary market price of the Shares diverge. If Shares began trading 
at a discount to the Substitute Basket, an Authorized Participant could 
purchase the Shares in secondary market transactions and, after 
accumulating enough Shares to comprise a creation unit, redeem them 
from the Fund in exchange for a redemption basket reflecting the NAV 
per share of the Fund's portfolio holdings.\10\ The purchases of Shares 
would reduce the supply of Shares in the market, and thus tend to drive 
up the Shares' market price closer to the Fund's NAV.\11\ 
Alternatively, if Shares are trading at a premium, the transactions in 
the arbitrage process are reversed. Applicants further state that, like 
with traditional ETFs, market participants also can engage in arbitrage 
without using the creation or redemption processes. For example, if a 
Fund is trading at a premium to the Substitute Basket, the market 
participant may sell Shares short and take a long position in the 
Substitute Basket securities, wait for the trading prices to move 
toward parity, and then close out the positions in both the Shares and 
the securities, to realize a profit from the relative movement of their 
trading prices. Similarly, a market participant could buy Shares and 
take a short position in the Substitute Basket securities in an attempt 
to profit when Shares are trading at a discount to the Substitute 
Basket.
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    \10\ In addition to purchasing Shares, Applicants assert an 
Authorized Participant also would likely hedge its intraday risk by 
shorting the securities in the Substitute Basket (the same as in the 
redemption basket) in an amount corresponding to its long position 
in Shares. After the Authorized Participant returns a creation unit 
to the Fund in exchange for a redemption basket, the Authorized 
Participant can use the basket securities to cover its short 
positions.
    \11\ Applicants assert the purchase of the Shares in the 
secondary market, combined with the sale of the redemption basket 
securities, may also drive the market price of Shares and the value 
of the Fund's portfolio holdings closer together.
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    c. Protective Conditions. First, the Funds will provide certain 
public disclosures to explain to investors how they differ from 
traditional ETFs and inform investors that the Funds' bid-ask spreads 
and premiums/discounts may be larger than those for traditional ETFs 
due to the lack of transparency, thus making trading in the Funds' 
Shares more expensive. The Funds will also disclose that market 
participants may attempt to reverse engineer a Fund's trading strategy, 
which, if successful, could increase opportunities for trading 
practices that may disadvantage the Fund and its shareholders. Each 
Fund will include a legend (the ``Legend'') in a prominent location on 
the outside cover page of its prospectus, as well as on its website and 
any marketing materials, that will highlight for investors the 
differences between the Funds and fully transparent actively managed 
ETFs and the above costs and risk. Unless otherwise requested by the 
staff of the Commission, the Legend will read as follows:
    This ETF is different from traditional ETFs.
    Traditional ETFs tell the public what assets they hold each day. 
This ETF will not. This may create additional risks for your 
investment. For example:
     You may have to pay more money to trade the ETF's shares. 
This ETF will provide less information to traders, who tend to charge 
more for trades when they have less information.
     The price you pay to buy ETF shares on an exchange may not 
match the value of the ETF's portfolio. The same is true when you sell 
shares. These price differences may be greater for this ETF compared to 
other ETFs because it provides less information to traders.
     These additional risks may be even greater in bad or 
uncertain market conditions.
     The ETF will publish on its website each day a 
``Substitute Basket'' designed

[[Page 72714]]

to help trading in shares of the ETF. While the Substitute Basket 
includes some of the ETF's holdings, it is not the ETF's actual 
portfolio.
    The differences between this ETF and other ETFs may also have 
advantages. By keeping certain information about the ETF secret, this 
ETF may face less risk that other traders can predict or copy its 
investment strategy. This may improve the ETF's performance. If other 
traders are able to copy or predict the ETF's investment strategy, 
however, this may hurt the ETF's performance.
    For additional information regarding the unique attributes and 
risks of the ETF, see section [ ] below.
    5. Second, Applicants will comply with the requirements of 
Regulation Fair Disclosure (``Reg. FD'') as if it applied to them, thus 
prohibiting the Fund's selective disclosure of any material nonpublic 
information.\12\ Applicants note that because the Funds will not 
publicly disclose their portfolio holdings daily, the selective 
disclosure of material nonpublic information, including information 
other than portfolio information, would be more likely to provide an 
unfair advantage to the recipient than in the context of other ETFs.
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    \12\ See 17 CFR 243. ETFs are not otherwise subject to Reg. FD. 
Reg. FD's Rule 100(b)(2)(iii) exempts from Reg. FD certain 
communications made in connection with a securities offering 
registered under the Securities Act. Applicants would not rely on 
this exemption; as the Funds will be continuously offered, this 
exemption would likely make the condition requiring Applicants to 
comply with Reg. FD meaningless.
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    6. Third, the Funds and their Adviser will take remedial actions as 
necessary if the Funds do not function as anticipated. For at least the 
first three years after launch, a Fund will establish certain 
thresholds for its level of Tracking Error,\13\ premiums/discounts, and 
spreads, so that, upon the Fund's crossing a threshold, the Adviser 
will promptly call a meeting of the Fund's board of directors, and will 
present the board with recommendations for appropriate remedial 
measures.\14\ The board would then consider the continuing viability of 
the Fund, whether shareholders are being harmed, and what, if any, 
action would be appropriate.\15\ In addition, Applicants have agreed to 
provide to Commission staff on a periodic basis certain metrics and 
other such information as the staff may request in order to facilitate 
the staff's ongoing monitoring of the Funds.\16\
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    \13\ ``Tracking Error'' is the standard deviation over the past 
three months of the daily proxy spread (i.e., the difference, in 
percentage terms, between the Substitute Basket's per share NAV and 
that of the Fund at the end of the trading day).
    \14\ For at least the first three years after launch of a Fund, 
its board would promptly meet (1) if the Tracking Error exceeds 1%; 
or (2) if, for 30 or more days in any quarter or 15 days in a row 
(a) the absolute difference between either the market closing price 
or Bid/Ask Price, on one hand, and End of Day NAV, on the other, 
exceeds no more than 2%, or (b) the bid/ask spread exceeds no more 
than 2%. A Fund may adopt additional or lower (i.e., less than the 
1% and 2% upper limits) thresholds to the extent deemed appropriate 
and approved by the Fund's board. The Board will also consider 
information provided by the Adviser reflecting how the Fund's Intra-
Day NAV compares to the Bid/Ask Price of Shares at the time as of 
which the Intra-Day NAV is calculated, and will evaluate such 
information in the context of its oversight of the Fund.
    \15\ For at least three years after launch of each Fund, the 
board will also undertake these considerations on an annual basis, 
regardless of whether the Fund's preset thresholds have been 
crossed. Potential actions may include, but are not limited to, 
changing lead market makers, listing the Fund on a different 
Exchange, changing the size of creation units, changing the 
construction of the Substitute Basket, changing the Fund's 
investment objective or strategy, and liquidating the Fund.
    \16\ See condition 7.
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III. Requested Exemptive Relief

    7. 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, 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.\17\
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    \17\ Applicants request that the terms and conditions of the 
requested order apply to other registered open-end management 
investment companies or series thereof not advised by the Adviser 
(``Authorized Funds''). Applicants anticipate that the Adviser or an 
affiliate thereof may in the future enter into agreements concerning 
Applicant's intellectual property rights in the Funds with the 
registered investment advisers advising the Authorized Funds 
(together with the Authorized Funds, ``Future Applicants''). 
Applicants further expect that Future Applicants would apply for a 
separate exemptive order that incorporates by reference all the 
terms and conditions of the requested order and any amendments 
thereto.
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    8. 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.

A. Overview of Requested Relief

    9. Sections 5(a)(1) and 2(a)(32) of the Act. Because the Shares 
will not be individually redeemable, Applicants request an exemption 
from section 5(a)(1) and section 2(a)(32) of the Act that would permit 
the Funds to register as open-end management investment companies and 
issue Shares that are redeemable in creation units only.
    10. Sections 17(a)(1) and (2) of the Act. Applicants request an 
exemption from sections 17(a)(1) and 17(a)(2) of the Act to permit 
persons that are affiliated persons, or second-tier affiliates, of the 
Funds, solely by virtue of certain ownership interests, to effectuate 
purchases and redemptions in-kind. The deposit procedures for in-kind 
purchases of creation units and the redemption procedures for in-kind 
redemptions of creation units will be the same for all purchases and 
redemptions and basket securities will be valued in the same manner as 
those portfolio securities currently held by the Funds.
    11. Section 22(d) of the Act and rule 22c-1 thereunder. 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.
    12. Together, section 22(d) and rule 22c-1 are designed to: (i) 
Prevent dilution caused by certain riskless trading practices of 
principal underwriters and dealers; (ii) prevent unjust discrimination 
or preferential treatment among investors purchasing and redeeming fund 
shares; and (iii) preserve an orderly distribution of investment 
company shares.\18\
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    \18\ See ETF Rule Adopting Release, supra note 1, at text 
accompanying note 116.
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    13. Applicants believe that none of these concerns will be raised 
by permitting Shares to trade in the secondary market at negotiated 
prices. Applicants state that secondary market trading in Shares does 
not involve the Funds as parties and cannot result in dilution of an 
investment in Shares, and to the extent different prices for Shares 
exist during a given trading day, or from day to day, such variances 
occur as a

[[Page 72715]]

result of third-party market forces, such as supply and demand. 
Therefore, Applicants assert that secondary market transactions in 
Shares will not lead to discrimination or preferential treatment among 
purchasers. Finally, Applicants state that the proposed distribution 
system will be orderly because anyone will be able to sell or acquire 
Shares on an exchange and arbitrage activity should ensure that 
secondary market transactions occur at prices at or close to the Fund's 
NAV.
    14. Section 22(e) of the Act. Applicants seek relief from section 
22(e) to permit Funds to satisfy redemption requests more than seven 
days from the tender of Shares for redemption with respect to foreign 
securities where the settlement cycle, coupled with local holiday 
schedules, would not permit a Fund to satisfy redemption requests 
within the seven days required under section 22(e) of the Act. A Fund 
would deliver the foreign securities as soon as practicable, but in no 
event later than 15 days after the tender of Shares.

B. Considerations Relating to the Requested Relief

    15. In support of the requested exemptive relief, the Applicants 
also believe the proposed terms and conditions sufficiently address 
possible concerns regarding the relief, as discussed below.
    16. Proposed Arbitrage Mechanism. Applicants believe that the 
proposed arbitrage mechanism can work in an efficient manner to 
maintain secondary market prices of Shares close to their NAV while 
providing investors with the opportunity to invest in active strategies 
through a vehicle that offers the traditional benefits of ETFs. In 
addition, to the extent that the Funds do not function as anticipated, 
Applicants have undertaken to take remedial actions as appropriate.
    17. Use of Substitute Baskets. Applicants believe they have 
addressed possible concerns of using a Substitute Basket as an 
arbitrage mechanism. First, Applicants note that a Fund's Substitute 
Basket would not misrepresent the Fund's holdings and that they will 
take steps to avoid investor confusion. To that effect, the Funds would 
provide disclosures in their prospectus, marketing materials and 
website clearly indicating the Substitute Basket's purpose and that it 
is not the Fund's portfolio holdings.\19\ Second, Applicants state that 
they have structured their arbitrage mechanism so that arbitrageurs' 
trading will not have a significant market impact on the securities in 
the Substitute Basket and other Creation Baskets, in particular those 
that a Fund does not hold for investment purposes.\20\
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    \19\ In addition, every day the Funds would disseminate the 
Basket Overlap, which would inform market participants as to the 
degree to which the Substitute Basket and the Fund's portfolio 
actually differ.
    \20\ Specifically, the Funds expect to include in the Substitute 
Basket only assets that are liquid and have a high trading volume. 
Further, Applicants note that their proposed arbitrage mechanism is 
not novel in this respect. Currently, arbitrageurs for fully-
transparent ETFs may use securities that are not in the ETFs' 
portfolio to hedge their positions in the ETFs' shares.
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    18. Reverse Engineering. Applicants indicate they have addressed 
possible concerns that other market participants may be able to reverse 
engineer current activity in a Fund's holdings and use such information 
to the disadvantage of the Fund and its shareholders. Applicants have 
represented 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.

IV. Applicants' Conditions

    Applicants agree that any order of the Commission granting the 
requested relief will be subject to the following conditions:
    1. As long as a Fund operates in reliance on the requested order, 
the Shares of the Fund will be listed on an Exchange.
    2. The website for the Funds, which will be publicly accessible at 
no charge, will contain, on a per Share basis for each Fund, the prior 
Business Day's Intra-Day NAV and End of Day NAV and Closing Price or 
Bid/Ask Price of the Shares, a calculation of the premium or discount 
of the Closing Price or Bid/Ask Price against such End of Day NAV, and 
any other information regarding premiums and discounts as may be 
required for other ETFs under rule 6c-11 under the Act, as amended. The 
website will also disclose any information regarding the bid-ask spread 
for each Fund as may be required for other ETFs under rule 6c-11 under 
the Act, as amended.
    3. Each Fund will include the Legend in a prominent location on the 
outside cover page of its prospectus, as well as on its website and any 
marketing materials.
    4. On each Business Day, before the commencement of trading of 
Shares, each Fund will publish on its website the Substitute Basket and 
the Basket Overlap for that day.
    5. No Adviser or Subadviser, directly or indirectly, will cause any 
Authorized Participant (or any investor on whose behalf an Authorized 
Participant may transact with the Fund) to acquire any Deposit 
Instrument for a Fund through a transaction in which the Fund could not 
engage directly.
    6. The requested relief to permit ETF operations will expire on the 
effective date of any Commission rule under the Act that provides 
relief permitting the operation of actively managed ETFs that disclose 
a proxy portfolio on each Business Day, without fully disclosing the 
ETF's entire portfolio at the same time.
    7. Each Fund will provide the Commission staff with periodic 
reports (for which confidential treatment may be requested) containing 
such information as the Commission staff may request.
    8. Each Fund and each person acting on behalf of a Fund \21\ will 
comply with and agree to be subject to the requirements of Regulation 
Fair Disclosure as if it applied to them (except that the exemptions 
provided in Rule 100(b)(2)(iii) therein shall not apply).
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    \21\ For purposes of this condition, ``person acting on behalf 
of a Fund'' shall have the same meaning as ``person acting on behalf 
of an issuer'' for a closed-end investment company under 17 CFR 
243.101(c).
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    9. Each Fund will maintain and preserve, for a period of not less 
than five years, in an easily accessible place, (i) all written 
agreements (or copies thereof) between an Authorized Participant and 
the Fund or one of its service providers that allows the Authorized 
Participant to place orders for the purchase or redemption of Creation 
Units; (ii) a copy of the Substitute Basket published on the Fund's 
website for each Business Day; and (iii) a list of all creation or 
redemption baskets exchanged with an Authorized Participant where cash 
was included in the basket in lieu of some or all of the Substitute 
Basket securities (except for cash included because the securities are 
not eligible for trading by the Authorized Participant or the investor 
on whose behalf the Authorized Participant is acting), the amount of 
any such cash in lieu and the identity of the Authorized Participant 
conducting the transaction.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-25050 Filed 11-12-20; 8:45 am]
BILLING CODE 8011-01-P