Document ID: SEC-2012-1996-0001
Agency: sec
Document Type: Notice
Title: Applications: Foreside Advisor Services, LLC, et al.
Posted Date: 2012-12-05T05:00Z

[Federal Register Volume 77, Number 234 (Wednesday, December 5, 2012)]
[Notices]
[Pages 72416-72423]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-29317]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 30284; 812-14023]

Foreside Advisor Services, LLC, et al.; Notice of Application

November 29, 2012.
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 (2) of the Act, and under section 12(d)(1)(J) for 
an exemption from sections 12(d)(1)(A) and (B) of the Act.

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Applicants: Foreside Advisor Services, LLC (``FAS''), Foreside ETF 
Trust (the ``Trust'') and Foreside Fund Services, LLC 
(``Distributor'').

Summary of Application: Applicants request an order that permits: (a) 
Certain

[[Page 72417]]

open-end management investment companies or series thereof 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 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; and (e) certain registered management investment companies and 
unit investment trusts outside of the same group of investment 
companies as the series to acquire Shares.

Filing Dates: The application was filed on April 2, 2012, and amended 
on November 29, 2012.

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. December 26, 2012, 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: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-1090. Applicants, 
Three Canal Plaza, Suite 100, Portland, ME 04101.

FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at 
(202) 551-6876 or Mary Kay Frech, 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 via the 
Commission's Web site by searching for the file number, or an applicant 
using the Company name box, at http://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicants' Representations

    1. The Trust, a Delaware statutory trust, will be registered under 
the Act as an open-end management investment company. Applicants 
request that the order apply to the initial series of the Trust, The 
ETF 50, described in Exhibit A to the application (``Initial Fund''), 
and future series of the Trust and future open-end management 
investment companies and series thereof advised by FAS or an entity 
controlling, controlled by or under common control with FAS (the 
``Adviser'') that comply with the terms and conditions of the 
application (each such company or series, a ``Future Fund,'' and 
collectively with the Initial Fund, the ``Funds'').\1\ The Initial Fund 
and the Future Funds will each track the performance of a specified 
equity or fixed income securities index (``Underlying Index''). Future 
Funds may be based on Underlying Indexes that include only foreign 
equity or fixed income securities (``International Funds''). Other 
Future Funds may be based on Underlying Indexes that include foreign 
and domestic equity or fixed income securities (``Global Funds'').
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    \1\ All existing entities that intend to rely on the requested 
order have been named as applicants. Any other existing or future 
entity that subsequently relies on the order will comply with the 
terms and conditions of the application. An Acquiring Fund (as 
defined below) may rely on the order only to invest in a Fund and 
not in any other registered investment company.
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    2. FAS or another Adviser will serve as the investment adviser to 
the Funds. FAS and each other Adviser will be registered as an 
investment adviser under the Investment Advisers Act of 1940 
(``Advisers Act''). The Adviser may enter into subadvisory agreements 
with investment advisers to act as subadvisers with respect to any Fund 
(each, a ``Subadviser''). Any Subadviser to a Fund will be registered 
under the Advisers Act. The Distributor, a broker-dealer registered 
under the Securities Exchange Act of 1934 (``Broker'') and an affiliate 
of the Adviser, will act as the distributor and principal underwriter 
of Creation Units of Shares. In the future, another Broker may act as 
distributor and principal underwriter. No Distributor will be 
affiliated with any Exchange (as defined below) or any Index Provider 
(as defined below).
    3. Each Fund will consist of a portfolio of securities and other 
instruments (``Portfolio Instruments'') selected to correspond 
generally to the price and yield performance of an Underlying Index. No 
entity that creates, compiles, sponsors or maintains an Underlying 
Index (``Index Provider'') is or will be an affiliated person, as 
defined in section 2(a)(3) of the Act, or an affiliated person of an 
affiliated person of the Trust or a Fund, a promoter, the Adviser, a 
Subadviser, or a Distributor.
    4. The investment objective of each Fund will be to provide 
investment returns that closely correspond, before fees and expenses, 
to the price and yield performance of its Underlying Index.\2\ Each 
Fund will sell and redeem Creation Units on a ``Business Day,'' which 
is defined to include any day that the Trust is open for business as 
required by section 22(e) of the Act. The Adviser and/or Subadviser may 
utilize a replication or a representative sampling strategy to track 
its Underlying Index. A Fund using a replication strategy will invest 
in substantially all of the Component Securities in its Underlying 
Index in the same approximate proportions as in the Underlying Index. A 
Fund using a representative sampling strategy generally will hold a 
significant number, but not necessarily all, of the Component 
Securities of its Underlying Index. Applicants state that if 
representative sampling is used, a Fund will not be expected to track 
its Underlying Index with the same degree of accuracy as a Fund 
employing the replication strategy. Applicants expect that each Fund 
will have a tracking error relative to the performance of its 
Underlying Index of no more than five percent.
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    \2\ Applicants represent that at least 80% of each Fund's total 
assets will be invested in the constituent securities of its 
respective Underlying Index (``Component Securities''), TBA 
Transactions (as defined below) representing Component Securities, 
and Depositary Receipts (as defined below) representing Component 
Securities. Each Fund also may invest the remaining 20% of its total 
assets in a broad variety of other instruments, including securities 
not included in its Underlying Index, which the Adviser or 
Subadviser believes will assist the Fund in tracking the performance 
of its Underlying Index.
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    5. Applicants anticipate that the price of a Share will range from 
$15 to $25, and that Creation Units will consist of at least 25,000 
Shares. All orders to purchase and redeem Creation Units must be placed 
with the Distributor by or through an ``Authorized Participant,'' which 
is either: (a) A ``participating party,'' i.e., a Broker or other 
participant in the Continuous Net Settlement System of the National 
Securities Clearing Corporation (``NSCC''), a clearing agency 
registered with the Commission and affiliated with the Depository Trust 
Company (``DTC''), or (b) a participant in the DTC (``DTC 
Participant''), which in any case, has executed an agreement with the 
Distributor. The Distributor will transmit all purchase orders to the 
relevant Fund.
    6. The Shares will be purchased and redeemed in Creation Units and

[[Page 72418]]

generally on an in-kind basis. Except where the purchase or redemption 
will include cash under the limited circumstances specified below, 
purchasers will be required to purchase Creation Units by making an in-
kind deposit of specified instruments (``Deposit Instruments''), and 
shareholders redeeming their Shares will receive an in-kind transfer of 
specified instruments (``Redemption Instruments'').\3\ On any given 
Business Day the names and quantities of the instruments that 
constitute the Deposit Instruments and the names and quantities of the 
instruments that constitute the Redemption Instruments will be 
identical, unless the Fund is Rebalancing (as defined below). In 
addition, the Deposit Instruments and the Redemption Instruments will 
each correspond pro rata to the positions in a Fund's portfolio 
(including cash positions),\4\ except: (a) In the case of bonds, for 
minor differences when it is impossible to break up bonds beyond 
certain minimum sizes needed for transfer and settlement; (b) for minor 
differences when rounding is necessary to eliminate fractional shares 
or lots that are not tradeable round lots; \5\ (c) ``to be announced'' 
transactions (``TBA Transactions''),\6\ derivatives and other positions 
that cannot be transferred in kind \7\ will be excluded from the 
Deposit Instruments and the Redemption Instruments; \8\ (d) to the 
extent the Fund determines, on a given Business Day, to use a 
representative sampling of the Fund's portfolio; \9\ or (e) for 
temporary periods, to effect changes in the Fund's portfolio as a 
result of the rebalancing of its Underlying Index (any such change, a 
``Rebalancing''). If there is a difference between the net asset value 
(``NAV'') attributable to a Creation Unit and the aggregate market 
value of the Deposit Instruments or Redemption Instruments exchanged 
for the Creation Unit, the party conveying instruments with the lower 
value will also pay to the other an amount in cash equal to that 
difference (the ``Cash Amount'').
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    \3\ The Funds must comply with the federal securities laws in 
accepting Deposit Instruments and satisfying redemptions with 
Redemption Instruments, including that the Deposit Instruments and 
Redemption Instruments are sold in transactions that would be exempt 
from registration under the Securities Act of 1933 (``Securities 
Act''). In accepting Deposit Instruments and satisfying redemptions 
with Redemption Instruments that are restricted securities eligible 
for resale pursuant to Rule 144A under the Securities Act, the Funds 
will comply with the conditions of Rule 144A.
    \4\ The portfolio used for this purpose will be the same 
portfolio used to calculate the Fund's NAV for that Business Day.
    \5\ A tradeable round lot for a security will be the standard 
unit of trading in that particular type of security in its primary 
market.
    \6\ A TBA Transaction is a method of trading mortgage-backed 
securities. In a TBA Transaction, the buyer and seller agree on 
general trade parameters such as agency, settlement date, par amount 
and price. The actual pools delivered generally are determined two 
days prior to the settlement date.
    \7\ This includes instruments that can be transferred in kind 
only with the consent of the original counterparty to the extent the 
Fund does not intend to seek such consents.
    \8\ Because these instruments will be excluded from the Deposit 
Instruments and the Redemption Instruments, their value will be 
reflected in the determination of the Cash Amount (defined below).
    \9\ A Fund may only use sampling for this purpose if the sample: 
(i) Is designed to generate performance that is highly correlated to 
the performance of the Fund's portfolio; (ii) consists entirely of 
instruments that are already included in the Fund's portfolio; and 
(iii) is the same for all Authorized Participants on a given 
Business Day.
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    7. Purchases and redemptions of Creation Units may be made in whole 
or in part on a cash basis, rather than in kind, solely under the 
following circumstances: (a) To the extent there is a Cash Amount, as 
described above; (b) if, on a given Business Day, a Fund announces 
before the open of trading that all purchases, all redemptions or all 
purchases and redemptions on that day will be made entirely in cash; 
(c) if, upon receiving a purchase or redemption order from an 
Authorized Participant, a Fund determines to require the purchase or 
redemption, as applicable, to be made entirely in cash; \10\ (d) if, on 
a given Business Day, a Fund requires all Authorized Participants 
purchasing or redeeming Shares on that day to deposit or receive (as 
applicable) cash in lieu of some or all of the Deposit Instruments or 
Redemption Instruments, respectively, solely because: (i) Such 
instruments are not eligible for transfer through either the NSCC or 
DTC; or (ii) in the case of Global Funds and International Funds, such 
instruments are not eligible for trading due to local trading 
restrictions, local restrictions on securities transfers or other 
similar circumstances; or (e) if a Fund permits an Authorized 
Participant to deposit or receive (as applicable) cash in lieu of some 
or all of the Deposit Instruments or Redemption Instruments, 
respectively, solely because: (i) Such instruments are, in the case of 
the purchase of a Creation Unit, not available in sufficient quantity; 
(ii) such instruments are not eligible for trading by an Authorized 
Participant or the investor on whose behalf the Authorized Participant 
is acting; or (iii) a holder of Shares of a Global Fund or 
International Fund would be subject to unfavorable income tax treatment 
if the holder receives redemption proceeds in kind.\11\
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    \10\ In determining whether a particular Fund will sell or 
redeem Creation Units entirely on a cash or in kind basis (whether 
for a given day or a given order), the key consideration will be the 
benefit that would accrue to the Fund and its investors. For 
instance, in bond transactions, the Adviser may be able to obtain 
better execution than Share purchasers because of the Adviser's 
size, experience and potentially stronger relationships in the fixed 
income markets. Purchases of Creation Units either on an all cash 
basis or in kind are expected to be neutral to the Funds from a tax 
perspective. In contrast, cash redemptions typically require selling 
portfolio holdings, which may result in adverse tax consequences for 
the remaining Fund shareholders that would not occur with an in kind 
redemption. As a result, tax considerations may warrant in kind 
redemptions.
    \11\ A ``custom order'' is any purchase or redemption of Shares 
made in whole or in part on a cash basis in reliance on clause 
(e)(i) or (e)(ii).
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    8. Each Business Day, before the open of trading on a national 
securities exchange, as defined in section 2(a)(26) of the Act 
(``Exchange'') on which Shares are listed (``Primary Listing 
Exchange''), each Fund will cause to be published through the NSCC the 
names and quantities of the instruments comprising the Deposit 
Instruments and the Redemption Instruments, as well as the estimated 
Cash Amount (if any), for that day. The list of Deposit Instruments and 
Redemption Instruments will apply until a new list is announced on the 
following Business Day, and there will be no intra-day changes to the 
list except to correct errors in the published list. The intra-day 
indicative value of Shares, which will represent on a per Share basis 
the sum of the current value of the Portfolio Instruments, will be 
published on the Consolidated Tape every 15 seconds throughout the 
regular trading hours of the Primary Listing Exchange.
    9. Each Fund may recoup settlement costs charged by NSCC and DTC by 
imposing a transaction fee on investors purchasing or redeeming 
Creation Units (``Transaction Fee''). The Transaction Fee will be borne 
only by purchasers and redeemers of Creation Units and will be limited 
to amounts that have been determined appropriate by the Adviser to 
defray the transaction expenses that will be incurred by a Fund when an 
investor purchases or redeems Creation Units.\12\ All orders to 
purchase Creation Units will be placed with the Distributor by or 
through an Authorized Participant, and the Distributor will transmit 
all purchase

[[Page 72419]]

orders to the relevant Fund. The Distributor will furnish a prospectus 
and a confirmation to Authorized Participants placing purchase orders 
and will maintain a record of the instructions given to a Fund to 
implement delivery of its Shares.
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    \12\ Where a Fund permits an in-kind purchaser to substitute 
cash-in-lieu of depositing one or more Deposit Instruments, the 
purchaser may be assessed a higher Transaction Fee to cover the cost 
of purchasing those particular Deposit Instruments. In all cases, 
the Transaction Fee will be limited in accordance with the 
requirements of the Commission applicable to open-end management 
investment companies offering redeemable securities.
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    10. Shares of each Fund will be listed on an Exchange. The 
principal secondary market for the Shares will be the Primary Listing 
Exchange. It is expected that one or more member firms of the Primary 
Listing Exchange will be designated to act as a specialist or market 
maker and maintain a market for the Shares trading on the Primary 
Listing Exchange. The price of Shares will be based on a current bid/
offer in the secondary market. Transactions involving the purchases or 
sales of Shares on an Exchange will be subject to customary brokerage 
fees and charges.
    11. Applicants expect that purchasers of Creation Units will 
include institutional investors and arbitrageurs. Authorized 
Participants also may purchase or redeem Creation Units in connection 
with their market making activities. Applicants expect that secondary 
market purchasers of Shares will include both institutional and retail 
investors.\13\ The price at which Shares trade will be disciplined by 
arbitrage opportunities created by the ability to purchase or redeem 
Creation Units at NAV, which applicants believe should ensure that 
Shares similarly do not trade at a material premium or discount in 
relation to NAV.
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    \13\ Shares will be registered in book-entry form only. DTC or 
its nominee will be the record or registered owner of all 
outstanding Shares. Beneficial ownership of Shares will be shown on 
the records of DTC or DTC Participants.
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    12. 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 
must accumulate enough Shares to constitute a Creation Unit. Redemption 
requests must be placed by or through an Authorized Participant.
    13. Neither the Trust nor any Fund will be marketed or otherwise 
held out as a traditional open-end investment company or a ``mutual 
fund''. Instead, each Fund will be marketed as an ``exchange-traded 
fund.'' All marketing materials that describe the features or method of 
obtaining, buying or selling Creation Units, or Shares being listed and 
traded on an Exchange, or refer to redeemability, will prominently 
disclose that Shares are not individually redeemable shares and will 
disclose that the owners of Shares may acquire those Shares from the 
Fund or tender such Shares for redemption to the Fund only in Creation 
Units. Copies of annual and semi-annual shareholder reports will also 
be provided to the DTC Participants for distribution to beneficial 
owners of Shares.

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, under sections 6(c) and 17(b) 
of the Act granting an exemption from sections 17(a)(1) and (2) of the 
Act, and under section 12(d)(1)(J) for an exemption from sections 
12(d)(1)(A) and (B) 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. 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.

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 a 
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 the Trust to issue Shares 
in Creation Units only. Applicants state that Creation Units will 
always be redeemable in accordance with the provisions of the Act. 
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 
materially from their NAV per Share.

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 that is currently being offered to 
the public by or through an 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 the purchase and sale of Shares of a Fund will not be 
accomplished at an offering price described in the Fund's prospectus, 
as required by section 22(d), nor will sales and repurchases be made at 
a price based on the current NAV next computed after receipt of an 
order, as required by rule 22c-1. Applicants request an exemption under 
section 6(c) from these provisions.
    5. Applicants believe 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 intended 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, and (c) ensure an orderly distribution system of shares 
by contract dealers by eliminating price competition from non-contract 
dealers who could offer investors shares at less than the published 
sales price and who could pay investors a little 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 secondary market transactions in Shares 
would not cause dilution for owners of such Shares, because such 
transactions do not directly involve Fund assets. Similarly, secondary 
market trading in Shares should not create unjust discrimination or 
preferential treatment among buyers

[[Page 72420]]

to the extent different prices exist during a given trading day, or 
from day to day. Applicants state that such variances occur as a result 
of third-party market forces, such as supply and demand, but do not 
occur as a result of unjust or discriminatory manipulation. Finally, 
applicants contend that the proposed distribution system will be 
orderly because arbitrage activity will ensure that the Shares do not 
trade at a material discount or premium in relation to their NAV.

Section 22(e) of the Act

    7. 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 the settlement of redemptions of Creation Units of the 
Global and International Funds 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 Funds invest. Applicants have 
been advised that, under certain circumstances, the delivery cycles for 
transferring Portfolio Instruments to redeeming investors, coupled with 
local market holiday schedules, will require a delivery process of up 
to fourteen (14) calendar days. Applicants request relief under section 
6(c) of the Act from section 22(e) to allow Global and International 
Funds to pay redemption proceeds up to 14 calendar days after the 
tender of the Creation Units. With respect to Future Funds based on a 
global or an international Underlying Index, applicants seek the same 
relief from section 22(e) only to the extent that similar circumstances 
exist. Except as disclosed in the relevant Global Fund's or 
International Fund's SAI, applicants expect that the Global Funds and 
International Funds will be able to deliver redemption proceeds within 
seven days.\14\
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    \14\ Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will 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.
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    8. Applicants submit that Congress adopted section 22(e) to prevent 
unreasonable, undisclosed and unforeseen delays in the actual payment 
of redemption proceeds. Applicants state that allowing redemption 
payments for Creation Units of a Fund to be made within 14 calendar 
days would not be inconsistent with the spirit and intent of section 
22(e). Applicants state that the SAI will disclose those local holidays 
(over the period of at least one year following the date thereof), if 
any, that are expected to prevent the delivery of redemption proceeds 
in seven calendar days and the maximum number of days (up to 14 
calendar days) needed to deliver the proceeds for each affected Global 
Fund and International Fund.
    9. Applicants are not seeking relief from section 22(e) for Global 
or International Funds that do not effect redemptions of Creation Units 
in-kind.

Section 12(d)(1) of the Act

    10. 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 the investment company's shares 
to another investment company if the sale would cause the acquiring 
company to own more than 3% of the acquired company's voting stock, or 
if the sale would cause more than 10% of the acquired company's voting 
stock to be owned by investment companies generally.
    11. Applicants request an exemption to permit management investment 
companies (``Acquiring Management Companies'') and unit investment 
trusts (``Acquiring Trusts'') registered under the Act that are not 
advised or sponsored by the Adviser and are not part of the same 
``group of investment companies,'' as defined in section 
12(d)(1)(G)(ii) of the Act, as the Funds (collectively, ``Acquiring 
Funds'') to acquire Shares beyond the limits of section 12(d)(1)(A). In 
addition, applicants seek relief to permit each Fund, the Distributor 
and/or a Broker to sell Shares to Acquiring Funds in excess of the 
limits of section 12(d)(1)(B).
    12. Each investment adviser to an Acquiring Management Company 
within the meaning of section 2(a)(20)(A) of the Act (``Acquiring Fund 
Adviser'') will be registered as an investment adviser under the 
Advisers Act. An ``Acquiring Fund Subadviser'' is any investment 
advisor within the meaning of section 2(a)(20)(B) of the Act to an 
Acquiring Management Company. Each Acquiring Trust's sponsor is the 
``Sponsor.''
    13. Applicants submit that the proposed conditions to the requested 
relief adequately address the concerns underlying the limits in section 
12(d)(1)(A) and (B), which include concerns about undue influence by a 
fund of funds over underlying funds, excessive layering of fees and 
overly complex fund structures. Applicants believe that the requested 
exemption is consistent with the public interest and the protection of 
investors.
    14. Applicants believe that neither an Acquiring Fund nor an 
Acquiring Fund Affiliate would be able to exert undue influence over a 
Fund.\15\ Condition 5 limits the ability of an Acquiring Fund's 
Advisory Group \16\ or an Acquiring Fund's Subadvisory Group \17\ to 
control a Fund within the meaning of section 2(a)(9) of the Act. 
Applicants propose other conditions to limit the potential for undue 
influence over the Funds, including that no Acquiring Fund or Acquiring 
Fund Affiliate will cause a 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'').\18\
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    \15\ An ``Acquiring Fund Affiliate'' is defined as the Acquiring 
Fund Adviser, Acquiring Fund Subadviser(s), any Sponsor, promoter or 
principal underwriter of an Acquiring Fund and any person 
controlling, controlled by or under common control with any of these 
entities. A ``Fund Affiliate'' is defined as the Adviser, 
Subadviser(s), promoter or principal underwriter of a Fund and any 
person controlling, controlled by or under common control with any 
of these entities.
    \16\ An ``Acquiring Fund's Advisory Group'' is defined as the 
Acquiring Fund Adviser, 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 section 3(c)(l) or 3(c)(7) of the Act, 
that is advised or sponsored by the Acquiring Fund Adviser, Sponsor 
or any person controlling, controlled by or under common control 
with the Acquiring Fund Adviser or Sponsor.
    \17\ An ``Acquiring Fund's Subadvisory Group'' is defined as any 
Acquiring Fund Subadviser, any person controlling, controlled by, or 
under common control with the Acquiring Fund Subadviser, and any 
investment company or issuer that would be an investment company but 
for section 3(c)(l) or 3(c)(7) of the Act (or portion of such 
investment company or issuer) advised or sponsored by the Acquiring 
Fund Subadviser or any person controlling, controlled by or under 
common control with the Acquiring Fund Subadviser.
    \18\ An ``Underwriting Affiliate'' is defined as a principal 
underwriter in any underwriting or selling syndicate that is an 
officer, director, member of an advisory board, Acquiring Fund 
Adviser, Acquiring Fund Subadviser, 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 
Subadviser, Sponsor, or employee is an affiliated person, except any 
person whose relationship to the Fund is covered by section 10(f) of 
the Act is not an Underwriting Affiliate.

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[[Page 72421]]

    15. Applicants do not believe that the proposed arrangement will 
involve excessive layering of fees. With respect to Acquiring 
Management Companies, applicants note that the board of directors or 
trustees, including a majority of the independent directors or trustees 
within the meaning of section 2(a)(19) of the Act, of any Acquiring 
Fund, will find that any fees charged under the Acquiring Management 
Company's advisory contract(s) are based on services provided that will 
be in addition to, rather than duplicative of, services provided under 
the advisory contract(s) of any Fund in which the Acquiring Management 
Company may invest. Under condition 13, the Acquiring Fund Adviser, or 
trustee of any Acquiring Trust (``Trustee''), or Sponsor, will waive 
fees otherwise payable to it by the Acquiring Fund in an amount at 
least equal to any compensation (including fees received pursuant to 
any plan adopted under rule 12b-1 under the Act) received from a Fund 
by the Acquiring Fund Adviser, Trustee or Sponsor, or an affiliated 
person of the Acquiring Fund Adviser, Trustee or Sponsor, in connection 
with the investment by the Acquiring Fund in the Fund. Applicants also 
state that any sales charges 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.\19\
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    \19\ Any references to NASD Conduct Rule 2830 include any 
successor or replacement rule that may be adopted by the Financial 
Industry Regulatory Authority.
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    16. Applicants submit that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that no Fund will 
acquire securities of any investment company or company relying on 
section 3(c)(l) or 3(c)(7) of the Act in excess of the limits contained 
in section 12(d)(l)(A) of the Act, except to the extent permitted by 
exemptive relief from the Commission permitting the Fund to purchase 
shares of other investment companies for short-term cash management 
purposes. To ensure that the Acquiring Funds understand and will comply 
with the terms and conditions of the requested order, any Acquiring 
Fund will be required to enter into a written agreement with the Fund 
(the ``Acquiring Fund Agreement''). The Acquiring Fund Agreement will 
include an acknowledgment from the Acquiring Fund that it may rely on 
the order only to invest in a Fund and not in any other investment 
company.
    17. Applicants note that a Fund may choose to reject any direct 
purchase of Creation Units by an Acquiring Fund. A Fund would also 
retain its right to reject any initial investment by an Acquiring Fund 
in excess of the limits in section 12(d)(l)(A) of the Act by declining 
to execute an Acquiring Fund Agreement with an Acquiring Fund.

Section 17 of the Act

    18. 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'' of another 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 a company's voting securities. The Funds may be deemed to 
be controlled by the Adviser 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 Adviser (an ``Affiliated Fund''). Applicants believe 
there exists a possibility that, with respect to one or more Funds and 
the Trust, a large institutional investor could own more than 5% of a 
Fund or the Trust, or in excess of 25% of the outstanding Shares of a 
Fund or the Trust, making that investor a first-tier affiliate of each 
Fund under section 2(a)(3)(A) or section 2(a)(3)(C) of the Act. In 
addition, a large institutional investor could own 5% or more of, or in 
excess of 25% of the outstanding shares of one or more Affiliated 
Funds, making that investor a second-tier affiliate of a Fund.
    19. 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 in order to 
permit persons that are affiliated persons or second-tier affiliates of 
the Funds solely by virtue of (a) holding 5% or more, or in excess of 
25% of the outstanding Shares of one or more Funds; (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, to effectuate purchases and redemptions in-kind. 
Applicants also request an exemption in order to permit a Fund to sell 
Shares to, and purchase Shares from, and to engage in any accompanying 
in-kind transactions with, an Acquiring Fund of which the Fund is an 
affiliated person or a second-tier affiliate.\20\
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    \20\ To the extent that purchases and sales of Shares of a Fund 
occur in the secondary market and not through principal transactions 
directly between an Acquiring Fund and a Fund, relief from section 
17(a) would not be necessary. However, the requested relief would 
apply to direct sales of Shares in Creation Units by a Fund to an 
Acquiring Fund and redemptions of those Shares. Applicants are not 
seeking relief from section 17(a) for, and the requested relief will 
not apply to, transactions where a Fund could be deemed an 
affiliated person or a second-tier affiliate of an Acquiring Fund 
because the Adviser provides investment advisory services to that 
Acquiring Fund.
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    20. 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 a Fund in Creation Units. Deposit 
Instruments and Redemption Instruments will be valued in the same 
manner as those Portfolio Instruments currently held by the relevant 
Funds, and the valuation of the Deposit Instruments and Redemption 
Instruments will be made in the same manner and on the same terms for 
all, regardless of the identity of the purchaser or redeemer. Deposit 
Instruments, Redemption Instruments, and the balancing Cash Amounts, 
except for any permitted cash-in-lieu amounts consistent with the terms 
of the application, will be the same regardless of the identity of the 
purchaser or redeemer. Therefore, applicants state that in-kind 
purchases and redemptions create no opportunity for affiliated persons 
or applicants to effect a transaction detrimental to the other holders 
of Shares of that Fund. Applicants also believe that in-kind purchases 
and redemptions will not result in abusive self-dealing or overreaching 
of the Fund. Applicants believe that an exemption is appropriate under 
sections 17(b) and 6(c) because the proposed arrangement meets the 
standards for relief in those sections. Applicants note that any 
consideration paid for the purchase or redemption of Shares directly 
from a Fund will be based on the NAV of the Fund in accordance with 
policies and procedures set forth in the Fund's registration 
statement.\21\ Applicants also

[[Page 72422]]

state that the proposed transactions are consistent with the general 
purposes of the Act and appropriate in the public interest.
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    \21\ 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 or (b) 
an affiliated person of a Fund, or a second-tier affiliate, for the 
sale by the Fund of its Shares to an Acquiring Fund, may be 
prohibited by section 17(e) of the Act. The Acquiring Fund Agreement 
also will include this acknowledgment.
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Applicants' Conditions

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

ETF Relief

    1. As long as a Fund operates in reliance on the requested relief 
to permit ETF operations, its Shares will be listed on an Exchange.
    2. Neither the Trust nor any Fund will be advertised or marketed as 
an open-end investment company or a mutual fund. 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 a Fund and tender those Shares for redemption to a Fund in 
Creation Units only.
    3. The Web site for the Funds, which is and will be publicly 
accessible at no charge, will contain, on a per Share basis for each 
Fund, the prior Business Day's NAV and the market closing price or the 
midpoint of the bid/ask spread at the time of the calculation of such 
NAV (``Bid/Ask Price''), and a calculation of the premium or discount 
of the market closing price or Bid/Ask Price against such NAV.
    4. 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 index-based exchange-traded funds.

12(d)(1) Relief

    5. The members of the Acquiring Fund's Advisory Group will not 
control (individually or in the aggregate) a 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) a 
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 a Fund, 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 a Fund, it will vote its Shares 
in the same proportion as the vote of all other holders of the Shares. 
This condition does not apply to an Acquiring Fund Subadvisory Group 
with respect to a 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.
    6. No Acquiring Fund or Acquiring Fund Affiliate will cause any 
existing or potential investment by the Acquiring Fund in a Fund to 
influence the terms of any services or transactions between the 
Acquiring Fund or an Acquiring Fund Affiliate and the Fund or a Fund 
Affiliate.
    7. 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 a Fund or a Fund 
Affiliate in connection with any services or transactions.
    8. Once an investment by an Acquiring Fund in Shares exceeds the 
limits in section 12(d)(1)(A)(i) of the Act, the board of trustees of 
the Trust (``Board''), including a majority of the disinterested 
directors/trustees, will determine that any consideration paid by the 
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 Fund; (ii) is within the range of consideration that 
the 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 with respect to any services or transactions 
between a Fund and its investment adviser(s), or any person 
controlling, controlled by or under common control with such investment 
adviser(s).
    9. No Acquiring Fund or Acquiring Fund Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to a Fund) 
will cause the Fund to purchase a security in any Affiliated 
Underwriting.
    10. The Board, including a majority of the independent trustees, 
will adopt procedures reasonably designed to monitor any purchases of 
securities by the Fund in an Affiliated Underwriting, once an 
investment by an Acquiring Fund in the securities of the Fund 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 
determine whether the purchases were influenced by the investment by 
the Acquiring Fund in the Fund. The Board will consider, among other 
things: (i) Whether the purchases were consistent with the investment 
objectives and policies of the 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 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 Fund.
    11. Each 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 Fund 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.
    12. Before investing in Shares in excess of the limits in section 
12(d)(1)(A), each Acquiring Fund and the Fund will execute an Acquiring 
Fund Agreement stating, without limitation, that their boards of 
directors or trustees and their investment adviser(s), or their 
Sponsors or Trustee, as applicable, understand the terms and

[[Page 72423]]

conditions of the order, and agree to fulfill their responsibilities 
under the order. At the time of its investment in Shares in excess of 
the limit in section 12(d)(1)(A)(i), an Acquiring Fund will notify the 
Fund of the investment. At such time, the Acquiring Fund will also 
transmit to the Fund a list of the names of each Acquiring Fund 
Affiliate and Underwriting Affiliate. The Acquiring Fund will notify 
the Fund of any changes to the list of the names as soon as reasonably 
practicable after a change occurs. The Fund 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.
    13. The Acquiring Fund Adviser, 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 (including fees received 
pursuant to any plan adopted under rule 12b-1 under the Act) received 
from the Fund by the Acquiring Fund Adviser, Trustee or Sponsor, or an 
affiliated person of the Acquiring Fund Adviser, Trustee or Sponsor, 
other than any advisory fees paid to the Acquiring Fund Adviser, 
Trustee, or Sponsor, or its affiliated person by the Fund, in 
connection with the investment by the Acquiring Fund in the Fund. 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 a 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 
Fund, in connection with any investment by the Acquiring Management 
Company in the Fund 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.
    14. 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.
    15. No Fund will acquire securities of any other 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 permitted by exemptive relief from the Commission permitting 
the Fund to purchase shares of other investment companies for short-
term cash management purposes.
    16. Before approving any advisory contract under section 15 of the 
Act, the board of directors or trustees 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 
contract(s) of any 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.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-29317 Filed 12-4-12; 8:45 am]
BILLING CODE 8011-01-P