Document ID: SEC-2013-1031-0001
Agency: sec
Document Type: Notice
Title: Applications: First Trust Exchange-Traded Fund, et al.
Posted Date: 2013-06-07T04:00Z

[Federal Register Volume 78, Number 110 (Friday, June 7, 2013)]
[Notices]
[Pages 34410-34413]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-13551]

[[Page 34410]]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 30546; File No. 812-14070]

First Trust Exchange-Traded Fund, et al.; Notice of Application

June 3, 2013.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under section 6(c) of the Investment 
Company Act of 1940 (``Act'') for an exemption from section 15(a) of 
the Act and rule 18f-2 under the Act, as well as from certain 
disclosure requirements.

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Summary of Application: Applicants, including exchange-traded funds 
(``ETFs''), request an order that would permit them to enter into and 
materially amend sub-advisory agreements without shareholder approval 
and would grant relief from certain disclosure requirements.

Applicants: First Trust Exchange-Traded Fund, First Trust Exchange-
Traded Fund II, First Trust Exchange-Traded Fund III, First Trust 
Exchange-Traded Fund IV, First Trust Exchange-Traded Fund V, First 
Trust Exchange-Traded Fund VI, First Trust Exchange-Traded Fund VII, 
First Trust Exchange-Traded AlphaDEX(R) Fund and First Trust 
Exchange-Traded AlphaDEX(R) Fund II (each an ``ETF Trust''), 
First Trust Series Fund (the ``Series Trust''), First Defined Portfolio 
Fund, LLC (``First Defined''), First Trust Variable Insurance Trust 
(``VIT'' and, together with each ETF Trust, the Series Trust, and First 
Defined, each a ``Company'' and together, the ``Companies'') and First 
Trust Advisors L.P. (``First Trust'' and, together with the Companies, 
the ``Applicants'').

DATES: Filing Dates: The application was filed on August 24, 2012, and 
amended on February 19, 2013.

Hearing or Notification of Hearing: An order granting the application 
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 June 28, 2013, and should be accompanied by proof of service on 
the Applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-1090. Applicants, 
Attn: W. Scott Jardine, 120 East Liberty Drive, Suite 400, Wheaton, IL 
60187.

FOR FURTHER INFORMATION CONTACT: Steven I. Amchan, Senior Counsel, at 
(202) 551-6826, or Jennifer L. Sawin, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Exemptive Applications Office).

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 ETF Trusts, the Series Trust, and VIT each are organized as 
Massachusetts business trusts, and First Defined is organized as a 
Delaware limited liability company. Each Company is, or will be, 
registered under the Act as an open-end management investment 
company.\1\ The ETF Trusts have received or may rely on exemptive 
relief to offer series that sell their shares on a national securities 
exchange at negotiated prices. As of February 19, 2013, each ETF Trust, 
other than First Trust Exchange-Traded Fund V and First Trust Exchange-
Traded Fund VII, had series with publicly outstanding shares. Also as 
of February 19, 2013, the Series Trust had three existing series 
currently offered and sold, First Defined had eight, and VIT had one. 
All Companies may offer additional series in the future.\2\
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    \1\ The Companies and all of their existing and future series 
are referred to herein as ``Funds.''
    \2\ Applicants request that any relief granted pursuant to the 
application apply not only to the series of the Companies but also 
to any existing or future open-end management investment companies 
or series thereof that (a) are advised by First Trust or any entity 
controlling, controlled by or under common control with First Trust 
or its successors (each such entity included with First Trust in the 
term ``Advisor''), (b) are registered under the Act, (c) use a 
management approach that utilizes Sub-Advisers (as defined below) as 
described in the application (the ``Manager of Managers 
Structure''), and (d) comply with the terms and conditions in the 
application (included in the term ``Funds''); and any Advisor. The 
term ``Company'' as used in the application includes any existing or 
future open-end management investment company that is registered 
with the Commission and advised by the Advisor. Every existing 
registered open-end management investment company that currently 
intends to rely on the requested order is named as an Applicant. Any 
entity that relies on the order in the future will do so only in 
accordance with the terms and conditions in the application. For the 
purposes of the requested order, ``successor'' is limited to an 
entity that results from a reorganization into another jurisdiction 
or a change in the type of business organization. If the name of any 
Fund relying on the requested relief contains the name of a Sub-
Adviser, the name of the Advisor that serves as the primary adviser 
to that Fund, or a trademark or trade name owned by that Advisor, 
will precede the name of the Sub-Adviser.
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    2. First Trust, an Illinois limited partnership with its principal 
office in Wheaton, Illinois, is registered as an investment adviser 
under the Investment Advisers Act of 1940 (``Advisers Act''). First 
Trust has one limited partner, Grace Partners of DuPage L.P., and one 
general partner, The Charger Corporation. First Trust currently serves 
as the investment adviser to the existing Funds pursuant to an 
investment advisory agreement with respect to each Fund (each, an 
``Advisory Agreement'') approved by the applicable board of trustees 
(the ``Board'') \3\, including a majority of the trustees who are not 
``interested persons,'' as defined in section 2(a)(19) of the Act (the 
``Independent Trustees''), and by the shareholder(s) of each Fund in 
the manner required by sections 15(a) and (c) of the Act and rule 18f-2 
thereunder. With respect to new Funds offered in the future, the 
Advisory Agreement will be approved by the Board, including majority of 
the Independent Trustees, and by the initial shareholder of the Fund in 
the manner required by sections 15(a) and (c) of the Act and rule 18f-2 
thereunder.
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    \3\ ``Board,'' as used herein, is the applicable board of 
directors or trustees for each Fund, including future Funds.
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    3. Under the terms of the applicable Advisory Agreement, the 
Advisor, subject to the oversight of the Board, generally furnishes a 
continuous investment program for each Fund. For the investment 
management services that it provides to each Fund, the Advisor receives 
the fee specified in the Advisory Agreement from each Fund based on the 
Fund's average daily net assets. The terms of the Advisory Agreement 
for any Fund that will use sub-advisers also permit or will permit the 
Advisor, subject to the approval of the applicable Board, including a 
majority of the Independent Trustees, and the approval of the 
shareholders of the Fund (to the extent required by applicable law), to 
delegate portfolio management responsibilities of all or a portion of 
the assets of the Fund to one or more sub-advisers. With respect to 
certain existing Funds the Advisor has entered into investment sub-
advisory agreements with unaffiliated sub-

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advisers (each, a ``Sub-Adviser'' and such agreements, ``Sub-Advisory 
Agreements'') pursuant to which the Sub-Advisers will provide 
investment advisory services to those Funds. The Advisor may, in the 
future, enter into Sub-Advisory Agreements with other Sub-Advisers for 
one or more Funds.\4\ Each Sub-Adviser is, or will be, an investment 
adviser registered under the Advisers Act, or not subject to such 
registration. Each Sub-Adviser is and will be responsible, subject to 
the general supervision of the Advisor and the Board, for, among other 
things, the purchase and sale of securities for the applicable Fund. 
The Advisor will (1) Set each Fund's overall investment strategies; (2) 
evaluate, select, and recommend to the Board Sub-Advisers needed to 
manage all or part of the Funds' assets; (3) monitor and evaluate each 
Sub-Adviser's investment programs, results, and performance; and (4) 
review each Fund's compliance with its investment objective(s), 
policies and restrictions. The Advisor will also recommend to the Board 
whether Sub-Advisory Agreements should be renewed, modified or 
terminated. Additionally, when the Advisor employs multiple Sub-
Advisers, the Advisor will allocate, and reallocate, the Fund's assets 
among Sub-Advisers. The Advisor currently compensates each Sub-Adviser 
out of the advisory fees paid to the Advisor under the relevant 
Advisory Agreement; in the future, subject to the terms of the 
applicable Advisory Agreement and Sub-Advisory Agreement, Sub-Advised 
Funds may pay advisory fees to the Sub-Advisers directly. Where the 
Sub-Advisers are paid directly by the Funds, Applicants acknowledge 
that, after the requested order is issued, shareholder approval will 
still be sought for any amendment to a Sub-Advisory Agreement that 
would increase the total management and advisory fees payable by a 
Fund.
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    \4\ Each existing Sub-Advisory Agreement (i) was approved by the 
Board, including a majority of the Independent Trustees, and the 
shareholders of the applicable Fund in accordance with sections 
15(a) and 15(c) of the Act and rule 18f-2 thereunder and (ii) 
complies fully with the requirements of section 15(a) of the Act.
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    4. Applicants request an order to permit the Advisor, subject to 
Board approval, to select certain Sub-Advisers to manage all or a 
portion of the assets of a Fund pursuant to a Sub-Advisory Agreement 
and materially amend Sub-Advisory Agreements without obtaining 
shareholder approval. The requested relief will not extend to any sub-
adviser that is an affiliated person, as defined in section 2(a)(3) of 
the Act, of a Company, a Fund, or the Advisor, other than by reason of 
serving as a sub-adviser to one or more of the Funds (``Affiliated Sub-
Advisers'').
    5. Applicants acknowledge that the requested order seeks relief for 
Funds that are ETFs (``ETF Funds''). However, Applicants believe that 
operations of the ETF Funds under the requested order address the 
concerns historically considered by the Commission when granting 
identical relief to mutual funds. Applicants believe that similar to 
shareholders of a mutual fund who may ``vote with their feet'' by 
redeeming their individual shares at net asset value (``NAV'') if they 
do not approve of a change in sub-adviser or subadvisory agreement, ETF 
Fund shareholders will be able, due to the arbitrage mechanism 
implemented for each ETF Fund, to sell shares in the secondary market 
at negotiated prices that do not vary materially from the relevant 
Fund's NAV if the shareholders do not approve of a change.
    6. Applicants also request an order exempting the Funds from 
certain disclosure provisions described below that may require the 
Applicants to disclose fees paid to each Sub-Adviser. Applicants seek 
an order to permit each Fund to disclose (as a dollar amount and a 
percentage of the Fund's net assets) only: (a) The aggregate fees paid 
to the Advisor and any Affiliated Sub-Advisers; and (b) the aggregate 
fees paid to Sub-Advisers (collectively, the ``Aggregate Fee 
Disclosure''). A Fund that employs an Affiliated Sub-Adviser will 
provide separate disclosure of any fees paid to the Affiliated Sub-
Adviser.

Applicants' Legal Analysis

    1. Section 15(a) of the Act provides, in relevant part, that it is 
unlawful for any person to act as an investment adviser to a registered 
investment company except pursuant to a written contract that has been 
approved by the vote of a majority of the company's outstanding voting 
securities. Rule 18f-2 under the Act provides that each series or class 
of stock in a series investment company affected by a matter must 
approve that matter if the Act requires shareholder approval.
    2. Form N-1A is the registration statement used by open-end 
investment companies. Item 19(a)(3) of Form N-1A requires disclosure of 
the method and amount of the investment adviser's compensation.
    3. Rule 20a-1 under the Act requires proxies solicited with respect 
to an investment company to comply with Schedule 14A under the 
Securities Exchange Act of 1934 (``Exchange Act''). Items 22(c)(1)(ii), 
22(c)(1)(iii), 22(c)(8) and 22(c)(9) of Schedule 14A, taken together, 
require a proxy statement for a shareholder meeting at which the 
advisory contract will be voted upon to include the ``rate of 
compensation of the investment adviser,'' the ``aggregate amount of the 
investment adviser's fees,'' a description of the ``terms of the 
contract to be acted upon,'' and, if a change in the advisory fee is 
proposed, the existing and proposed fees and the difference between the 
two fees.
    4. Regulation S-X sets forth the requirements for financial 
statements required to be included as part of a registered investment 
company's registration statement and shareholder reports filed with the 
Commission. Sections 6-07(2)(a), (b) and (c) of Regulation S-X require 
a registered investment company to include in its financial statements 
information about the investment advisory fees.
    5. Section 6(c) 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 provisions of the Act, or 
from any rule thereunder, if 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. Applicants state that the requested relief meets this standard for 
the reasons discussed below.
    6. Applicants state that the shareholders expect the Advisor to 
select the portfolio managers or, subject to the review and approval of 
the Board, the Sub-Adviser for a Fund that is best suited to achieve 
the Fund's investment objective(s). Applicants assert that, from the 
perspective of the investor, the role of the Sub-Advisers with respect 
to the Funds utilizing the Manager of Managers Structure is 
substantially equivalent to the role of the individual portfolio 
managers employed by traditional investment company advisory firms. In 
the absence of exemptive relief from section 15(a) of the Act, when a 
new Sub-Adviser is proposed for retention by a Fund, shareholders would 
be required to approve the Sub-Advisory Agreement with that Sub-
Adviser. Similarly, approval by the shareholders of the affected Fund 
would be required in order to amend an existing Sub-Advisory Agreement 
in any material respect or in order to continue to retain an existing 
Sub-Adviser whose Sub-Advisory Agreement is ``assigned'' as a result of 
a change of control. Obtaining shareholder approval would be costly and 
slow, and potentially harmful to the affected Fund and its 
shareholders. Applicants note that each Advisory

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Agreement will remain fully subject to the requirements of section 
15(a) of the Act and rule 18f-2 under the Act, including the 
requirement for shareholder voting. Moreover, the Board would comply 
with the requirements of sections 15(a) and 15(c) of the Act before 
entering into or amending a Sub-Advisory Agreement.
    7. If new Sub-Advisers are hired, the applicable Fund will inform 
shareholders of the hiring of a new Sub-Adviser pursuant to the 
following procedures (``Modified Notice and Access Procedures''): (a) 
Within 90 days after a new Sub-Adviser is hired for any Fund, that Fund 
will furnish its shareholders with either a Multi-manager Notice or a 
Multi-manager Notice and Multi-manager Information Statement; \5\ and 
(b) the Fund will make the Multi-manager Information Statement 
available on the Web site identified in the Multi-manager Notice no 
later than when the Multi-manager Notice (or Multi-manager Notice and 
Multi-manager Information Statement) is first sent to shareholders, and 
will maintain it on that Web site for at least 90 days. In the 
circumstances described in the Application, a proxy solicitation to 
approve the appointment of new Sub-Advisers provides no more meaningful 
information to shareholders than the proposed Multi-manager Information 
Statement.\6\
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    \5\ A ``Multi-manager Notice'' will be modeled on a Notice of 
Internet Availability as defined in rule 14a-16 under the Exchange 
Act, and specifically will, among other things: (a) Summarize the 
relevant information regarding the new Sub-Adviser; (b) inform 
shareholders that the Multi-manager Information Statement is 
available on a Web site; (c) provide the Web site address; (d) state 
the time period during which the Multi-manager Information Statement 
will remain available on that Web site; (e) provide instructions for 
accessing and printing the Multi-manager Information Statement; and 
(f) instruct the shareholder that a paper or email copy of the 
Multi-manager Information Statement may be obtained, without charge, 
by contacting the Funds.
    A ``Multi-manager Information Statement'' will meet the 
requirements of Regulation 14C, Schedule 14C and Item 22 of Schedule 
14A under the Exchange Act for an information statement, except as 
modified by the requested order to permit Aggregate Fee Disclosure. 
Multi-manager Information Statements will be filed electronically 
with the Commission via the EDGAR system.
    \6\ Applicants state that the ETF Funds will rely on the 
disclosure document delivery mechanisms currently used by mutual 
funds that are not directly sold and by other ETFs to ensure that 
shareholders who purchase in the secondary markets receive 
disclosure materials.
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    8. Applicants assert that the requested disclosure relief would 
benefit Fund shareholders because it would improve the Advisor's 
ability to negotiate the fees paid to Sub-Advisers. Applicants state 
that the Advisor may be able to negotiate rates that are below a Sub-
Adviser's ``posted'' amounts if the Advisor is not required to disclose 
the Sub-Advisers' fees to the public. Applicants submit that the 
requested relief will also encourage Sub-Advisers to negotiate lower 
sub-advisory fees with the Advisor if the lower fees are not required 
to be made public.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Before a Fund may rely on the order requested in the 
application, the operation of the Fund in the manner described in the 
application will be approved by a majority of the Fund's outstanding 
voting securities, as defined in the Act, or, in the case of a Fund 
whose public shareholders purchase shares on the basis of a prospectus 
containing the disclosure contemplated by condition 2 below, by the 
initial shareholder(s) before offering shares of that sub-advised Fund 
to the public.
    2. The prospectus for each Fund relying on the order requested in 
the application will disclose the existence, substance, and effect of 
any order granted pursuant to the application. Each Fund relying on the 
order requested in the application will hold itself out to the public 
as utilizing the Manager of Managers Structure described in the 
application. The prospectus will prominently disclose that the Advisor 
has ultimate responsibility (subject to oversight by the Board) to 
oversee the Sub-Advisers and recommend their hiring, termination, and 
replacement.
    3. Funds will inform shareholders of the hiring of a new Sub-
Adviser within 90 days of the hiring of the new Sub-Adviser pursuant to 
the Modified Notice and Access Procedures.
    4. The Advisor will not enter into a sub-advisory agreement with 
any Affiliated Sub-Adviser without such agreement, including the 
compensation to be paid thereunder, being approved by the shareholders 
of the applicable Fund.
    5. At all times, at least a majority of the Board will be 
Independent Trustees, and the nomination of new or additional 
Independent Trustees will be placed within the discretion of the then-
existing Independent Trustees.
    6. Whenever a sub-adviser change is proposed for a Fund with an 
Affiliated Sub-Adviser, the Board, including a majority of the 
Independent Trustees, will make a separate finding, reflected in the 
applicable Board minutes, that such change is in the best interests of 
the Fund and its shareholders, and does not involve a conflict of 
interest from which the Advisor or the Affiliated Sub-Adviser derives 
an inappropriate advantage.
    7. Whenever a sub-adviser is hired or terminated, the Advisor will 
provide the Board with information showing the expected impact on the 
profitability of the Advisor.
    8. The Advisor will provide general management services to each 
Fund that is sub-advised, including overall supervisory responsibility 
for the general management and investment of the Fund's assets and, 
subject to review and approval of the Board, will: (i) Set each Fund's 
overall investment strategies; (ii) evaluate, select and recommend Sub-
Advisers to manage all or a part of a Fund's assets; (iii) allocate 
and, when appropriate, reallocate a Fund's assets among one or more 
Sub-Advisers; (iv) monitor and evaluate the performance of Sub-
Advisers; and (v) implement procedures reasonably designed to ensure 
that the Sub-Advisers comply with the relevant Fund's investment 
objective(s), policies and restrictions.
    9. No trustee or officer of a Company, or director, manager or 
officer of the Advisor, will own directly or indirectly (other than 
through a pooled investment vehicle that is not controlled by such 
person), any interest in a Sub-Adviser except for: (a) Ownership of 
interests in the Advisor or any entity that controls, is controlled by, 
or is under common control with the Advisor, or (b) ownership of less 
than 1% of the outstanding securities of any class of equity or debt of 
any publicly traded company that is either a Sub-Adviser or an entity 
that controls, is controlled by, or is under common control with a Sub-
Adviser.
    10. Each Fund will disclose in its registration statement the 
Aggregate Fee Disclosure.
    11. In the event the Commission adopts a rule under the Act 
providing substantially similar relief to that in the order requested 
in the application, the requested order will expire on the effective 
date of that rule.
    12. The Advisor will provide the Board, no less frequently than 
quarterly, with information about the profitability of the Advisor on a 
per Fund basis. The information will reflect the impact on 
profitability of the hiring or termination of any sub-adviser during 
the applicable quarter.
    13. Independent Legal Counsel, as defined in rule 0-1(a)(6) under 
the Act, will be engaged to represent the Independent Trustees. The 
selection of such counsel will be within the discretion of the then-
existing Independent Trustees.

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    14. For Funds that pay fees to a Sub-Adviser directly from Fund 
assets, any changes to a Sub-Advisory Agreement that would result in an 
increase in the total management and advisory fees payable by a Fund 
will be required to be approved by the shareholders of the Fund.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-13551 Filed 6-6-13; 8:45 am]
BILLING CODE 8011-01-P