Document ID: SEC-2011-0835-0001
Agency: sec
Document Type: Notice
Title: Applications: Precidian ETFs Trust, et al.
Posted Date: 2011-06-15T04:00Z

[Federal Register Volume 76, Number 115 (Wednesday, June 15, 2011)]
[Notices]
[Pages 35055-35062]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-14843]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29692; 812-13818]

Precidian ETFs Trust, et al.; Notice of Application

June 9, 2011.
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

[[Page 35056]]

(``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.

-----------------------------------------------------------------------

Applicants: Precidian ETFs Trust (fka NEXT ETFs Trust) (``Trust''), 
Precidian Funds, LLC (fka NEXT ETFs, LLC) (``Adviser'') and Foreside 
Fund Services, LLC. (``Foreside'').

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

DATES: Filing Dates: The application was filed on September 1, 2010, 
and amended on February 17, 2011, and June 3, 2011.

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. June 30, 2011 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, Trust and Adviser, 
c/o Mark Criscitello, 350 Main St., Suite 9, Bedminister, New Jersey 
07921, Foreside, Three Canal Plaza, Suite 100, Portland, ME 04101.

FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Senior Counsel, at 
(202) 551-6868 or Janet M. Grossnickle, Assistant Director, 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 Delaware statutory trust. The 
Trust will initially offer one series, the Maxis Nikkei 225 Index Fund, 
(``Initial Fund'') whose performance will correspond generally to the 
performance of a specified securities index (``Underlying Index'').\1\
---------------------------------------------------------------------------

    \1\ The Underlying Index for the Initial Fund is the Nikkei 
Stock Average.
---------------------------------------------------------------------------

    2. Applicants request that the order apply to the Initial Fund and 
any future series of the Trust and any other open-end management 
companies or series thereof that may track specified domestic and/or 
foreign securities indexes (``Future Funds'').\2\ Any Future Fund will 
be (a) advised by the Adviser or an entity controlling, controlled by, 
or under common control with the Adviser, and (b) comply with the terms 
and conditions of the application. Each Underlying Index will be 
comprised solely of equity and/or fixed income securities. Future Funds 
may be based on Underlying Indexes comprised of domestic and/or non-
domestic equity and/or fixed income securities that meet the standards 
for trading in U.S. markets (``Domestic Funds'') or non-domestic 
securities that do not meet the requirements for trading in the U.S. 
markets (``Foreign Funds'') or Underlying Indexes comprised of a 
combination of domestic and foreign securities (``Global Funds''). The 
Initial Fund and all Future Funds, together, are the ``Funds.'' \3\
---------------------------------------------------------------------------

    \2\ All entities that currently intend to rely on the order are 
named as applicants. Any other existing or future entity that relies 
on the order will comply with the terms and conditions of the 
application. An Investing Fund (as defined below) may rely on the 
order only to invest in the Funds and not in any other registered 
investment company.
    \3\ Each Fund will comply with the disclosure requirements 
adopted by the Commission in Investment Company Act Release No. 
28584 (Jan. 13, 2009).
---------------------------------------------------------------------------

    3. The Adviser will be registered as an investment adviser under 
the Investment Advisers Act of 1940 (``Advisers Act'') and will serve 
as investment adviser to the Funds. The Adviser may enter into sub-
advisory agreements with one or more investment advisers as sub-
advisers to act as sub-advisers to a particular Fund (each, a ``Sub-
Adviser''). Each Sub-Adviser will be registered under the Advisers Act. 
The Trust will enter into a distribution agreement with one or more 
distributors that will be registered as a broker-dealer (``Broker'') 
under the Securities Exchange Act of 1934 (``Exchange Act'') and will 
serve as the principal underwriter and distributor (``Distributor'') 
for one or more Funds. The Distributor for the Initial Fund will be 
Foreside. A Distributor may be an affiliated person of, or an 
affiliated person of such affiliated person of, the Adviser and/or Sub-
Advisers within the meaning of section 2(a)(3) of the Act.
    4. Each Fund will consist of a portfolio of securities (``Portfolio 
Securities'') selected to correspond generally to the 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, 
(``Affiliated Person'') or an affiliated person of an affiliated person 
(``Second-Tier Affiliate'') of the Trust, any Fund, the Adviser, any 
Sub-Adviser, or promoter of a Fund, or of any Distributor.
    5. The investment objective of each Fund will be to provide 
investment returns that correspond, before fees and expenses, generally 
to the performance of its Underlying Index.\4\ Each Fund will sell and 
redeem Creation Units on a ``Business Day,'' which is defined to 
include any day that the Trust and a Fund is required to be open under 
section 22(e) of the Act. A Fund will utilize either a replication or 
representative sampling strategy to track its Underlying Index. A Fund 
using a replication strategy will invest in the Component Securities in 
its Underlying Index in the same approximate

[[Page 35057]]

proportions as in such Underlying Index. A Fund using a representative 
sampling strategy will hold some, but not necessarily all of the 
Component Securities of its Underlying Index.\5\ Applicants state that 
in using the representative sampling strategy, a Fund is not expected 
to track the performance of its Underlying Index with the same degree 
of accuracy as would an investment vehicle that invests in every 
Component Security of the Underlying Index with the same weighting as 
the Underlying Index. Applicants expect that each Fund will have an 
annual tracking error relative to the performance of its Underlying 
Index of less than 5 percent.
---------------------------------------------------------------------------

    \4\ Applicants represent that at least 80% of each Fund's total 
assets (excluding securities lending collateral) (``80% Basket'') 
will be invested in component securities that comprised its 
Underlying Index (``Component Securities'') or TBA Transactions (as 
defined below), or in the case of Foreign Funds and Global Funds, 
the 80% Basket requirement may also include Depositary Receipts 
(defined below) representing such securities. Each Fund may also 
invest up to 20% of its assets in a broad variety of other 
instruments and securities not included in its Underlying Index, 
which the Adviser and/or Sub-Adviser believes will help the Fund in 
tracking the performance of its Underlying Index.
    \5\ Securities are selected for inclusion in a Fund following a 
representative sampling strategy to have aggregate investment 
characteristics (based on market capitalization and industry 
weightings), fundamental characteristics (such as return 
variability, earnings valuation and yield) and liquidity measures 
similar to those of such Fund's Underlying Index taken in its 
entirety.
---------------------------------------------------------------------------

    6. Creation Units will consist of specified large aggregations of 
Shares, e.g., 25,000 or 100,000 Shares and it is expected that its 
initial price will range from $1 million to $10 million. All orders to 
purchase Creation Units must be placed with the Distributor by or 
through a party that has entered into an agreement with the Distributor 
(``Authorized Participant''). The Distributor will be responsible for 
transmitting the orders to the Funds. 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, 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 purchased in 
Creation Units in exchange for an in-kind deposit by the purchaser of a 
portfolio of securities (the ``Deposit Securities''), designated by the 
Adviser, together with the deposit of a specified cash payment 
(``Balancing Amount'' and together with the Deposit Securities, the 
``Portfolio Deposit''). The Balancing Amount will be 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.\6\ Applicants state that operating on 
an ``in-kind'' basis for one or more Funds may present operational 
problems for such Funds. Therefore, each Fund may permit, under certain 
circumstances, an in-kind purchaser to substitute cash in lieu of 
depositing some or all of the Deposit Securities if the Adviser and/or 
Sub-Adviser believed that it would reduce the Fund's transaction costs 
or enhance the Fund's operating efficiency. To preserve maximum 
efficiency and flexibility, a Fund reserves the right to accept and 
deliver Creation Units entirely for cash.
---------------------------------------------------------------------------

    \6\ On each Business Day prior to the opening of trading on each 
Fund's Listing Exchange (as defined below), a list of the names and 
the required number of shares of each Deposit Security, included in 
the current Portfolio Deposit (based on information at the end of 
the previous Business Day) for the relevant Fund, along with the 
Balancing Amount. Any national securities exchange (as defined in 
section 2(a)(26) of the Act) (``Listing Exchange'') on which Shares 
are listed will disseminate, every 15 seconds throughout the trading 
day through the facilities of the Consolidated Tape Association, an 
amount representing on a per Share basis, the sum of the current 
value of the Deposit Securities and the estimated Balancing Amount.
---------------------------------------------------------------------------

    7. An investor purchasing or redeeming a Creation Unit from a Fund 
will be charged a fee (``Transaction Fee'') to prevent the dilution of 
the interests of shareholders resulting from costs in connection with 
the purchase or redemption of Creation Units.\7\ 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 Funds. The Distributor also will be 
responsible for delivering the Fund's prospectus to those persons 
purchasing Shares in 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 the applicable Fund to implement the delivery of 
its Shares.
---------------------------------------------------------------------------

    \7\ Where a Fund permits an in-kind purchaser to substitute 
cash-in-lieu of depositing one or more of the requisite Deposit 
Securities, the purchaser may be assessed a higher Transaction Fee 
to cover the cost of purchasing such Deposit Securities.
---------------------------------------------------------------------------

    8. Shares will be listed and traded at negotiated prices on one or 
more national securities exchanges as defined in section 2(a)(26) of 
the Act (each a ``Stock Exchange''). It is expected that one or more 
Stock Exchange liquidity providers or market makers (``Market Makers'') 
will be assigned to Shares and maintain a market for Shares trading on 
the Listing Exchange. Price of Shares trading on a Stock Exchange will 
be based on a current bid-offer market. Transactions involving the sale 
of Shares on a Stock Exchange will be subject to customary brokerage 
commissions and charges.
    9. Applicants expect that purchasers of Creation Units will include 
institutional investors and arbitrageurs. Market Makers 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.\8\ The 
price at which Shares trade will be disciplined by arbitrage 
opportunities created by the option continually to purchase or redeem 
Shares in Creation Units, which should help to ensure that Shares will 
not trade at a material discount or premium in relation to their NAV 
per Share.
---------------------------------------------------------------------------

    \8\ 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.
---------------------------------------------------------------------------

    10. 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. 
Although applicants currently contemplate that Creation Units generally 
will be redeemed in-kind, together with any applicable Cash Redemption 
Payment (as defined below), the Trust reserves the right to make 
redemption payments in-kind, in cash only payments and/or cash-in-lieu 
payments or a combination of both.\9\ At the discretion of the Fund, a 
beneficial owner might also receive a cash-in-lieu amount instead of a 
Redemption Securities because, for instance, it was restrained by 
regulation or policy from transacting in the securities. A redeeming 
investor may pay a Transaction Fee, imposed in the same manner as the 
Transaction Fee incurred in purchasing such Shares of Creation Units.
---------------------------------------------------------------------------

    \9\ The relevant Funds also intend to substitute a cash-in-lieu 
amount to replace any Deposit Security or Redemption Security (as 
defined below) of a Fund that is a ``to-be-announced transaction'' 
or ``TBA Transaction.'' A TBA Transaction is a method of trading 
mortgage-backed securities. In a TBA Transaction, the buyer and 
seller agree upon 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. The 
amount of substituted cash in the case of TBA Transactions will be 
equivalent to the value of the TBA Transaction listed as a Deposit 
Security or Redemption Security.
---------------------------------------------------------------------------

    11. An investor redeeming a Creation Unit generally will receive 
(a) portfolio Securities designated to be delivered for redemptions 
(``Redemption Securities'') on the date that the request for redemption 
is submitted and (b) a ``Cash Redemption Payment,'' consisting of an 
amount calculated in the same manner as the Balancing Amount, although 
the actual amount of the Cash Redemption Payment may differ if the 
Redemption

[[Page 35058]]

Securities are not identical to the Deposit Securities on that day.
    12. Applicants state that in accepting Deposit Securities and 
satisfying redemptions with Redemption Securities, Funds will comply 
with the Federal securities laws, including that the Deposit Securities 
and Redemption Securities are sold in transactions that would be exempt 
from registration under the Securities Act of 1933 (``Securities 
Act'').\10\ Deposit Securities and Redemption Securities either (a) 
will correspond pro rata to the Portfolio Securities of a Fund, or (b) 
will not correspond pro rata to the Portfolio Securities, provided that 
the Deposit Securities and Redemption Securities will (i) Consist of 
the same representative sample of Portfolio Securities designed to 
generate performance that is highly correlated to the performance of 
the Portfolio Securities, (ii) consist only of securities that are 
already included among the existing Portfolio Securities, and (iii) be 
the same for all Authorized Participants on a given Business Day.\11\
---------------------------------------------------------------------------

    \10\ In accepting Deposit Securities and satisfying redemptions 
with Redemption Securities that are restricted securities eligible 
for resale pursuant to rule 144A under the Securities Act, the 
relevant Funds will comply with the conditions of rule 144A.
    \11\ In either case, Deposit Securities and Redemption 
Securities may differ solely to the extent necessary (1) because it 
is impossible to break up bonds beyond certain minimum sizes needed 
for transfer and settlement, (2) because, in the case of equity 
securities, rounding is necessary to eliminate fractional shares or 
lots, that are not tradeable round lots or (3) for temporary 
periods, to effect changes in the Portfolio Securities as a result 
of the rebalancing of an Underlying Index. A tradable round lot will 
be the standard unit of trading in that particular type of security 
in its primary market.
---------------------------------------------------------------------------

    13. Neither the Trust nor any Fund will be advertised or marketed 
or otherwise held out as a traditional open-end investment company or 
``mutual fund.'' Instead, each Fund will be marketed as an ``exchange-
traded fund'' or an ``ETF''. All advertising materials that describe 
the features or method of obtaining, buying or selling Creation Units, 
or Shares traded on an Exchange, or refer to redeemability, will 
prominently disclose that Shares are not individually redeemable and 
that the owners of Shares may acquire or tender such Shares for 
redemption to the Fund in Creation Units only. The Funds will provide 
copies of their annual and semi-annual shareholder reports to DTC 
Participants for distribution to shareholders.

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 (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 and each Fund 
to redeem Shares in Creation Units only. Applicants state that 
investors may purchase Shares in Creation Units from each Fund and 
redeem Creation Units according to 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 
substantially 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 secondary market trading in Shares will take place at 
negotiated prices, not at a current offering price described in a 
Fund's 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, and (c) ensure an orderly distribution system of 
investment company shares by eliminating price competition from non-
contract 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

[[Page 35059]]

between the market price of Shares and their NAV remains narrow.

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 
state that settlement of redemptions for Foreign Funds, including the 
Initial Fund, and Global Funds will be contingent not only on the 
settlement cycle of the U.S. Securities markets but also on the 
delivery cycles in local markets for underlying foreign Portfolio 
Securities held by the Foreign Funds and Global Funds. Applicants state 
that current delivery cycles for transferring Portfolio Securities to 
redeeming investors, coupled with local market holiday schedules, in 
certain circumstances will cause the delivery process for the Foreign 
Funds, including the Initial Fund, and Global Funds up to 14 calendar 
days. Applicants request relief under section 6(c) of the Act from 
section 22(e) to allow Foreign Funds, including the Initial Fund, and 
Global Funds to pay redemption proceeds up to 14 calendar days after 
the tender of the Creation Units for redemption. Except as disclosed in 
the relevant Foreign Fund's and Global Fund's SAI, applicants expect 
that each Foreign Fund and Global Fund will be able to deliver 
redemption proceeds within seven days.\12\
---------------------------------------------------------------------------

    \12\ Rule 15c6-1 under the Exchange Act requires that most 
securities transactions be settled within three business days of the 
trade date. Applicants acknowledge that relief obtained from the 
requirements of section 22(e) will not affect any obligations that 
they have under rule 15c6-1.
---------------------------------------------------------------------------

    8. Applicants state 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 the number of 
days indicated above 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 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 each affected Foreign Fund, 
including the Initial Fund, and Global Fund.
    9. Applicants are not seeking relief from section 22(e) with 
respect to Foreign Funds or Global Funds that do not effect creations 
and 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 its shares to another 
investment company if the sale will cause the acquiring company to own 
more than 3% of the acquired company's voting stock, or if the sale 
will 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 (``Investing Management Companies'') and unit investment 
trusts (``Investing Trusts'') registered under the Act that are not 
sponsored or advised by the Adviser or an entity controlling, 
controlled by, or under common control with 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, 
``Investing Funds'') to acquire shares of a Fund beyond the limits of 
section 12(d)(1)(A). In addition, applicants seek relief to permit a 
Fund, any Distributor, and/or any Broker to sell Shares to Investing 
Funds in excess of the limits of section 12(d)(1)(B).
    12. Each Investing Management Company will be advised by an 
investment adviser within the meaning of section 2(a)(20)(A) of the Act 
(the ``Investing Fund Adviser'') and may be sub-advised by one or more 
investment advisers within the meaning of section 2(a)(20)(B) of the 
Act (each an ``Investing Fund Sub-Adviser''). Any investment adviser to 
an Investing Fund will be registered under the Advisers Act. Each 
Investing Trust will be sponsored by a sponsor (``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 Investing Fund nor an 
Investing Funds Affiliate would be able to exert undue influence over a 
Fund.\13\ To limit the control that an Investing Fund may have over a 
Fund, applicants propose a condition prohibiting the Investing Fund 
Adviser, Sponsor, any person controlling, controlled by, or under 
common control with the Investing Fund Adviser or Sponsor, and any 
investment company and any issuer that would be an investment company 
but for sections 3(c)(1) or 3(c)(7) of the Act that is advised or 
sponsored by the Investing Fund Adviser, the Sponsor, or any person 
controlling, controlled by, or under common control with the Investing 
Fund Adviser or Sponsor (``Investing Funds' Advisory Group'') from 
controlling (individually or in the aggregate) a Fund within the 
meaning of section 2(a)(9) of the Act. The same prohibition would apply 
to any Investing Fund Sub-Adviser, any person controlling, controlled 
by or under common control with the Investing Fund Sub-Adviser, and any 
investment company or issuer that would be an investment company but 
for section 3(c)(1) or 3(c)(7) of the Act (or portion of such 
investment company or issuer) advised or sponsored by the Investing 
Fund Sub-Adviser or any person controlling, controlled by or under 
common control with the Investing Fund Sub-Adviser (``Investing Funds' 
Sub-Advisory Group''). Applicants propose other conditions to limit the 
potential for undue influence over the Funds, including that no 
Investing Fund or Investing Funds Affiliate (except to the extent it is 
acting in its capacity as an investment adviser to a Fund) 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''). 
An ``Underwriting Affiliate'' is a principal underwriter in any 
underwriting or selling syndicate that is an officer, director, member 
of an advisory board, Investing Fund Adviser, Investing Fund Sub-
Adviser, employee or Sponsor of

[[Page 35060]]

the Investing Fund, or a person of which any such officer, director, 
member of an advisory board, Investing Fund Adviser, Investing Fund 
Sub-Adviser, employee or Sponsor 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).
---------------------------------------------------------------------------

    \13\ An ``Investing Funds Affiliate'' is any Investing Fund 
Adviser, Investing Fund Sub-Adviser, Sponsor, promoter and principal 
underwriter of an Investing Fund, and any person controlling, 
controlled by or under common control with any of these entities. 
``Fund Affiliate'' is an investment adviser, promoter, or principal 
underwriter of a Fund or any person controlling, controlled by or 
under common control with any of these entities.
---------------------------------------------------------------------------

    15. Applicants do not believe that the proposed arrangement will 
involve excessive layering of fees. The board of directors or trustees 
of any Investing Management Company, including a majority of the 
directors or trustees who are not interested directors or trustees 
within the meaning of section 2(a)(19) of the Act (``disinterested 
directors or trustees''), will find that the advisory fees charged 
under the contract are based on services provided that will be in 
addition to, rather than duplicative of, services provided under the 
advisory contract of any Fund in which the Investing Management Company 
may invest. In addition, under condition 9, an Investing Fund Adviser, 
or Investing Trust's trustee (``Trustee'') or Sponsor, will waive fees 
otherwise payable to it by the Investing Fund in an amount at least 
equal to any compensation (including fees received pursuant to any plan 
adopted by a Fund under rule 12b-1 under the Act) received from a Fund 
by the Investing Fund Adviser, Trustee or Sponsor or an affiliated 
person of the Investing Fund Adviser, Trustee or Sponsor, in connection 
with the investment by the Investing Fund in the Fund. Applicants also 
state that any sales charges and/or service fees charged with respect 
to shares of an Investing Fund will not exceed the limits applicable to 
a fund of funds as set forth in Conduct Rule 2830 of the NASD.\14\
---------------------------------------------------------------------------

    \14\ All references to Conduct Rule 2830 of the NASD include any 
successor or replacement rule that may be adopted by the Financial 
Industry Regulatory Authority.
---------------------------------------------------------------------------

    16. Applicants submit that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that a Fund will be 
prohibited from acquiring securities of any investment company or 
company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of 
the limits contained in section 12(d)(1)(A) of the Act, except to the 
extent permitted by exemptive relief from the Commission permitting the 
Fund to purchase shares for short-term cash management purposes. To 
ensure that an Investing Fund is aware of the terms and conditions of 
the requested order, the Investing Funds must enter into an agreement 
with the respective Funds (``Investing Fund Participation Agreement''). 
The Investing Fund Participation Agreement will include an 
acknowledgement from the Investing Fund that it may rely on the order 
only to invest in the Funds and not in any other investment company.
    17. Applicants also note that a Fund may choose to reject a direct 
purchase of Shares in Creation Units by an Investing Fund. To the 
extent that an Investing Fund purchases Shares in the secondary market, 
a Fund would still retain its ability to reject initial purchases of 
Shares made in reliance on the requested order by declining to enter 
into the Investing Fund Agreement prior to any investment by an 
Investing Fund in excess of the limits of section 12(d)(1)(A).

Section 17 of the Act

    18. Section 17(a) of the Act generally prohibits an Affiliated 
Person or a Second-Tier Affiliate, from selling any security to or 
purchasing any security from the company. Section 2(a)(3) of the Act 
defines ``affiliated person'' to include any person directly or 
indirectly owning, controlling, or holding with power to vote 5% or 
more of the outstanding voting securities of the other person and any 
person directly or indirectly controlling, controlled by, or under 
common control with, the other person. Section 2(a)(9) of the Act 
defines ``control'' as the power to exercise a controlling influence, 
and 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 Adviser or an entity 
controlling, controlled by or under common control with 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 or an entity 
controlling, controlled by or under common control with the Adviser (an 
``Affiliated Fund''). Applicants also state that any investor, 
including Market Makers, owning 5% or holding in excess of 25% of the 
Trust or such Funds may be deemed affiliated persons of the Trust or 
such Funds. In addition, an investor could own 5% or more, or in excess 
of 25% of the outstanding shares of one or more Affiliated Funds making 
that investor a Second-Tier Affiliate of the Funds.
    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 in-kind purchases and redemptions of Creation Units from the 
Funds by persons that are Affiliated Persons or Second-Tier Affiliates 
of the Funds solely by virtue of one or more of the following: (a) 
Holding 5% or more, or more than 25%, of the Shares of the Trust or 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. Applicants 
also request an exemption in order to permit each Fund to sell Shares 
to and redeem Shares from, and engage in the in-kind transactions that 
would accompany such sales and redemptions with, any Investing Fund of 
which the Fund is an Affiliated Person or Second-Tier Affiliate.\15\
---------------------------------------------------------------------------

    \15\ 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 Investing Fund and a Fund), relief 
from Section 17(a) would not be necessary. The requested relief is 
intended to cover, however, in-kind transactions directly between 
Funds and Investing Funds.
---------------------------------------------------------------------------

    20. Applicants contend 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 
Securities and Redemption Securities for each Fund will be valued in 
the same manner as the Portfolio Securities currently held by such 
Fund, and will be valued in this same manner, regardless of the 
identity of the purchaser or redeemer. Portfolio Securities, Deposit 
Securities, Redemption Securities, Balancing Amounts and Cash 
Redemption Payments (except for any permitted cash-in-lieu amounts) 
will be the same regardless of the identity of the purchaser or 
redeemer. Therefore, applicants state that in-kind purchases and 
redemptions will afford no opportunity for the specified affiliated 
persons of a Fund 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 of 
the Fund. Applicants also submit that the sale of Shares to and 
redemption of Shares from an Investing Fund satisfies the standards for 
relief under sections 17(b) and 6(c) of the Act. Applicants note that 
any consideration paid for the purchase or redemption of Shares 
directly from 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.\16\ Applicants also

[[Page 35061]]

state that the proposed transactions are consistent with the general 
purposes of the Act and appropriate in the public interest.
---------------------------------------------------------------------------

    \16\ Applicants acknowledge that the receipt of compensation by 
(a) an affiliated person of an Investing Fund, or an affiliated 
person of such person, for the purchase by the Investing Fund of 
Shares of a Fund or (b) an affiliated person of a Fund, or an 
affiliated person of such person, for the sale by the Fund of Shares 
to an Investing Fund, may be prohibited by section 17(e)(1) of the 
Act. The Investing Fund Participation Agreement also will include 
this acknowledgment.
---------------------------------------------------------------------------

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 order, 
the Shares of such Fund 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 maintained for each Fund, 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 the 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.

Section 12(d)(1) Relief

    5. The members of an Investing Funds' 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 Investing Funds' 
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 
Investing Funds' Advisory Group or the Investing Funds' SubAdvisory 
Group, each in the aggregate, becomes a holder of more than 25% 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 Fund's Shares. 
This condition does not apply to the Investing Funds' SubAdvisory Group 
with respect to a Fund for which the Investing Fund Sub-Adviser or a 
person controlling, controlled by, or under common control with the 
Investing Fund Sub-Adviser acts as the investment adviser within the 
meaning of section 2(a)(20)(A) of the Act.
    6. No Investing Fund or Investing Funds Affiliate will cause any 
existing or potential investment by the Investing Fund in a Fund to 
influence the terms of any services or transactions between the 
Investing Fund or an Investing Funds Affiliate and the Fund or a Fund 
Affiliate.
    7. The board of directors or trustees of an Investing Management 
Company, including a majority of the disinterested directors or 
trustees, will adopt procedures reasonably designed to assure that the 
Investing Fund Adviser and any Investing Fund Sub-Adviser are 
conducting the investment program of the Investing Management Company 
without taking into account any consideration received by the Investing 
Management Company or an Investing Funds Affiliate from a Fund or a 
Fund Affiliate in connection with any services or transactions.
    8. Once an investment by an Investing Fund in securities of a Fund 
exceeds the limit in section 12(d)(1)(A)(i) of the Act, the board of 
trustees of the Trust (``Board''), including a majority of the 
disinterested trustees, will determine that any consideration paid by 
the Fund to the Investing Fund or an Investing Funds Affiliate in 
connection with any services or transactions: (a) Is fair and 
reasonable in relation to the nature and quality of the services and 
benefits received by the Fund; (b) 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 (c) 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. The Investing Fund Adviser, Trustee or Sponsor, as applicable, 
will waive fees otherwise payable to it by the Investing Fund in an 
amount at least equal to any compensation (including fees received 
pursuant to any plan adopted by a Fund under rule 12b-1 under the Act) 
received from the Fund by the Investing Fund Adviser, Trustee or 
Sponsor, or an affiliated person of the Investing Fund Adviser, Trustee 
or Sponsor, other than any advisory fees paid to the Investing Fund 
Adviser, Trustee, or Sponsor, or its affiliated person by the Fund, in 
connection with the investment by the Investing Fund in the Fund. Any 
Investing Fund Sub-Adviser will waive fees otherwise payable to the 
Investing Fund Sub-Adviser, directly or indirectly, by the Investing 
Management Company in an amount at least equal to any compensation 
received from a Fund by the Investing Fund Sub-Adviser, or an 
affiliated person of the Investing Fund Sub-Adviser, other than any 
advisory fees paid to the Investing Fund Sub-Adviser or its affiliated 
person by the Fund, in connection with any investment by the Investing 
Management Company in the Fund made at the direction of the Investing 
Fund Sub-Adviser. In the event that the Investing Fund Sub-Adviser 
waives fees, the benefit of the waiver will be passed through to the 
Investing Management Company.
    10. No Investing Fund or Investing Funds 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.
    11. The Board, including a majority of the disinterested trustees, 
will adopt procedures reasonably designed to monitor any purchases of 
securities by a Fund in an Affiliated Underwriting, once an investment 
by an Investing 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 Investing Fund in the Fund. The Board will consider, among other 
things: (a) Whether the purchases were consistent with the investment 
objectives and policies of the Fund; (b) 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 (c) 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

[[Page 35062]]

procedures designed to assure that purchases of securities in 
Affiliated Underwritings are in the best interest of shareholders of 
the Fund.
    12. 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 Investing 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 Board's 
determinations were made.
    13. Before investing in a Fund in excess of the limits in section 
12(d)(1)(A), each Investing Fund and the Fund will execute an Investing 
Fund Participation Agreement stating, without limitation, that their 
respective boards of directors or trustees and their investment 
advisers or Trustee and Sponsor, as applicable, understand the terms 
and conditions of the order, and agree to fulfill their 
responsibilities under the order. At the time of its investment in 
Shares of a Fund in excess of the limit in section 12(d)(1)(A)(i), an 
Investing Fund will notify the Fund of the investment. At such time, 
the Investing Fund will also transmit to the Fund a list of the names 
of each Investing Funds Affiliate and Underwriting Affiliate. The 
Investing Fund will notify the Fund of any changes to the list of names 
as soon as reasonably practicable after a change occurs. The Fund and 
the Investing Fund will maintain and preserve a copy of the order, the 
Investing Fund Participation 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.
    14. Before approving any advisory contract under section 15 of the 
Act, the board of directors or trustees of each Investing Management 
Company, including a majority of the disinterested directors or 
trustees, will find that the advisory fees charged under such 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 Investing Management Company may invest. These 
findings and their basis will be recorded fully in the minute books of 
the appropriate Investing Management Company.
    15. Any sales charges and/or service fees charged with respect to 
shares of an Investing Fund will not exceed the limits applicable to a 
fund of funds as set forth in Conduct Rule 2830 of the NASD.
    16. No Fund will acquire securities of an 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.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-14843 Filed 6-14-11; 8:45 am]
BILLING CODE 8011-01-P