Document ID: SEC-2006-0122-0041
Agency: sec
Document Type: Notice
Title: First Trust Advisors L.P., et al.; Notice of Application
Posted Date: 2008-10-03T04:00Z

[Federal Register: October 3, 2008 (Volume 73, Number 193)]
[Notices]               
[Page 57702-57705]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03oc08-115]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28421; 812-13477]

 
First Trust Advisors L.P., et al.; Notice of Application

September 29, 2008.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (``Act'') for an exemption from sections 
2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act and rule 22c-1 under the 
Act and under sections 6(c) and 17(b) of the Act for an exemption from 
sections 17(a)(1) and (a)(2) of the Act.

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Applicants: First Trust Advisors L.P. (the ``Advisor''), First Trust 
Portfolios L.P. (the ``Distributor'') and First Trust Exchange-Traded 
Fund III (the ``Initial Trust'').

Summary of Application: Applicants request an order that permits: (a) 
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 
negotiated market prices; (c) certain series to pay redemption 
proceeds, under certain circumstances, more than seven days after the 
tender of Shares for redemption; and (d) certain affiliated persons of 
the series to deposit securities into, and receive securities from, the 
series in connection with the purchase and redemption of Creation 
Units.

Filing Dates: The application was filed on January 14, 2008, and 
amended on July 14, 2008. Applicants have agreed to file an amendment 
during the notice period, the substance of which is reflected in the 
notice.

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 October 24, 2008, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-1090. Applicants: 100 Warrenville 
Rd., Lisle, IL 60532.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at 
(202) 551-6817, or Marilyn Mann, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549-1520 (tel. 202-551-5850).

Applicants' Representations

    1. The Initial Trust is an open-end management investment company 
registered under the Act and organized as a Massachusetts business 
trust. The Initial Trust will offer three initial series: the First 
Trust BRIC Equal Weight Fund, the First Trust Target Mega Cap Fund, and 
the First Trust Target International Mega Cap Fund (the ``Initial 
Funds''). Each Initial Fund's investment objective will be to provide 
capital appreciation by investing in stocks selected according to a 
quantitative screening methodology developed by the Advisor.
    2. Applicants request that the order apply to any existing or 
future series (``Future Funds'') of any existing or future open-end 
management investment companies (``Future Trusts'') that will invest in 
equity securities traded in the U.S. markets and/or foreign equity 
securities. Any Future Fund will be (a) advised by the Advisor or an 
entity controlling, controlled by, or under common control with the 
Advisor, and (b) comply with the terms and conditions of the order. The 
Initial Funds and Future Funds together are the ``Funds'' and the 
Initial Trust and the Future Trusts together are the ``Trusts.'' Funds 
that invest all or a portion of their assets in foreign equity 
securities are each an ``International Fund.'' Each Fund will operate 
as an actively-managed exchange-traded fund (``ETF'').
    3. The Advisor is registered as an investment adviser under the 
Investment Advisers Act of 1940 (``Advisers Act'') and will serve as 
the investment adviser to the Funds. The Advisor may in the future 
retain one or more subadvisers (``Subadvisers'') to manage the Funds' 
portfolios. Any Subadviser will be registered under the Advisers Act. 
The Distributor, a broker-dealer registered under the Securities 
Exchange Act of 1934 (``Exchange Act''), will serve as the principal 
underwriter and distributor for the Funds.\1\
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    \1\ 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 
application.
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    4. Shares of the Funds will be sold at a price of between $20 and 
$50 per Share in Creation Units of between 25,000 and 150,000 Shares. 
All orders to purchase Creation Units must be placed with the 
Distributor by or through a

[[Page 57703]]

party that has entered into an agreement with a Fund and the 
Distributor (``Authorized Participant''). An Authorized Participant 
must be either: (a) A broker-dealer 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,'' and such participant, ``DTC Participant''). Shares of each 
Fund generally will be sold in Creation Units in exchange for an in-
kind deposit by the purchaser of a portfolio of securities designated 
by the Advisor (the ``Deposit Securities''), together with the deposit 
of a relatively small specified cash payment (``Cash Component''). The 
Cash Component is an amount equal to the difference between (a) the net 
asset value (``NAV'') per Creation Unit of the Fund and (b) the total 
aggregate market value per Creation Unit of the Deposit Securities.\2\ 
Applicants state that in some circumstances it may not be practicable 
or convenient for a Fund to operate exclusively on an ``in-kind'' 
basis. Each Fund reserves the right to permit, under certain 
circumstances, a purchaser of Creation Units to substitute cash in lieu 
of depositing some or all of the requisite Deposit Securities.
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    \2\ In addition to the list of names and amount of each security 
constituting the current Deposit Securities, it is intended that, on 
each day that a Fund is open, including as required by section 22(e) 
of the Act (``Business Day''), the Cash Component effective as of 
the previous Business Day, per outstanding Share of each Fund, will 
be made available. The Stock Exchange or a major market data vendor 
intends to disseminate widely, every 15 seconds, during regular 
trading hours, an approximate amount per Share representing the sum 
of the estimated Cash Component effective through and including the 
previous Business Day, plus the current value of the Deposit 
Securities, on a per Share basis.
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    5. An investor purchasing a Creation Unit from a Fund will be 
charged a fee (``Transaction Fee'') to prevent the dilution of the 
interests of the remaining shareholders resulting from costs in 
connection with the purchase of Creation Units.\3\ The maximum 
Transaction Fees relevant to each Fund will be fully disclosed in the 
prospectus (``Prospectus'') or statement of additional information 
(``SAI'') of such Fund. All orders to purchase Creation Units will be 
placed with the Distributor by or through an Authorized Participant and 
it will be the Distributor's responsibility to transmit such orders to 
the respective Fund's transfer agent. The Distributor also will be 
responsible for delivering the Prospectus to those persons purchasing 
Creation Units, and for maintaining records of both the orders placed 
with it and the confirmations of acceptance furnished by it. In 
addition, the Distributor will maintain a record of the instructions 
given to a Fund to implement the delivery of Shares.
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    \3\ Where a Fund permits a purchaser to substitute cash in lieu 
of depositing a portion of the requisite Deposit Securities, the 
purchaser may be assessed a higher Transaction Fee to cover the cost 
of purchasing such Deposit Securities, including brokerage costs, 
and part or all of the spread between the expected bid and the offer 
side of the market relating to such Deposit Securities.
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    6. Purchasers of Shares in Creation Units may hold such Shares or 
may sell such Shares into the secondary market. Shares will be listed 
and traded on a national securities exchange as defined in section 
2(a)(26) of the Act (``Stock Exchange''). It is expected that one or 
more member firms of a listing Stock Exchange will be designated to act 
as a specialist and maintain a market for Shares on the Stock Exchange 
(the ``Specialist''), or if Nasdaq is the listing Stock Exchange, one 
or more member firms of Nasdaq will act as a market maker (``Market 
Maker'') and maintain a market for Shares.\4\ Prices of Shares trading 
on a Stock Exchange will be based on the current bid/offer market. 
Shares sold in the secondary market will be subject to customary 
brokerage commissions and charges.
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    \4\ If Shares are listed on the Nasdaq, no particular Market 
Maker will be contractually obligated to make a market in Shares, 
although Nasdaq's listing requirements stipulate that at least two 
Market Makers must be registered as Market Makers in Shares to 
maintain the listing. Registered Market Makers are required to make 
a continuous, two-sided market at all times or be subject to 
regulatory sanctions.
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    7. Applicants expect that purchasers of Creation Units will include 
institutional investors and arbitrageurs (which could include 
institutional investors). The Specialist, or Market Maker, in providing 
a fair and orderly secondary market for the Shares, also may purchase 
Creation Units for use in its market-making activities. Applicants 
expect that secondary market purchasers of Shares will include both 
institutional investors and retail investors.\5\ Applicants expect that 
the price at which the Shares trade will be disciplined by arbitrage 
opportunities created by the ability to continually purchase or redeem 
Creation Units at their NAV, which should ensure that the Shares will 
not trade at a material discount or premium in relation to their NAV.
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    \5\ Shares will be registered in book-entry form only. DTC or 
its nominee will be the registered owner of all outstanding Shares. 
DTC or DTC Participants will maintain records reflecting beneficial 
owners of Shares.
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    8. Shares will not be individually redeemable, and owners of Shares 
may acquire those Shares from a Fund, or tender such Shares for 
redemption to the Fund, in Creation Units only. To redeem, an investor 
will have to accumulate enough Shares to constitute a Creation Unit. 
Redemption orders must be placed by or through an Authorized 
Participant. An investor redeeming a Creation Unit generally will 
receive (a) a portfolio of securities designated to be delivered for 
Creation Unit redemptions on the date that the request for redemption 
is submitted (``Fund Securities''), which may not be identical to the 
Deposit Securities required to purchase Creation Units on that date, 
and (b) a ``Cash Redemption Payment,'' consisting of an amount 
calculated in the same manner as the Cash Component, although the 
actual amount of the Cash Redemption Payment may differ from the Cash 
Component if the Fund Securities are not identical to the Deposit 
Securities on that day. An investor may receive the cash equivalent of 
a Fund Security in certain circumstances, such as if the investor is 
constrained from effecting transactions in the security by regulation 
or policy. A redeeming investor may pay a Transaction Fee, calculated 
in the same manner as a Transaction Fee payable in connection with 
purchases of Creation Units.
    9. Neither a Trust nor any individual Fund will be marketed or 
otherwise held out as an ``open-end investment company'' or a ``mutual 
fund.'' Instead, each Fund will be marketed as an ``actively-managed 
exchange-traded fund.'' All marketing materials that describe the 
method of obtaining, buying or selling Shares, or refer to 
redeemability, will prominently disclose that Shares are not 
individually redeemable and that the owners of Shares may purchase or 
redeem Shares from a Fund in Creation Units only. The same approach 
will be followed in the SAI, shareholder reports and investor 
educational materials issued or circulated in connection with the 
Shares. The Funds will provide copies of their annual and semi-annual 
shareholder reports to DTC Participants for distribution to beneficial 
owners of Shares.
    10. The Funds' Web site, which will be publicly available prior to 
the public offering of Shares, will include the Prospectus and other 
information about the Funds that is updated on a daily basis, including 
the mid-point of the bid-ask spread at the time of the calculation of 
NAV (``Bid/Ask Price''). On each Business Day, before the commencement 
of trading in Shares on the Stock Exchange, each Fund will disclose the 
identities and quantities of

[[Page 57704]]

the securities (``Portfolio Securities'') and other assets held in the 
Fund portfolio that will form the basis for the Fund's calculation of 
NAV at the end of the Business Day.\6\
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    \6\ Applicants note that under accounting procedures followed by 
the Funds, trades made on the prior Business Day (``T'') will be 
booked and reflected in NAV on the current Business Day (``T + 1''). 
Accordingly, the Funds will be able to disclose at the beginning of 
the Business Day the portfolio that will form the basis for the NAV 
calculation at the end of the Business Day.
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Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act 
granting an exemption from sections 2(a)(32), 5(a)(1), 22(d) and 22(e) 
of the Act and rule 22c-1 under the Act; and under sections 6(c) and 
17(b) of the Act granting an exemption from sections 17(a)(1) and 
(a)(2) of the Act.
    2. Section 6(c) of the Act provides that the Commission may exempt 
any person, security or transaction, or any class of persons, 
securities or transactions, from any provision of the Act, if and to 
the extent that such exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act. 
Section 17(b) of the Act authorizes the Commission to exempt a proposed 
transaction from section 17(a) of the Act if evidence establishes that 
the terms of the transaction, including the consideration to be paid or 
received, are reasonable and fair and do not involve overreaching on 
the part of any person concerned, and the proposed transaction is 
consistent with the policies of the registered investment company and 
the general provisions of the Act.

Sections 5(a)(1) and 2(a)(32) of the Act

    3. Section 5(a)(1) of the Act defines an ``open-end company'' as a 
management investment company that is offering for sale or has 
outstanding any redeemable security of which it is the issuer. Section 
2(a)(32) of the Act defines a redeemable security as any security, 
other than short-term paper, under the terms of which the holder, upon 
its presentation to the issuer, is entitled to receive approximately 
his proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Shares will not be individually redeemable, 
applicants request an order that would permit each Fund, as a series of 
an open-end management investment company, to issue Shares that are 
redeemable in Creation Units only. Applicants state that investors may 
purchase Shares in Creation Units from each Fund and redeem Creation 
Units from each Fund. Applicants further state that because the market 
price of Shares will be disciplined by arbitrage opportunities, 
investors should be able to sell Shares in the secondary market at 
prices that do not vary substantially from their NAV.

Section 22(d) of the Act and Rule 22c-1 Under the Act

    4. Section 22(d) of the Act, among other things, prohibits a dealer 
from selling a redeemable security, which is currently being offered to 
the public by or through a principal underwriter, except at a current 
public offering price described in the prospectus. Rule 22c-1 under the 
Act generally requires that a dealer selling, redeeming, or 
repurchasing a redeemable security do so only at a price based on its 
NAV. Applicants state that secondary market trading in Shares will take 
place at negotiated prices, not at a current offering price described 
in the prospectus, and not at a price based on NAV. Thus, purchases and 
sales of Shares in the secondary market will not comply with section 
22(d) of the Act and rule 22c-1 under the Act. Applicants request an 
exemption under section 6(c) from these provisions.
    5. Applicants assert that the concerns sought to be addressed by 
section 22(d) of the Act and rule 22c-1 under the Act with respect to 
pricing are equally satisfied by the proposed method of pricing Shares. 
Applicants maintain that while there is little legislative history 
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to (a) prevent dilution caused by 
certain 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 of investment company shares by eliminating 
price competition from dealers offering shares at less than the 
published sales price and repurchasing shares at more than the 
published redemption price.
    6. Applicants believe that none of these purposes will be thwarted 
by permitting Shares to trade in the secondary market at negotiated 
prices. Applicants state that (a) secondary market trading in Shares 
does not involve the Funds as parties and cannot result in dilution of 
an investment in Shares, and (b) to the extent different prices exist 
during a given trading day, or from day to day, such variances occur as 
a result of third-party market forces, such as supply and demand. 
Therefore, applicants assert that secondary market transactions in 
Shares will not lead to discrimination or preferential treatment among 
purchasers. Finally, applicants contend that the proposed distribution 
system will be orderly because arbitrage activity will ensure that the 
difference between the market price of Shares and their NAV remains 
narrow.

Section 22(e) of the Act

    7. Section 22(e) generally prohibits a registered investment 
company from suspending the right of redemption or postponing the date 
of payment of redemption proceeds for more than seven days after the 
tender of a security for redemption. The principal reason for the 
requested exemption is that settlement of redemptions for the 
International Funds is contingent not only on the settlement cycle of 
the United States markets, but also on currently practicable delivery 
cycles in local markets for underlying foreign securities held by the 
International Funds. Applicants state that local market delivery cycles 
for transferring certain foreign securities to investors redeeming 
Creation Units, together with local market holiday schedules, will 
under certain circumstances require a delivery process in excess of 
seven calendar days for the International Funds. Applicants request 
relief under section 6(c) of the Act from section 22(e) in such 
circumstances to allow the International Funds to pay redemption 
proceeds up to 12 calendar days after the tender of any Creation Unit 
for redemption. At all other times and except as disclosed in the 
relevant SAI, applicants expect that each International Fund will be 
able to deliver redemption proceeds within seven days.\7\ With respect 
to Future Funds that are International Funds, applicants seek the same 
relief from section 22(e) only to the extent that circumstances similar 
to those described in the application exist.
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    \7\ Rule 15c6-1 under the Exchange Act requires that most 
securities transactions be settled within three business days of the 
trade. Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will affect any obligations applicants 
may have under rule 15c6-1.
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    8. Applicants state that section 22(e) was designed to prevent 
unreasonable, undisclosed and unforeseen delays in the payment of 
redemption proceeds. Applicants assert that the requested relief will 
not lead to the problems that section 22(e) was designed to prevent. 
Applicants state that the SAI for each International Fund will disclose 
those local holidays (over the period of at

[[Page 57705]]

least one year following the date of the SAI), if any, that are 
expected to prevent the delivery of redemption proceeds in seven 
calendar days, and the maximum number of days needed to deliver the 
proceeds for the relevant International Fund.

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

    9. Sections 17(a)(1) and (2) of the Act generally prohibit an 
affiliated person of a registered investment company, or an affiliated 
person of such a person (``second tier affiliate''), from selling any 
security to or purchasing any security from the company. Section 
2(a)(3) of the Act defines ``affiliated person'' to include any person 
directly or indirectly owning, controlling, or holding with power to 
vote 5% or more of the outstanding voting securities of the other 
person and any person directly or indirectly controlling, controlled 
by, or under common control with, the other person. Section 2(a)(9) of 
the Act provides that a control relationship will be presumed where one 
person owns more than 25% of another person's voting securities. The 
Funds may be deemed to be controlled by the Advisor or an entity 
controlling, controlled by or under common control with the Advisor and 
hence affiliated persons of each other. In addition, the Funds may be 
deemed to be under common control with any other registered investment 
company (or series thereof) advised by the Advisor or an entity 
controlling, controlled by or under common control with the Advisor (an 
``Affiliated Fund'').
    10. Applicants request an exemption from section 17(a), under 
sections 6(c) and 17(b), to permit in-kind purchases and redemptions by 
persons that are affiliated persons or second tier affiliates of the 
Funds solely by virtue of one or more of the following: (1) holding 5% 
or more, or more than 25%, of the outstanding Shares of the respective 
Trust or one or more Funds; (2) an affiliation with a person with an 
ownership interest described in (1); or (3) holding 5% or more, or more 
than 25%, of the shares of one or more Affiliated Funds.
    11. Applicants contend that no useful purpose would be served by 
prohibiting these affiliated persons or second tier affiliates of a 
Fund from purchasing or redeeming Creation Units through ``in-kind'' 
transactions. The deposit procedure for in-kind purchases and the 
redemption procedure for in-kind redemptions will be the same for all 
purchases and redemptions. Deposit Securities and Fund Securities will 
be valued under the same objective standards applied to valuing 
Portfolio Securities. Therefore, applicants state that in-kind 
purchases and redemptions will afford no opportunity for the affiliated 
persons and second tier affiliates described above to effect a 
transaction detrimental to the other holders of Shares. Applicants also 
believe that in-kind purchases and redemptions will not result in 
abusive self-dealing or overreaching by these persons of the Fund.

Applicants' Conditions

    The applicants agree that any order of the Commission granting the 
requested relief will be subject to the following conditions:
    1. Each Prospectus will clearly disclose that, for purposes of the 
Act, Shares are issued by the Fund, which is a registered investment 
company and that the acquisition of Shares by investment companies and 
companies relying on sections 3(c)(1) or 3(c)(7) of the Act is subject 
to the restrictions of section 12(d)(1) of the Act, except as permitted 
by an exemptive order that permits registered investment companies to 
invest in a Fund beyond the limits in section 12(d)(1), subject to 
certain terms and conditions, including that the registered investment 
company enter into an agreement with the Fund regarding the terms of 
the investment.
    2. As long as the Funds operate in reliance on the requested order, 
the Shares of the Funds will be listed on a Stock Exchange.
    3. Neither the Trusts nor any Fund will be advertised or marketed 
as an open-end investment company or a mutual fund. Each Fund's 
Prospectus will prominently disclose that the Fund is an actively 
managed exchange-traded fund. Each Prospectus will prominently disclose 
that the Shares are not individually redeemable shares and will 
disclose that the owners of the Shares may acquire those Shares from 
the Fund and tender those Shares for redemption to the Fund in Creation 
Units only. Any advertising material that describes the purchase or 
sale of Creation Units or refers to redeemability will prominently 
disclose that the Shares are not individually redeemable and that 
owners of the Shares may acquire those Shares from the Fund and tender 
those Shares for redemption to the Fund in Creation Units only.
    4. The Web site for the Funds, which is and will be publicly 
accessible at no charge, will contain the following information, on a 
per Share basis, for each Fund: (a) the prior Business Day's NAV and 
the Bid/Ask Price, and a calculation of the premium or discount of the 
Bid/Ask Price against the NAV; and (b) data in chart format displaying 
the frequency distribution of discounts and premiums of the daily Bid/
Ask Price against the NAV, within appropriate ranges, for each of the 
four previous calendar quarters (or for the life of the Fund, if 
shorter).
    5. The Prospectus and annual report for each Fund will also 
include: (a) the information listed in condition 4(b), (i) in the case 
of the Prospectus, for the most recently completed year (and the most 
recently completed quarter or quarters, as applicable) and (ii) in the 
case of the annual report, for the immediately preceding five years (or 
for the life of the Fund, if shorter), and (b) calculated on a per 
Share basis for one-, five- and ten-year periods (or for the life of 
the Fund, if shorter), the cumulative total return and the average 
annual total return based on NAV and Bid/Ask Price.
    6. On each Business Day, before commencement of trading in Shares 
on the Stock Exchange, the Fund will disclose on its Web site the 
identities and quantities of the Portfolio Securities and other assets 
held by the Fund that will form the basis for the Fund's calculation of 
NAV at the end of the Business Day.
    7. The Advisor or Subadvisor, directly or indirectly, will not 
cause any Authorized Participant (or any investor on whose behalf an 
Authorized Participant may transact with the Fund) to acquire any 
Deposit Security for the Fund through a transaction in which the Fund 
could not engage directly.
    8. The requested order will expire on the effective date of any 
Commission rule under the Act that provides relief permitting the 
operation of actively managed exchange-traded funds.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-23366 Filed 10-2-08; 8:45 am]

BILLING CODE 8011-01-P