Document ID: SEC-2012-1602-0001
Agency: sec
Document Type: Notice
Title: Applications: Northern Trust Investments, Inc., et al.
Posted Date: 2012-09-28T04:00Z

[Federal Register Volume 77, Number 189 (Friday, September 28, 2012)]
[Notices]
[Pages 59683-59686]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-23858]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 30211; 812-13968]

Northern Trust Investments, Inc., et al.; Notice of Application

September 24, 2012.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application to amend a prior order under section 
6(c) of the Investment Company Act of 1940 (``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 
for an exemption from sections 17(a)(1) and (a)(2) of the Act, and 
under section 12(d)(1)(J) of the Act for an exemption from sections 
12(d)(1)(A) and 12(d)(1)(B) of the Act.

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SUMMARY OF APPLICATION: Applicants seek to amend the Prior Order \1\ to 
offer certain exchange-traded funds based on equity and/or fixed income 
securities indexes for which Northern Trust Investments, Inc. 
(``Adviser'') or an Affiliated Person (as defined below) is an index 
provider (each a ``Self Indexing Fund'').
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    \1\ Northern Trust Investments, Inc., et al., Investment Company 
Act Release Nos. 29752 (Aug. 10, 2011) (notice) and 29782 (Sept. 6, 
2011) (order).

APPLICANTS: Adviser, FlexShares Trust (``Trust''), and Foreside Fund 
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Services, LLC (``Foreside'').

Filing Dates:  The application was filed on October 13, 2011, and 
amended on April 16, 2012 and August 16, 2012. Applicants have agreed 
to file an amendment during the notice period, the substance of which 
is reflected in this notice.

HEARING OR NOTIFICATION OF HEARING: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may

[[Page 59684]]

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 
22, 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 may request 
notification of a hearing 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. The Trust and 
the Adviser, 50 S. LaSalle Street, Chicago, IL 60603; Foreside, Two 
Portland Square, First Floor, Portland, ME 04101.

FOR FURTHER INFORMATION CONTACT: Jean E. Minarick, Senior Counsel, at 
(202) 551-6811, or Daniele Marchesani, 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 is registered as an open-end management investment 
company under the Act and organized as a Maryland statutory trust. 
Northern Trust Investments, Inc., an investment adviser registered 
under the Investment Advisers Act of 1940 (``Advisers Act''), serves as 
investment adviser to the Trust. Any Adviser (as defined below) will be 
registered as an adviser under the Advisers Act. The Adviser may retain 
sub-advisers (``Sub-Advisers'') to manage the assets of one or more 
Funds. Any Sub-Adviser will be registered or not subject to 
registration as an adviser under the Advisers Act. The Trust will enter 
into a distribution agreement with one or more distributors (each, a 
``Distributor''). Foreside is, and any other Distributor will be, a 
broker-dealer registered under the Securities Exchange Act of 1934 
(``Exchange Act'').
    2. The applicants are currently permitted to offer open-end 
management investment companies that are exchange traded funds (each, a 
``Fund'') tracking the performance of equity and fixed income indexes 
developed by third parties that are not ``affiliated persons'' (as such 
term is defined in section 2(a)(3) of the Act), or affiliated persons 
of affiliated persons, of the Trust, the Adviser, any Sub-Adviser, the 
Distributor or a promoter of a Fund. Applicants seek an order amending 
the Prior Order (``Amended Order'') that would allow them to offer 
Funds based on equity and/or fixed income securities indexes for which 
the Adviser or an affiliated person, or an affiliated person of an 
affiliated person, of the Trust, the Adviser, the Distributor, 
promoter, or any Sub-Adviser to the Fund (each other than the Adviser, 
an ``Affiliated Person'') is an index provider (as defined below) 
(each, a ``Self Indexing Fund''). Applicants request that the order 
apply to any Self Indexing Funds that are advised by the Adviser or an 
entity controlling, controlled by or under common control with the 
Adviser (with the Adviser, each an ``Adviser'') and operate pursuant to 
the terms and conditions of the Prior Order, as amended.\2\ The 
applicants also seek to amend the Prior Order to revise the terms and 
conditions concerning the purchase and redemption of shares of the 
Funds. Applicants believe that the requested relief continues to meet 
the necessary exemptive standards.
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    \2\ All entities that currently intend to rely on the Amended 
Order are named as applicants. Any other entity that relies on the 
Amended Order in the future will comply with the terms and 
conditions of the application. For purposes of this notice, the term 
``Trust'' also includes any other open-end series management 
investment company registered under the Act and advised by the 
Adviser that complies with the terms and conditions of the 
application.
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    3. Each underlying index for a Self Indexing Fund (``Underlying 
Index'') will be a rules based index comprised of equity and/or fixed 
income securities (including depositary receipts). The Adviser or an 
Affiliated Person, in its capacity as the index provider of an 
Underlying Index (the ``Index Provider''), will create and/or own a 
proprietary, rules based methodology (``Rules-Based Process'') to 
create indexes for use by the Self Indexing Funds and other 
investors.\3\ The Adviser, if it is the Index Provider, will be the 
owner of the Underlying Indexes and all related intellectual property 
related thereto, or the Adviser will enter into a license agreement 
with any other Affiliated Person who is an Index Provider for the use 
of the Underlying Indexes and related intellectual property at no cost 
to the Trust and the Self Indexing Funds.
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    \3\ The Underlying Indexes may be made available to registered 
investment companies, as well as separately managed accounts of 
institutional investors and privately offered funds that are not 
deemed to be ``investment companies'' in reliance on section 3(c)(1) 
or 3(c)(7) of the Act and other pooled investment vehicles for which 
the Adviser acts as adviser or subadviser (``Affiliated Accounts'') 
as well as other such registered investment companies, separately 
managed accounts, privately offered funds and other pooled 
investment vehicles for which it does not act either as adviser or 
subadviser (``Unaffiliated Accounts''). The Affiliated Accounts and 
the Unaffiliated Accounts, like the Self Indexing Funds, would seek 
to track the performance of one or more Underlying Index(es) by 
investing in the constituents of such Underlying Index(es) or a 
representative sample of such constituents of the Underlying Index. 
To the extent prohibited by Section 17(a) of the Act and consistent 
with the relief requested from section 17(a), the Affiliated 
Accounts will not engage in transactions in aggregations of Shares 
(``Creation Units'') with a Self Indexing Fund.
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    4. Applicants contend that any potential conflicts of interest 
arising from the fact that the Index Provider will be the Adviser or an 
Affiliated Person will not have any impact on the operation of the Self 
Indexing Funds because the Underlying Indexes will maintain 
transparency, the Self Indexing Funds' Deposit Securities and Fund 
Securities will be transparent, and the Adviser, or any Affiliated 
Person who is an Index Provider, any Sub-Adviser and the Self Indexing 
Funds each will adopt policies and procedures to address any potential 
conflicts of interest (``Policies and Procedures''). The Index Provider 
will publish in the public domain, including on its Web site and/or the 
Self Indexing Funds' Web site (``Web site''), the rules that govern the 
construction and maintenance of each of its Underlying Indexes. 
Applicants believe that this public disclosure will prevent the Adviser 
from possessing any advantage over other market participants by virtue 
of being the Index Provider or being affiliated with an Index Provider. 
Applicants note that the identity and Underlying Index weightings of 
the securities that meet the criteria of the Rules-Based Process, 
including the selection criteria, will be freely available.
    5. Like other index providers, the Index Provider may modify the 
Rules-Based Process in the future. The Rules-Based Process could be 
modified, for example, to reflect changes in the underlying market 
tracked by an Underlying Index, the way in which the Rules-Based 
Process takes into account market events or to change the way a 
corporate action, such as a stock split, is handled. Such changes would 
not take effect until the Index Provider has given (a) the Calculation 
Agent (defined below) reasonable prior written notice of such rule 
changes, and (b) the investing public at least sixty (60) days

[[Page 59685]]

published notice that such changes will be implemented. Underlying 
Indexes may have reconstitution dates and rebalance dates that occur on 
a periodic basis more frequently than once yearly, but no more 
frequently than monthly.
    6. As owner of the Underlying Indexes, the Index Provider will 
enter into an agreement (``Calculation Agent Agreement'') with a third 
party to act as ``Calculation Agent.'' The Calculation Agent will be 
solely responsible for the calculation and maintenance of each 
Underlying Index, as well as the dissemination of the values of each 
Underlying Index. The Calculation Agent will not be an affiliated 
person, as such term is defined in the Act, or an affiliated person of 
an affiliated person, of the Self Indexing Funds, the Adviser, any Sub-
Adviser, any promoter of a Fund or the Distributor.
    7. The Adviser, any Affiliated Person who is an Index Provider, any 
Sub-Adviser and the Self Indexing Funds each will adopt and implement 
Policies and Procedures to address any potential conflicts of interest. 
Among other things, the Policies and Procedures will be designed to 
limit or prohibit communication with respect to issues/information 
related to the maintenance, calculation and reconstitution of the 
Underlying Indexes between the personnel of the Index Provider who have 
responsibility for the Underlying Indexes and Rules-Based Process 
(``Index Personnel') and the personnel who have responsibility for the 
management of the Self Indexing Funds or any Affiliated Accounts. The 
Index Personnel (i) will not have any responsibility for the management 
of Self Indexing Funds or any Affiliated Account, (ii) will be 
expressly prohibited from sharing this information with any employees 
of the Adviser or those of any Sub-Adviser, that have responsibility 
for the management of the Self Indexing Funds or any Affiliated Account 
until such information is publicly announced, and (iii) will be 
expressly prohibited from sharing or using this non-public information 
in any way except in connection with the performance of their 
respective duties. In addition, the Adviser has, and any Sub-Adviser 
will have, pursuant to Rule 206(4)-7 under the Advisers Act, written 
policies and procedures designed to prevent violations of the Advisers 
Act and the rules under the Advisers Act. Also, the Adviser has adopted 
a code of ethics pursuant to rule 17j-1 under the Act and rule 204A-1 
under the Advisers Act (``Code of Ethics''). Any Sub-Adviser will be 
required to adopt a Code of Ethics and provide the Trust with the 
certification required by rule 17j-1 under the Act.
    8. The Self Indexing Funds, except as otherwise noted herein, will 
operate in a manner identical to the operation of the other Funds. 
Applicants agree that any order of the Commission granting the 
requested relief will be subject to all of the terms and conditions in 
the Prior Order, except as described in the application.

Additional Changes to the Prior Order

    1. Applicants also seek to amend the Prior Order to revise the 
terms and conditions concerning the purchase and redemption of shares 
of the Funds. Under the Amended Order, the discussion of purchases and 
redemptions of Creation Units in paragraphs 1-9 under Section IV.C. of 
the Prior Application, as well as the last two sentences of the first 
paragraph and the second paragraph under Section IV.E, is replaced with 
the following:
    Each Fund will sell Shares to investors in Creation Units through 
the Distributor on a continuous basis at net asset value (``NAV'') per 
share next determined after an order in proper form is received. For 
Funds utilizing an in-kind purchase process shares will be purchased in 
Creation Units in exchange for the deposit, by the purchaser, of a 
particular portfolio of specified instruments, i.e., Deposit 
Securities, designated by the Adviser, together with the deposit or 
refund of a specified cash payment, as determined under the procedures 
described below, as the case may be (any such cash, collectively with 
the Deposit Securities, a ``Fund Deposit''). Each Fund will sell and 
redeem Creation Units on each day that a Fund is open, which includes 
any day that the Fund is required to be open under Section 22(e) of the 
Act (``Business Day''). The Funds may also be open on days not required 
under Section 22(e) of the Act, including days that a national 
securities exchange, as defined in Section 2(a)(26) of the Act, on 
which Shares are traded (``Exchange'') is closed. The NAV of each Fund 
will normally be determined as of the close of the regular trading 
session on the New York Stock Exchange (``NYSE'') (ordinarily 4:00 p.m. 
Eastern time) on each Business Day.\4\ The NAV of each Fund that 
invests (1) primarily in fixed income securities and seek investment 
returns that closely correspond to the price and performance of a fixed 
income indices and (2) in equity securities or fixed income securities 
traded in foreign markets and seeks investment results that closely 
correspond to the price and yield of underlying indices whose component 
securities include such securities (``International Funds'') may be 
determined prior to 4:00 p.m. Eastern time on each Business Day.
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    \4\ Applicants note that each Fund will have in place procedures 
that provide for the fair valuation of securities and other 
instruments in its portfolio (``Portfolio Securities'') in 
calculating NAV.
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    In order to keep costs low and permit each Fund to be as full 
invested as possible, Shares will be purchased and redeemed in Creation 
Units and generally on an in-kind basis. Accordingly, 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 Deposit Securities and 
shareholders redeeming their shares will receive an in-kind transfer of 
specified instruments (``Fund Securities'').\5\ On any given Business 
Day, the names and quantities of the instruments that constitute the 
Deposit Securities and the names and quantities of the instruments that 
constitute the Fund Securities will be identical, unless the Fund is 
Rebalancing (as defined below). In addition, the Deposit Securities and 
the Fund Securities will correspond pro rata to the positions in the 
Fund's portfolio (including cash positions),\6\ 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; \7\ (c) 
TBA Transactions, derivatives and other positions that cannot be 
transferred in kind \8\ will be excluded from the Deposit Securities 
and Fund Securities; \9\ (d) to

[[Page 59686]]

the extent the Fund determines, on a given Business Day, to use a 
representative sampling of the Fund's portfolio; \10\ 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 NAV attributable 
to a Creation Unit and the aggregate market value of the Deposit 
Securities or Fund Securities 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 
Component'').
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    \5\ The Funds must comply with the federal securities laws in 
accepting Deposit Securities and satisfying redemptions with Fund 
Securities, including that the Deposit Securities and Fund 
Securities are sold in transactions that would be exempt from 
registration under the Securities Act of 1933 (``Securities Act''). 
In accepting Deposit Securities and satisfying redemptions with Fund 
Securities 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.
    \6\ The portfolio used for this purpose will be the same 
portfolio used to calculate the Fund's NAV for that Business Day.
    \7\ A tradeable round lot for a security will be the standard 
unit of trading in that particular type of security in its primary 
market.
    \8\ 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.
    \9\ Because these instruments will be excluded from the Deposit 
Securities and the Fund Securities, their value will be reflected in 
the determination of the Cash Component (as defined below).
    \10\ 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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    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 Component, 
as described above; (b) if, on a given Business Day, the 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,\11\ the Fund determines to require the purchase 
or redemption, as applicable, to be made entirely in cash; \12\ (d) if, 
on a given Business Day, the 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 Securities or 
Fund Securities, respectively, solely because: (i) Such instruments are 
not eligible for transfer through either the NSCC Process or the DTC 
Process; or (ii) in the case of 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 the Fund permits an Authorized Participant to deposit or receive 
(as applicable) cash in lieu of some or all of the Deposit Securities 
or Fund Securities, 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 an 
International Fund would be subject to unfavorable income tax treatment 
if the holder receives redemption proceeds in kind.\13\
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    \11\ An ``Authorized Participant'' is either (1) a 
``Participating Party,'' i.e., a broker-dealer or other participant 
in the Shares Clearing Process (as defined below) through the 
Continuous Net Settlement System of the National Securities Clearing 
Corporation (``NSCC''), or (2) a participant of The Depository Trust 
Company, a limited purpose trust company organized under the laws of 
the State of New York (``DTC,'' and such participant, a ``DTC 
Participant''), which in either case has executed an agreement with 
a Distributor, with respect to creations and redemptions of Creation 
Units. The ``Shares Clearing Process'' refers to processes through 
the Continuous Net Settlement System of the NSCC as such processes 
have been enhanced to effect purchases and redemptions of Creation 
Units.
    \12\ 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 that 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.
    \13\ 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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    Each Business Day, before the open of trading on a national 
securities exchange as defined in Section 2(a)(26) of the Act on which 
the Shares are listed (``Listing Exchange'), the Fund will cause to be 
published through the NSCC the names and quantities of the instruments 
comprising the Deposit Securities and the Fund Securities, as well as 
the estimated Cash Component (if any), for that day.\14\ The list of 
Deposit Securities and Fund Securities 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.
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    \14\ If the Fund is Rebalancing, it may need to announce two 
estimated Cash Components for that day, one for deposits and one for 
redemptions.
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    In order to defray the transaction expenses, including brokerage 
costs, that will be incurred by a Fund when investors purchase or 
redeem Creation Units, and other expenses, such as custody fees and 
stamp taxes, each Fund will impose purchase or redemption transaction 
fees (``Transaction Fees'') to be borne only by such purchasers or 
redeemers. Where a Fund permits an in-kind purchaser to substitute cash 
in lieu of depositing a portion of the Deposit Securities, the 
purchaser may be assessed a higher Transaction Fee to cover the cost of 
purchasing those securities. The exact amounts of such Transaction Fees 
will be determined separately for each Fund. The Transaction Fee is 
designed to protect the continuing shareholders of a Fund against the 
dilutive costs associated with the transfer or purchase of Portfolio 
Securities in connection with the purchase of Creation Units and with 
the transfer or sale of Portfolio Securities in connection with the 
redemption of Creation Units.
    Transaction Fees will be limited to amounts that have been 
determined by the Adviser to be appropriate and will take into account 
transaction costs and associated with the relevant Deposit Securities 
of the Funds. In all cases, such Transaction Fee will be limited in 
accordance with requirements of the Commission applicable to management 
investment companies offering redeemable securities.
    Creation Units will be issued in aggregations of at least 25,000 
Shares. Applicants recognize that each Share is issued by an investment 
company and, accordingly, the acquisition of any Shares by an 
investment company, whether acquired from the Fund or in the secondary 
market, shall be subject to the restrictions of Section 12(d)(1) of the 
Act except as permitted by an exemptive order that permits investment 
companies to invest in a Fund beyond those limitations.
    2. Finally, Applicants also seek to make certain conforming changes 
to the Prior Application related to the changes set forth above.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-23858 Filed 9-27-12; 8:45 am]
BILLING CODE 8011-01-P