Document ID: SEC-2009-1504-0001
Agency: sec
Document Type: Notice
Title: Applications: Pacific Investment Management Co. LLC and PIMCO ETF Trust
Posted Date: 2009-10-23T04:00Z

[Federal Register: October 23, 2009 (Volume 74, Number 204)]
[
Notices]               
[Page 54866-54872]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23oc09-90]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28949; File No. 812-13571]

 
Pacific Investment Management Company LLC and PIMCO ETF Trust; 

Notice of Application

October 20, 2009.

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 

Investment Company Act of 1940 (``Act'') for an exemption from sections 

2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act and rule 22c-1 under the 

Act, and under sections 6(c) and 17(b) of the Act for an exemption from 

sections 17(a)(1) and (a)(2) of the Act, 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: Pacific Investment Management Company LLC (the ``Advisor'') 

and PIMCO ETF Trust (the ``Trust'').

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

Series of certain actively managed open-end management investment 

companies to issue shares (``Shares'') redeemable in large aggregations 

only (``Creation Units''); (b) secondary market transactions in Shares 

to occur at negotiated market prices; (c) certain series to pay 

redemption proceeds, under certain circumstances, more than seven days 

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 September 4, 2008 and 

amended on October 8, 2009. 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 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 November 9, 2009, 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: 840 Newport Center 

Drive, Newport Beach, CA 92660.

FOR FURTHER INFORMATION CONTACT: Jill Ehrlich, Attorney Adviser, at 

(202) 551-6819 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 for 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 an open-end management company registered under the 

Act and organized as a Delaware statutory trust. The Trust will offer 

five actively-managed investment series: PIMCO Enhanced Short Maturity 

Strategy Fund, PIMCO Government Limited Maturity Strategy Fund, PIMCO 

Intermediate Municipal Bond Strategy Fund, PIMCO Prime Limited Maturity 

Strategy Fund, and PIMCO Short Term Municipal Bond Strategy Fund 

(together, the ``Initial Funds''). The investment objective of PIMCO 

Enhanced Short Maturity Strategy Fund, PIMCO Government Limited 

Maturity Strategy Fund, and PIMCO Prime Limited Maturity Strategy Fund 

will be to seek maximum current income, consistent with preservation of 

capital and daily liquidity. The investment objective of PIMCO 

Intermediate Municipal Bond Strategy Fund and PIMCO Short Term 

Municipal Bond Strategy Fund will be to seek tax-exempt income, 

consistent with preservation of capital.

    2. Applicants request that the order apply to any future series of 

the Trust or of other open-end management companies that may utilize 

active management investment strategies (``Future Funds'').\1\ Any 

Future Fund

[[Page 54867]]

will (a) be advised by the Advisor or an entity controlling, controlled 

by, or under common control with the Advisor, and (b) comply with the 

terms and conditions of the order. The Initial Fund and Future Funds 

together are the ``Funds.'' Each Fund will consist of a portfolio of 

securities (including fixed-income securities and/or equity securities) 

and/or currencies (``Portfolio Instruments'').\2\ Funds holding non-

U.S. investments are ``Global Funds.'' Each Fund will operate as an 

actively managed exchange-traded fund (``ETF'').

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    \1\ All entities that currently intend to rely on the order are 

named as applicants. Any Funds that rely on the order in the future 

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 Funds and not in any other registered investment company.

    \2\ To the extent consistent with other investment limitations, 

the Initial Funds may invest in mortgage- or asset-backed 

securities, including TBA Transactions (defined below), and may 

engage in forward commitment transactions. Neither the Initial Funds 

nor any Future Fund will invest in options contracts, futures 

contracts, or swap agreements.

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    3. The Advisor, a Delaware limited liability company, is registered 

as an investment adviser under the Investment Advisers Act of 1940 

(``Advisers Act'') and will be the investment adviser to the Funds. The 

Advisor may enter into sub-advisory agreements with investment advisers 

to act as sub-advisers with respect to the Trust and in connection with 

Future Funds (each a ``Subadvisor''). Any Subadvisor will be registered 

under the Advisers Act. Allianz Global Investors Distributors LLC (the 

``Distributor'') is a broker-dealer that is registered under the 

Securities Exchange Act of 1934 (the ``Exchange Act'') and will act as 

the distributor and principal underwriter of the Funds.

    4. Applicants anticipate that a Creation Unit will consist of at 

least 50,000 Shares and that the price of a Share will range from $20 

to $200. All orders to purchase Creation Units must be placed with the 

Distributor by or through a party that has executed a participant 

agreement with the Distributor and the transfer agent with respect to 

the creation and redemption of Creation Units (``Authorized 

Participant''). An Authorized Participant must be either: (1) A broker 

or dealer registered under the Exchange Act (``Broker'') or other 

participant in the Continuous Net Settlement (``CNS'') System of the 

National Securities Clearing Corporation (``NSCC''), a clearing agency 

registered with the Commission, or (2) a participant in the Depository 

Trust Company (``DTC'' and such participant, a ``DTC Participant''). 

The Initial Funds and certain Future Funds will generally be purchased 

entirely for cash (``All-Cash Payments'') and will generally be 

redeemed in-kind for certain specified Portfolio Instruments 

(``Redemption Instruments''). However, the Trust reserves the right to 

permit purchases of Creation Units by means of an in-kind tender of 

specified instruments (``Deposit Instruments'') and to permit cash 

redemptions.\3\ In-kind purchases and redemptions will be accompanied 

by a small cash balancing amount to ensure that the transactions occur 

at net asset value (``NAV''). The Trust reserves the right to permit, 

under certain circumstances, a purchaser of Creation Units to 

substitute cash in lieu of depositing some or all of the required 

Deposit Instruments.

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    \3\ Applicants state that in determining whether a particular 

Fund will be selling or redeeming Creation Units on a cash or in-

kind basis, the key consideration will be the benefit which would 

accrue to Fund investors. Applicants state that in many cases, 

particularly to the extent the Deposit Instruments (as defined 

below) are less liquid, investors may benefit by the use of all cash 

purchases because the Advisor would execute trades rather than 

Market Makers (as defined below). Applicants believe that the 

Advisor may be able to obtain better execution in bond transactions 

due to its size, experience and potentially stronger relationships 

in the fixed income markets. With respect to redemptions, tax 

considerations may warrant in-kind redemptions, which do not result 

in a taxable event for the Fund.

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    5. An investor purchasing a Creation Unit from a Fund will be 

charged a fee (``Transaction Fee'') to prevent the dilution of the 

interests of the remaining shareholders resulting from costs in 

connection with the purchase of Creation Units.\4\ The maximum 

Transaction Fees relevant to each Fund will be completely disclosed in 

the prospectus (``Prospectus'' 1A \5\ or other documentation. 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 all purchase orders to the 

relevant Fund. The Distributor also will be responsible for delivering 

a Prospectus to those persons purchasing Creation Units and for 

maintaining records of both the orders placed with it and the 

confirmations of acceptance furnished by it.

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    \4\ Where a Fund permits an in-kind purchaser to deposit cash in 

lieu of depositing one or more Deposit Instruments, the purchaser 

may be assessed a higher Transaction Fee to offset the transaction 

cost to the Fund of buying those particular Deposit Instruments.

    \5\ All representations and conditions contained in the 

application that require a Fund to disclose particular information 

in the Fund's Prospectus and/or annual report shall be effective 

with respect to the Fund until the time that the Fund complies with 

the disclosure requirements adopted by the Commission in Investment 

Company Act Release No. 28584 (Jan. 13, 2009).

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    6. Purchasers of Shares in Creation Units may hold such Shares or 

may sell such Shares into the secondary market. Shares will be listed 

and traded at negotiated prices on a national securities exchange as 

defined in section 2(a)(26) of the Act (the ``Stock Exchange''). It is 

expected that one or more member firms of the listing Stock Exchange 

will be designated to act as a specialist and maintain a market for 

Shares on the Stock Exchange (``Specialist''), or if Nasdaq is the 

listing Stock Exchange, one or more member firms of Nasdaq will act as 

a market maker (``Market Maker'') and maintain a market for Shares.\6\ 

The price of the Shares trading on the Stock Exchange will be based on 

a current bid-offer market. Shares sold in the secondary market will be 

subject to customary brokerage commissions and charges.

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    \6\ If Shares are listed on Nasdaq, no Specialist will be 

contractually obligated to make a market in Shares. Rather, under 

Nasdaq's listing requirements, two or more Market Makers will be 

registered in Shares and required to make a continuous, two-sided 

market or face regulatory sanctions.

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    7. Applicants expect that purchasers of Creation Units will include 

arbitrageurs. The Specialists or Market Makers, in providing a fair and 

orderly secondary market for Shares, also may purchase Creation Units 

for use in their own market making activities. Applicants expect that 

secondary market purchasers of Shares will include both institutional 

and retail investors.\7\ Applicants expect that the price at which the 

Shares trade will be disciplined by arbitrage opportunities created by 

the ability to continually purchase or redeem Creation Units at their 

NAV, which should ensure that the Shares will not trade at a material 

discount or premium in relation to their NAV.

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    \7\ 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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    8. Shares will not be individually redeemable, and owners of Shares 

may acquire those Shares from a Fund, or tender such Shares for 

redemption to the Fund, in Creation Units only. To redeem, an investor 

must accumulate enough Shares to constitute a Creation Unit. Redemption 

requests must be placed by or through an Authorized Participant. 

Applicants currently contemplate that Creation Units of the Initial 

Funds will be redeemed principally in-kind (together with a balancing 

cash payment).\8\ To the extent

[[Page 54868]]

a Fund utilizes in-kind redemptions, an investor redeeming a Creation 

Unit will receive the Redemption Instruments, which, applicants expect, 

in most cases will be the same as the Deposit Instruments required of 

investors purchasing Creation Units on the same day. The redeeming 

investor also must pay to the Fund a Transaction Fee.

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    \8\ Applicants state that each Fund intends to substitute a 

cash-in-lieu amount to replace any Deposit Instrument or Redemption 

Instrument 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 Transaction will be equivalent 

to the value of the TBA Transaction listed as a Deposit Instrument 

or Redemption Instrument.

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    9. Applicants state that in accepting Deposit Instruments and 

satisfying redemptions with Redemption Instruments, the relevant Funds 

will comply with the federal securities laws, 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'').\9\ To the extent in-kind purchases and 

redemptions are utilized, a Creation Unit will be purchased or redeemed 

from the Funds for a basket of Deposit Instruments or Redemption 

Instruments that corresponds pro rata, to the extent practicable, to 

the Fund portfolio plus a specified cash payment.\10\

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    \9\ 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 

relevant Funds will comply with the conditions of rule 144A. The 

Prospectus for a Fund will also state that an Authorized Participant 

that is not a ``Qualified Institutional Buyer'' as defined in rule 

144A under the Securities Act will not be able to receive, as part 

of a redemption, restricted securities eligible for resale under 

rule 144A.

    \10\ In some cases, for example, applicants state that it is 

impossible to break up bonds beyond certain minimum sizes needed for 

transfer and settlement, so there may be minor differences between a 

basket of Deposit Instruments or Redemption Instruments and a true 

pro rata slice of a Fund portfolio.

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    10. Neither the Trust nor any Fund will be marketed or otherwise 

held out as an ``open-end investment company'' or a ``mutual fund.'' 

Instead, each Fund will be marketed as an ``actively-managed exchange-

traded fund.'' Any advertising material where features of obtaining, 

buying or selling Creation Units are described or where there is 

reference to redeemability will prominently disclose that Shares are 

not individually redeemable and that owners of Shares may acquire 

Shares from a Fund and tender those Shares for redemption to a Fund in 

Creation Units only. The same approach will be followed in the 

statement of additional information (``SAI''), shareholder reports and 

any marketing or advertising materials issued or circulated in 

connection with the Shares.

    11. The Funds' Web site, which will be publicly available prior to 

the public offering of Shares, will include the Prospectus and 

information about the Funds that is updated on a daily basis, including 

the mid-point of the bid/ask spread at the time of the calculation of 

NAV (``Bid/Ask Price''). On each Business Day, which is defined to 

include any day that the Trust is open for business as required by 

section 22(e) of the Act, before commencement of trading in Shares on 

the Stock Exchange, the Fund will disclose on its website the 

identities and quantities of the Portfolio Instruments and other assets 

held by the Fund that will form the basis for the Fund's calculation of 

NAV at the end of the Business Day.\11\

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    \11\ Applicants note that under accounting procedures followed 

by the Funds, trades made on the prior Business Day (``T'') will be 

booked and reflected in NAV on the current Business Day (``T+1''). 

Accordingly, the Funds will be able to disclose at the beginning of 

the Business Day the portfolio that will form the basis for the NAV 

calculation at the end of the Business Day.

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Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act 

granting an exemption from sections 2(a)(32), 5(a)(1), 22(d) and 22(e) 

of the Act and rule 22c-1 under the Act; and under sections 6(c) and 

17(b) of the Act granting an exemption from sections 17(a)(1) and 

17(a)(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 each Fund, as a series of 

an open-end management investment company, to issue Shares that are 

redeemable in Creation Units only. Applicants state that investors may 

purchase Shares in Creation Units from each Fund and redeem Creation 

Units from each Fund. Applicants further state that because the market 

price of Shares will be disciplined by arbitrage opportunities, 

investors should be able to sell Shares in the secondary market at 

prices that do not vary substantially from their NAV.

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

    4. Section 22(d) of the Act, among other things, prohibits a dealer 

from selling a redeemable security 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 the 

Prospectus, and not at a price based on NAV. Thus, purchases and sales 

of Shares in the secondary market will not comply with section 22(d) of 

the Act and rule 22c-1 under the Act. Applicants request an exemption 

under section 6(c) from these provisions.

    5. Applicants assert that the concerns sought to be addressed by 

section 22(d) of the Act and rule 22c-1 under the Act with respect to 

pricing are equally satisfied by the proposed method of pricing Shares. 

Applicants maintain that, while there is little legislative history 

regarding section 22(d), its provisions, as well as those of rule 22c-

1, appear to have been designed to (a)

[[Page 54869]]

prevent dilution caused by certain riskless-trading schemes by 

principal underwriters and contract dealers, (b) prevent unjust 

discrimination or preferential treatment among buyers resulting from 

sales at different prices, and (c) assure an orderly distribution of 

investment company shares by eliminating price competition from Brokers 

offering shares at less than the published sales price and repurchasing 

shares at more than the published redemption price.

    6. Applicants believe that none of these purposes will be thwarted 

by permitting Shares to trade in the secondary market at negotiated 

prices. Applicants state that (a) secondary market trading in Shares 

does not involve the Funds as parties and cannot result in dilution of 

an investment in Shares, and (b) to the extent different prices exist 

during a given trading day, or from day to day, such variances occur as 

a result of third-party market forces, such as supply and demand. 

Therefore, applicants assert that secondary market transactions in 

Shares will not lead to discrimination or preferential treatment among 

purchasers. Finally, applicants contend that the proposed distribution 

system will be orderly because arbitrage activity will ensure that the 

difference between the market price of Shares and their NAV remains 

narrow.

Section 22(e) of the Act

    7. Section 22(e) 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 the settlement of redemptions of Creation Units of the 

Global 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 the Global Funds invest. Applicants state that 

delivery cycles for transferring Portfolio Instruments to redeeming 

investors, coupled with local market holiday schedules, will require a 

delivery process longer than seven calendar days for a Global Fund. 

Applicants request relief under section 6(c) of the Act from section 

22(e) to allow a Global Fund to pay redemption proceeds up to 12 

calendar days after the tender of any Creation Units for redemption. 

Except as disclosed in the relevant Global Fund's Prospectus and/or 

SAI, applicants expect that each Global Fund will be able to deliver 

redemption proceeds within seven days.\12\ With respect to Future Funds 

that are Global Funds, applicants seek the same relief from section 

22(e) only to the extent that circumstances similar to those described 

in the application exist.

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    \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 no relief obtained from the 

requirements of section 22(e) will affect any obligations that it 

may otherwise have under rule 15c6-1.

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    8. Applicants state that section 22(e) was designed to prevent 

unreasonable and unforeseen delays in the payment of redemption 

proceeds. Applicants assert that the requested relief will not lead to 

the problems that section 22(e) was designed to prevent. Applicants 

state that the SAI 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 Global Fund. Applicants are not seeking 

relief from section 22(e) with respect to Global Funds that do not 

effect creations and redemptions of Creation Units in-kind.

Section 12(d)(1) of the Act

    9. 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.

    10. Applicants request relief to permit Investing Funds (as defined 

below) to acquire Shares in excess of the limits in section 12(d)(1)(A) 

of the Act and to permit the Funds, their principal underwriters and 

any Brokers to sell Shares to Investing Funds in excess of the limits 

in section 12(d)(l)(B) of the Act. Applicants request that these 

exemptions apply to: (1) Any Fund that is currently or subsequently 

part of the same ``group of investment companies'' as the Initial Funds 

within the meaning of section 12(d)(1)(G)(ii) of the Act as well as any 

principal underwriter for the Fund and any Brokers selling Shares of a 

Fund to an Investing Fund; and (2) each management investment company 

or unit investment trust registered under the Act that is not part of 

the same ``group of investment companies'' as the Funds within the 

meaning of section 12(d)(1)(G)(ii) of the Act and that enters into a 

FOF Participation Agreement (as defined below) with a Fund (such 

management investment companies are referred to herein as ``Investing 

Management Companies,'' such unit investment trusts are referred to 

herein as ``Investing Trusts,'' and Investing Management Companies and 

Investing Trusts together are referred to herein as ``Investing 

Funds''). Investing Funds do not include the Funds. Each Investing 

Trust will have a sponsor (``Sponsor'') and each Investing Management 

Company will have an investment adviser within the meaning of section 

2(a)(20)(A) of the Act (``Investing Fund Advisor'') that does not 

control, is not controlled by or under common control with the Advisor. 

Each Investing Management Company may also have one or more investment 

advisers within the meaning of section 2(a)(20)(B) of the Act (each, an 

``Investing Fund Sub-Advisor'').

    11. Applicants assert that the proposed transactions will not lead 

to any of the abuses that section 12(d)(1) was designed to prevent. 

Applicants submit that the proposed conditions to the requested relief 

address the concerns underlying the limits in section 12(d)(1), which 

include concerns about undue influence, excessive layering of fees and 

overly complex structures.

    12. Applicants believe that neither an Investing Fund nor an 

Investing Fund 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 an Investing Fund 

Advisor or a Sponsor, any person controlling, controlled by, or under 

common control with the Investing Fund Advisor or Sponsor, and any 

investment company or issuer that would be an investment company but

[[Page 54870]]

for section 3(c)(1) or 3(c)(7) of the Act that is advised or sponsored 

by the Investing Fund Advisor or Sponsor, or any person controlling, 

controlled by, or under common control with the Investing Fund Advisor 

or Sponsor (``Investing Fund's 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-Advisor, any person controlling, controlled by or under common 

control with the Investing Fund Sub-Advisor, 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-Advisor or any person 

controlling, controlled by or under common control with the Investing 

Fund Sub-Advisor (``Investing Fund's Sub-Advisory Group'').

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    \13\ ``Investing Fund Affiliate'' is the Investing Fund Advisor, 

Investing Fund Sub-Advisor, 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 and any person controlling, controlled by or 

under common control with any of these entities.

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    13. Applicants propose other conditions to limit the potential for 

undue influence over the Funds, including that no Investing Fund or 

Investing Fund 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 Advisor, Investing Fund Sub-

Advisor, employee or Sponsor of the Investing Fund, or a person of 

which any such officer, director, member of an advisory board, 

Investing Fund Advisor or Investing Fund Sub-Advisor, employee or 

Sponsor is an affiliated person (except that any person whose 

relationship to the Fund is covered by section 10(f) of the Act is not 

an Underwriting Affiliate).

    14. 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 persons'' within the 

meaning of section 2(a)(19) of the Act (``disinterested directors or 

trustees''), will be required to 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, an Investing Fund Advisor, trustee of a 

Investing Trust (``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-l under the Act) received 

from a Fund by the Investing Fund Advisor, Trustee or Sponsor or an 

affiliated person of the Investing Fund Advisor, Trustee or Sponsor, 

other than any advisory fees paid to the Investing Fund Advisor, 

Trustee or Sponsor or its affiliated person by a Fund, 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 Financial 

Industry Regulatory Authority (``Rule 2830'').

    15. 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 of other investment companies for short-term 

cash management purposes.

    16. 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 (``FOF Participation 

Agreement''). The FOF Participation Agreement will include an 

acknowledgment from the Investing Fund that it may rely on the order 

only to invest in the Funds and not in any other investment company.

Section 17(a) of the Act

    17. Section 17(a) of the Act generally prohibits an affiliated 

person of a registered investment company, or an affiliated person of 

such person (``second tier affiliates''), from selling any security to 

or purchasing any security from the company. Section 2(a)(3) of the Act 

defines ``affiliated person'' to include any person directly or 

indirectly owning, controlling, or holding with power to vote 5% or 

more of the outstanding voting securities of the other person and any 

person directly or indirectly controlling, controlled by, or under 

common control with, the other person. Section 2(a)(9) of the Act 

provides that a control relationship will be presumed where one person 

owns more than 25% of another person's voting securities. The Funds may 

be deemed to be controlled by the Advisor or an entity controlling, 

controlled by or under common control with the Advisor and hence 

affiliated persons of each other. In addition, the Funds may be deemed 

to be under common control with any other registered investment company 

(or series thereof) advised by the Advisor or an entity controlling, 

controlled by or under common control with the Advisor (an ``Affiliated 

Fund'').

    18. Applicants request an exemption under sections 6(c) and 17(b) 

of the Act from section 17(a) 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 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. Applicants also request 

an exemption in order to permit a Fund to sell its Shares to and redeem 

its 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.\14\

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    \14\ Applicants expect that most Investing Funds will purchase 

Shares in the secondary market and will not purchase Creation Units 

directly from a Fund.

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    19. 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. The deposit 

procedures for in-kind purchases of Creation Units and the redemption 

procedures for in-kind redemptions will be the same for all purchases 

and redemptions. Deposit Instruments and Redemption Instruments will be 

valued in the same manner as those Portfolio Instruments currently held 

by the relevant Funds. 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.

    20. Applicants also submit that the sale of Shares to and 

redemption of Shares from an Investing Fund satisfies

[[Page 54871]]

the standards for relief under sections 17(b) and 6(c) of the Act. 

Applicants note that 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.\15\ Applicants also state that the 

proposed transactions will be consistent with the policies of each 

Investing Fund and Fund and with the general purposes of the Act.

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    \15\ 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 its 

Shares to an Investing Fund, may be prohibited by section 17(e)(1) 

of the Act. The FOF Participation 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: \16\

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    \16\ See note 5, supra.

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A. Actively Managed Exchange-Traded Fund Relief

    1. Each Prospectus will clearly disclose that, for purposes of the 

Act, Shares are issued by a registered investment company and that the 

acquisition of Shares by investment companies and companies relying on 

sections 3(c)(1) or 3(c)(7) of the Act is subject to the restrictions 

of section 12(d)(1) of the Act, except as permitted by an exemptive 

order that permits registered investment companies to invest in a Fund 

beyond the limits in section 12(d)(1), subject to certain terms and 

conditions, including that the registered investment company enter into 

a FOF Participation Agreement with the Fund regarding the terms of the 

investment.

    2. As long as the Funds operate in reliance on the requested order, 

the Shares of the Funds will be listed on a Stock Exchange.

    3. Neither the Trust nor any Fund will be advertised or marketed as 

an open-end investment company or a mutual fund. Each Fund's Prospectus 

will prominently disclose that the Fund is an actively managed 

exchange-traded fund. Each Prospectus will prominently disclose that 

the Shares are not individually redeemable shares and will disclose 

that the owners of the Shares may acquire those Shares from the Fund 

and tender those Shares for redemption to the Fund in Creation Units 

only. Any advertising material that describes the purchase or sale of 

Creation Units or refers to redeemability will prominently disclose 

that the Shares are not individually redeemable and that owners of the 

Shares may acquire those Shares from the Fund and tender those Shares 

for redemption to the Fund in Creation Units only.

    4. The Web site for the Funds, which is and will be publicly 

accessible at no charge, will contain the following information, on a 

per Share basis, for each Fund: (a) The prior Business Day's NAV and 

the Bid/Ask Price, and a calculation of the premium or discount of the 

Bid/Ask Price against such NAV; and (b) data in chart format displaying 

the frequency distribution of discounts and premiums of the daily Bid/

Ask Price against the NAV, within appropriate ranges, for each of the 

four previous calendar quarters (or for the life of the Fund, if 

shorter).

    5. The Prospectus and annual report for each Fund will also 

include: (a) The information listed in condition A.4(b), (i) in the 

case of the Prospectus, for the most recently completed year (and the 

most recently completed quarter or quarters, as applicable) and (ii) in 

the case of the annual report, for the immediately preceding five years 

(or for the life of the Fund, if shorter), and (b) calculated on a per 

Share basis for one-, five- and ten-year periods (or for the life of 

the Fund, if shorter), the cumulative total return and the average 

annual total return based on NAV and Bid/Ask Price.

    6. On each Business Day, before commencement of trading in Shares 

on the Stock Exchange, the Fund will disclose on its website the 

identities and quantities of the Portfolio Instruments and other assets 

held by the Fund that will form the basis for the Fund's calculation of 

NAV at the end of the Business Day.

    7. The Advisor or any Subadvisor, directly or indirectly, will not 

cause any Authorized Participant (or any investor on whose behalf an 

Authorized Participant may transact with the Fund) to acquire any 

Deposit Instrument for the Fund through a transaction in which the Fund 

could not engage directly.

    8. The requested order will expire on the effective date of any 

Commission rule under the Act that provides relief permitting the 

operation of actively-managed exchange-traded funds.

B. Section 12(d)(1) Relief

    1. The members of the Investing 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 the Investing 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 

Investing Fund's Advisory Group or the Investing 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 

of the Fund in the same proportion as the vote of all other holders of 

the Fund's Shares. This condition does not apply to the Investing 

Fund's Subadvisory Group with respect to a Fund for which the Investing 

Fund Sub-Advisor or a person controlling, controlled by or under common 

control with the Investing Fund Sub-Advisor acts as the investment 

adviser within the meaning of section 2(a)(20)(A) of the Act.

    2. No Investing Fund or Investing Fund 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 Fund Affiliate and the Fund or a Fund 

Affiliate.

    3. 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 Advisor and any Investing Fund Sub-Advisor 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 Fund Affiliate from a Fund or a Fund 

Affiliate in connection with any services or transactions.

    4. Once an investment by an Investing Fund in the securities of a 

Fund exceeds the limit in section 12(d)(1)(A)(i) of the Act, the board 

of trustees (the ``Board'') of a Fund, including a majority of the 

disinterested Board members, will determine that any consideration paid 

by the Fund to the Investing Fund or an Investing 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 advisor(s), 

or any person controlling, controlled by or under common control with 

such investment advisor(s).

[[Page 54872]]

    5. The Investing Fund Advisor, or 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-l under 

the Act) received from a Fund by the Investing Fund Advisor, or Trustee 

or Sponsor, or an affiliated person of the Investing Fund Advisor, or 

Trustee or Sponsor, other than any advisory fees paid to the Investing 

Fund Advisor, or 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-Advisor will waive fees otherwise payable 

to the Investing Fund Sub-Advisor, 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-Advisor, or 

an affiliated person of the Investing Fund Sub-Advisor, other than any 

advisory fees paid to the Investing Fund Sub-Advisor or its affiliated 

person by the Fund, in connection with the investment by the Investing 

Management Company in the Fund made at the direction of the Investing 

Fund Sub-Advisor. In the event that the Investing Fund Sub-Advisor 

waives fees, the benefit of the waiver will be passed through to the 

Investing Management Company.

    6. No Investing Fund or Investing Fund 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 Affiliated Underwriting.

    7. The Board of a Fund, including a majority of the disinterested 

Board members, will adopt procedures reasonably designed to monitor any 

purchases of securities by the 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: (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.

    8. 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.

    9. Before investing in a Fund in excess of the limits in section 

12(d)(1)(A), an Investing Fund will execute a FOF Participation 

Agreement with the Fund stating that their respective boards of 

directors or trustees and their investment advisors, 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 Fund Affiliate and 

Underwriting Affiliate. The Investing Fund will notify the Fund of any 

changes to the list 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 FOF 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.

    10. 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.

    11. 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 Rule 2830.

    12. No Fund relying on this section 12(d)(1) relief will acquire 

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 of other investment companies for short-term cash management 

purposes.

    For the Commission, by the Division of Investment Management, 

under delegated authority.

Florence E. Harmon,

Deputy Secretary.

[FR Doc. E9-25560 Filed 10-22-09; 8:45 am]

BILLING CODE 8011-01-P