Document ID: SEC-2009-1061-0001
Agency: sec
Document Type: Notice
Title: Pax World Funds Trust II, et al.; Notice of Application
Posted Date: 2009-07-28T04:00Z

[Federal Register: July 28, 2009 (Volume 74, Number 143)]
[Notices]               
[Page 37258-37265]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jy09-77]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28834; File No. 812-13503]

 
Pax World Funds Trust II, et al.; Notice of Application

July 22, 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 (the ``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, under sections 6(c) and 17(b) of the Act for an 
exemption from sections 17(a)(1) and 17(a)(2) of the Act, and under 
section 12(d)(1)(J) of the Act for an exemption from sections 
12(d)(1)(A) and 12(d)(1)(B) of the Act.

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Summary of Application: Applicants request an order that would permit 
(a) certain open-end management investment companies and their series, 
to issue shares (``Fund Shares'') that can be redeemed only in large 
aggregations (``Creation Units''); (b) secondary market transactions in 
Fund Shares to occur at negotiated prices; (c) certain series to pay 
redemption proceeds, under certain circumstances, more than seven days 
after the tender of Fund 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 Fund Shares.

Applicants: Pax World Funds Trust II (``Trust''), Pax World Management 
Corp. (``Advisor'') and ALPS Distributors, Inc. (``Distributor'').

DATES:  Filing Dates: The application was filed on February 29, 2008, 
and amended on May 8, 2008, November 17, 2008, May 8, 2009, and July 7, 
2009.

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 August 12, 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, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090; Applicants: Pax World Management Corp. 
and Pax World Funds Trust II, 30 Penhallow Street, Suite 400, 
Portsmouth, NH 03801; ALPS Distributors, Inc., 1290 Broadway, Suite 
1100, Denver, CO 80203.

FOR FURTHER INFORMATION CONTACT: Laura J. Riegel, Senior Counsel at 
(202) 551-6873, or Julia Kim Gilmer, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file number, or an applicant 
using the Company name box, at http://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicants' Representations

    1. The Trust is registered as an open-end management investment 
company and is organized as a Massachusetts trust that will offer 
multiple series. The Trust will initially offer Fund Shares of two 
series (the ``Initial Funds''). Applicants may offer additional 
registered open-end investment companies in the future as well as 
additional series of the Trust and series of any existing or future 
open-end

[[Page 37259]]

investment companies registered under the Act, which will be advised by 
the Advisor or an entity controlling, controlled by, or under common 
control with the Advisor (``Future Funds'' and together with the 
Initial Funds, the ``Funds'').\1\
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    \1\ All existing entities that intend to rely on the requested 
order have been named as applicants. Any other existing or future 
entity that subsequently relies on the order will comply with the 
terms and conditions of the application.
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    2. The Advisor will serve as the investment adviser to the Initial 
Funds. The Advisor is registered as an investment adviser under the 
Investment Advisers Act of 1940, as amended (the ``Advisers Act''). In 
the future, the Advisor may enter into sub-advisory agreements with one 
or more additional investment advisers to act as sub-advisors to 
particular Funds (``Sub-Advisors''). Each Sub-Advisor will be 
registered under the Advisers Act. The Distributor is a broker-dealer 
registered under the Securities Exchange Act of 1934 (the ``Exchange 
Act'') and will act as the principal underwriter and distributor for 
the Creation Units of Fund Shares. The Distributor is not affiliated 
with the Advisor or any Sub-Advisor.
    3. Each Fund will hold certain equity securities (``Portfolio 
Securities'') and financial instruments selected to correspond, before 
fees and expenses, generally to the price and yield performance of a 
specified equity securities index (each, an ``Underlying Index'' and 
collectively, ``Underlying Indices'').\2\ Certain of the Underlying 
Indices are composed of equity securities of domestic issuers and non-
domestic issuers meeting the requirements for trading in U.S. markets 
(``Domestic Indices''). Other Underlying Indices include equity 
securities trading in non-U.S. markets or a combination of such 
securities with domestic equity securities (collectively ``Foreign 
Indices''). Funds which track Domestic Indices are referred to as 
``Domestic Funds'' and Funds which track Foreign Indices are referred 
to as ``Foreign Funds.'' No entity that compiles, creates, sponsors or 
maintains an Underlying Index (``Index Provider'') is or will be an 
affiliated person, as defined in section 2(a)(3) of the Act, or an 
affiliated person of an affiliated person, of the Trust or a Fund, of 
the Advisor, of any Sub-Advisor to or promoter of a Fund, or of the 
Distributor.\3\
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    \2\ The Underlying Indices for the Initial Funds are KLD Europe 
Asia Pacific Sustainability \SM\ Index and KLD North America 
Sustainability \SM\ Index.
    \3\ The Index Provider to the Initial Funds is KLD Research & 
Analytics, Inc.
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    4. The investment objective of each Fund will be to provide 
investment results that correspond, before fees and expenses, generally 
to the price and yield performance of its Underlying Index.\4\ The 
value of a Foreign Index and the value of a Domestic Index will be 
disseminated every 15 seconds, throughout the trading day. A Fund will 
utilize either a replication or representative sampling strategy which 
will be disclosed with regard to each Fund in its statutory prospectus 
(``Prospectus'').\5\ A Fund using a replication strategy will invest in 
the Component Securities in its Underlying Index in approximately the 
same proportions as in the Underlying Index. In certain circumstances, 
such as when there are practical difficulties or substantial costs 
involved in holding every security in an Underlying Index or when a 
Component Security is less liquid, illiquid or unavailable, a Fund may 
use a representative sampling strategy pursuant to which it will invest 
in some, but not all of the Component Securities of its Underlying 
Index.\6\ Applicants anticipate that a Fund that utilizes a 
representative sampling strategy will not track the performance of its 
Underlying Index with the same degree of accuracy as 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 a tracking error relative to the 
performance of its Underlying Index of less than 5 percent.
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    \4\ Applicants represent that each Fund will invest at least 80% 
of its total assets in the component securities that comprise its 
Underlying Index (``Component Securities'') or, in the case of 
Foreign Funds, Component Securities and depositary receipts 
representing such securities. ``Depositary Receipts'' will typically 
be American Depositary Receipts, but also include Global Depositary 
Receipts and European Depositary Receipts. Each Fund also may invest 
up to 20% of its assets in certain futures, options and swap 
contracts, cash and cash equivalents, as well as in stocks not 
included in its Underlying Index, but which the Advisor or Sub-
Advisor believes will help the Fund track its Underlying Index.
    \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).
    \6\ Under the representative sampling strategy, the Advisor or 
the Sub-Advisor will seek to construct a Fund's portfolio so that 
its market capitalization, industry weightings, fundamental 
investment characteristics (such as return variability, earnings 
valuation and yield) and liquidity measures perform like those of 
the Underlying Index.
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    5. The Trust will issue Creation Units in specified large 
aggregations of Fund Shares (e.g., 25,000 Fund Shares for each Fund) as 
will be clearly stated in the relevant Fund's Prospectus. Applicants 
expect that the initial price of a Creation Unit will fall in the range 
of $1,000,000 to $10,000,000. 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 (``NSCC''), a 
clearing agency registered with the Commission, or (b) a participant in 
the Depository Trust Company (``DTC'', and such participant, ``DTC 
Participant''). Fund Shares of each Fund generally will be sold in 
Creation Units in exchange for an in-kind deposit by the purchaser of a 
portfolio of securities designated by the Advisor or Sub-Advisor to 
correspond generally to the price and yield performance of the relevant 
Underlying Index (the ``Deposit Securities''), together with the 
deposit of a specified cash payment (``Balancing Amount''). The 
Balancing Amount is an amount equal to the difference between (a) the 
net asset value (``NAV'') (per Creation Unit) of a Fund and (b) the 
total aggregate market value (per Creation Unit) of the Deposit 
Securities.\7\ Each Fund may permit a purchaser of Creation Units to 
substitute cash in lieu of depositing some or all of the Deposit 
Securities if the Advisor or Sub-Advisor believes such method would 
reduce the Fund's transaction costs or enhance the Fund's operating 
efficiency.\8\
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    \7\ Each Fund will sell and redeem Creation Units only on a 
``Business Day'' which includes any day that a Fund is required to 
be open under section 22(e) of the Act. Each Business Day, prior to 
the opening of trading on the Listing Exchange (defined below), the 
list of names and amount of each security constituting the current 
Deposit Securities and the Balancing Amount will be made available. 
Any national securities exchange (as defined in section 2(a)(26) of 
the Act) (``Exchange'') on which Fund Shares are primarily listed 
(``Listing Exchange'') will disseminate, every 15 seconds during its 
regular trading hours, through the facilities of the Consolidated 
Tape Association, an amount per individual Fund Shares representing 
the sum of the estimated Balancing Amount and the current value of 
the Deposit Securities.
    \8\ Applicants state that in some circumstances or in certain 
countries, it may not be practicable or convenient, or permissible 
under the laws of certain countries or the regulations of certain 
foreign stock exchanges, for a Foreign Fund to operate exclusively 
on an ``in-kind'' basis. Applicants also note that when a 
substantial rebalancing of a Fund's portfolio is required, the 
Advisor or Sub-Advisor might prefer to receive cash rather than 
stocks so that the Fund may avoid transaction costs involved in 
liquidating part of its portfolio to achieve the rebalancing.

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[[Page 37260]]

    6. 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 the remaining shareholders resulting from costs in 
connection with the purchase or redemption of Creation Units.\9\ The 
maximum Transaction Fees relevant to each Fund and the method of 
calculating such Transaction Fees will be fully disclosed in the 
Prospectus of such Fund or statement of additional information 
(``SAI''). The Distributor will be responsible for delivering the 
Fund's 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. In addition, the 
Distributor will maintain a record of the instructions given to the 
applicable Fund to implement the delivery of its Fund Shares.
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    \9\ Where a Fund permits a purchaser to substitute cash in lieu 
of depositing a portion of the requisite Deposit Securities, the 
purchaser may be assessed a higher Transaction Fee to cover the cost 
of purchasing such Deposit Securities, including operational 
processing and brokerage costs, and part or all of the spread 
between the expected bid and the offer side of the market relating 
to such Deposit Securities.
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    7. Purchasers of Fund Shares in Creation Units may hold such Fund 
Shares or may sell such Fund Shares into the secondary market. Fund 
Shares will be listed and traded on an Exchange. It is expected that 
one or more member firms of a Listing Exchange will be designated to 
act as a specialist or a market maker and maintain a market for Fund 
Shares trading on the Listing Exchange. Prices of Fund Shares trading 
on an Exchange will be based on the current bid/ask market. Fund Shares 
sold in the secondary market will be subject to customary brokerage 
commissions and charges.
    8. Applicants expect that purchasers of Creation Units will include 
institutional investors and arbitrageurs (which could include 
institutional investors). A specialist or market maker, in providing a 
fair and orderly secondary market for the Fund Shares, also may 
purchase Creation Units for use in its market-making activities. 
Applicants expect that secondary market purchasers of Fund Shares will 
include both institutional investors and retail investors.\10\ 
Applicants expect that the price at which Fund Shares trade will be 
disciplined by arbitrage opportunities created by the option to 
continually purchase or redeem Creation Units at their NAV, which 
should ensure that Fund Shares will not trade at a material discount or 
premium in relation to their NAV.
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    \10\ Fund Shares will be registered in book-entry form only. DTC 
or its nominee will be the registered owner of all outstanding Fund 
Shares. DTC or DTC Participants will maintain records reflecting 
beneficial owners of Fund Shares.
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    9. Fund Shares will not be individually redeemable, and owners of 
Fund Shares may acquire those Fund Shares from the Fund, or tender such 
Fund Shares for redemption to the Fund, in Creation Units only. To 
redeem, an investor will have to accumulate enough Fund Shares to 
constitute a Creation Unit. Redemption orders must be placed by or 
through an Authorized Participant. An investor redeeming a Creation 
Unit generally will receive (a) Portfolio Securities designated to be 
delivered for Creation Unit redemptions (``Fund Securities'') on the 
date that the request for redemption is submitted \11\ 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 Fund Securities are not identical 
to the Deposit Securities on that day. An investor may receive the cash 
equivalent of a Fund Security in certain circumstances, such as if the 
investor is constrained from effecting transactions in the security by 
regulation or policy.
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    \11\ As a general matter, the Deposit Securities and Fund 
Securities will correspond pro rata to the Portfolio Securities held 
by each Fund, but Fund Securities received on redemption may not 
always be identical to Deposit Securities deposited in connection 
with the purchase of Creation Units for the same day. The Funds will 
comply with the Federal securities laws in accepting Deposit 
Securities and satisfying redemptions with Fund Securities, 
including that the Deposit Securities and Fund Securities are sold 
in transactions that would be exempt from registration under the 
Securities Act.
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    10. No Fund will be marketed or otherwise held out as a traditional 
open-end investment company or a mutual fund. Instead, each Fund will 
be marketed as an ``ETF,'' an ``investment company,'' a ``fund,'' or a 
``trust.'' All marketing materials that describe the features or method 
of obtaining, buying or selling Creation Units or Fund Shares traded on 
an Exchange, or refer to redeemability, will prominently disclose that 
Fund Shares are not individually redeemable and that the owners of Fund 
Shares may purchase or redeem Fund Shares from the Fund in Creation 
Units only. The same approach will be followed in the SAI, shareholder 
reports and investor educational materials issued or circulated in 
connection with the Fund Shares. 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 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, under sections 6(c) and 17(b) of the Act 
for an exemption from sections 17(a)(1) and 17(a)(2) of the Act, and 
under section 12(d)(1)(J) of the Act for an exemption from sections 
12(d)(1)(A) and (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 provisions 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 owner, upon 
its presentation to the issuer, is entitled to receive approximately 
his proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Fund Shares will not be individually redeemable, 
applicants request an order that would permit the Funds to register as 
open-end management investment companies and issue Fund Shares that are 
redeemable in Creation Units only. Applicants state that investors may 
purchase Fund Shares in Creation Units

[[Page 37261]]

and redeem Creation Units from each Fund. Applicants state that because 
Creation Units may always be purchased and redeemed at NAV, the market 
price of the Fund Shares should 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, which is currently being offered to 
the public by or through a principal 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 Fund 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 Fund 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 Fund 
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 of 
investment company shares by eliminating price competition from 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 Fund Shares to trade in the secondary market at 
negotiated prices. Applicants state that (a) secondary market trading 
in Fund Shares does not involve a Fund as a party and will not result 
in dilution of an investment in Fund 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 Fund Shares will not lead to discrimination or 
preferential treatment among purchasers. Finally, applicants contend 
that the proposed distribution system will be orderly because 
competitive forces will ensure that the difference between the market 
price of Fund Shares and their NAV remains narrow.

Section 22(e)

    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 the Foreign Funds is 
contingent not only on the settlement cycle of the United States 
market, but also on currently practicable delivery cycles in local 
markets for underlying foreign securities held by the Foreign Funds. 
Applicants state that local market delivery cycles for transferring 
Fund Securities to redeeming investors, coupled with local market 
holiday schedules, will, under certain circumstances, require a 
delivery process longer than seven calendar days for Foreign Funds. 
Applicants request relief under section 6(c) of the Act from section 
22(e) to allow the Foreign Funds to pay redemption proceeds up to 
fourteen calendar days after the tender of any Creation Units for 
redemption. Except as disclosed in the relevant Foreign Fund's 
Prospectus and/or SAI, applicants expect that each Foreign Fund will be 
able to deliver redemption proceeds within seven days.\12\ With respect 
to Future Funds that are Foreign 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. Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will affect any obligations applicants 
may have under rule 15c6-1.
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    8. Applicants state that section 22(e) was designed to prevent 
unreasonable, undisclosed 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, up to fourteen 
calendar days, needed to deliver the proceeds for the relevant Foreign 
Fund. Applicants are not seeking relief from section 22(e) with respect 
to Foreign Funds that do not effect creations and redemptions of 
Creation Units in-kind.

Section 12(d)(1)

    9. Section 12(d)(1)(A) of the Act, in relevant part, prohibits a 
registered investment company from acquiring securities of an 
investment company if such 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 and any other broker-dealer from selling the investment 
company's 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 an exemption to permit management investment 
companies (``Purchasing Management Companies'') and unit investment 
trusts (``Purchasing Trusts'') registered under the Act that are not 
sponsored or advised by the Advisor or any entity controlling, 
controlled by, or under common control with the Advisor 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 Trust (collectively, 
``Purchasing Funds'') to acquire shares of a Fund beyond the limits of 
section 12(d)(1)(A). Purchasing Funds do not include the Funds. In 
addition, applicants seek relief to permit a Fund or broker-dealer 
(``Broker'') that is registered under the Exchange Act to sell Fund 
Shares to a Purchasing Fund in excess of the limits of section 
12(d)(1)(B).
    11. Each Purchasing Management Company will be advised by an 
investment adviser within the meaning of section 2(a)(20)(A) of the Act 
(the ``Purchasing Fund Advisor'') and may be sub-advised by one or more 
investment advisers within the meaning of section 2(a)(20)(B) of the 
Act (each a ``Purchasing Fund Sub-Advisor''). Any investment adviser to 
a Purchasing Management Company will be registered under the Advisers 
Act. Each Purchasing Trust will be sponsored by a sponsor 
(``Sponsor'').

[[Page 37262]]

    12. Applicants submit that the proposed conditions to the requested 
relief adequately address the concerns underlying the limits in 
sections 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.
    13. Applicants believe that neither the Purchasing Funds nor a 
Purchasing Fund Affiliate would be able to exert undue influence over 
the Funds.\13\ To limit the control that a Purchasing Fund may have 
over a Fund, applicants propose a condition prohibiting a Purchasing 
Fund Advisor or a Sponsor, any person controlling, controlled by, or 
under common control with a Purchasing Fund Advisor 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 a Purchasing Fund Advisor or Sponsor, or any person 
controlling, controlled by, or under common control with a Purchasing 
Fund Advisor or Sponsor (``Purchasing 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 Purchasing Fund Sub-Advisor, any person controlling, controlled 
by or under common control with the Purchasing Fund Sub-Advisor, and 
any investment company or issuer that would be an investment company 
but for sections 3(c)(1) or 3(c)(7) of the Act (or portion of such 
investment company or issuer) advised or sponsored by the Purchasing 
Fund Sub-Advisor or any person controlling, controlled by or under 
common control with the Purchasing Fund Sub-Advisor (``Purchasing 
Fund's Sub-Advisory Group''). Applicants propose other conditions to 
limit the potential for undue influence over the Funds, including that 
no Purchasing Fund or Purchasing 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 any offering of securities 
during the existence of any 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, Purchasing Fund 
Advisor, Purchasing Fund Sub-Advisor, employee or Sponsor of a 
Purchasing Fund, or a person of which any such officer, director, 
member of an advisory board, Purchasing Fund Advisor, Purchasing 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).
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    \13\ A ``Purchasing Fund Affiliate'' is a Purchasing Fund 
Advisor, Purchasing Fund Sub-Advisor, Sponsor, promoter, and 
principal underwriter of a Purchasing Fund, and any person 
controlling, controlled by, or under common control with any of 
these entities. A ``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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    14. Applicants assert that the proposed conditions address any 
concerns regarding excessive layering of fees. The board of directors 
or trustees of any Purchasing 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 find that the advisory fees charged to the 
Purchasing Management Company are based on services provided that will 
be in addition to, rather than duplicative of, services provided under 
the advisory contract(s) of any Fund in which the Purchasing Management 
Company may invest. In addition, except as provided in condition 12, a 
Purchasing Fund Advisor or a trustee (``Trustee'') or Sponsor of a 
Purchasing Trust will, as applicable, waive fees otherwise payable to 
it by the Purchasing 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 by the Purchasing Fund 
Advisor or Trustee or Sponsor or an affiliated person of the Purchasing 
Fund Advisor, Trustee or Sponsor, from the Fund in connection with the 
investment by the Purchasing Fund in the Fund. Applicants state that 
any sales loads or service fees charged with respect to shares of a 
Purchasing Fund will not exceed the limits applicable to a fund of 
funds set forth in Conduct Rule 2830 of the National Association of 
Securities Dealers (``NASD'').\14\
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    \14\ Any references to NASD Conduct Rule 2830 include any 
successor or replacement rule to NASD Conduct Rule 2830 that may be 
adopted by the Financial Industry Regulatory Association.
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    15. Applicants submit that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that no Fund may 
acquire securities of any investment company or company relying on 
sections 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 a money market fund for short-term cash 
management purposes. To ensure that Purchasing Funds comply with the 
terms and conditions of the requested relief from section 12(d)(1), any 
Purchasing Fund that intends to invest in a Fund in reliance on the 
requested order will enter into a Purchasing Fund Agreement between the 
Fund and the Purchasing Fund requiring the Purchasing Fund to adhere to 
the terms and conditions of the requested order. The Purchasing Fund 
Agreement also will include an acknowledgement from the Purchasing Fund 
that it may rely on the requested order only to invest in the Funds and 
not in any other investment company.
    16. Applicants also note that a Fund may choose to reject a direct 
purchase of Fund Shares in Creation Units by a Purchasing Fund. To the 
extent that a Purchasing Fund purchases Fund Shares in the secondary 
market, a Fund would still retain its ability to reject initial 
purchases of Fund Shares made in reliance on the requested order by 
declining to enter into the Purchasing Fund Agreement prior to any 
investment by a Purchasing Fund in excess of the limits of section 
12(d)(1)(A).

Sections 17(a)(1) and (2) 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 a person (``Second-Tier Affiliate''), from selling any security to 
or purchasing any security from the company. Section 2(a)(3) of the Act 
defines ``affiliated person'' to include (a) 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, (b) any 
person 5% or more of whose outstanding voting securities are directly 
or indirectly owned, controlled or held with the power to vote by the 
other person, and (c) 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.

[[Page 37263]]

    18. Applicants request an exemption from section 17(a) of the Act 
pursuant to sections 17(b) and 6(c) of the Act to permit persons to 
effectuate in-kind purchases and redemptions with a Fund when they are 
affiliated persons of the Fund or Second-Tier Affiliates solely by 
virtue of one or more of the following: (a) Holding 5% or more, or in 
excess of 25%, of the outstanding Fund 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 other registered investment companies (or series 
thereof) advised by the Advisor.
    19. Applicants assert that no useful purpose would be served by 
prohibiting these types of affiliated persons from purchasing or 
redeeming Creation Units through ``in-kind'' transactions. The deposit 
procedures for both in-kind purchases and in-kind redemptions of 
Creation Units will be the same for all purchases and redemptions. 
Deposit Securities and Fund Securities will be valued in the same 
manner as Portfolio Securities. Therefore, applicants state that in-
kind purchases and redemptions will afford no opportunity for the 
specified affiliated persons, or Second-Tier Affiliates, of a Fund to 
effect a transaction detrimental to other holders of Fund Shares. 
Applicants also believe that in-kind purchases and redemptions will not 
result in self-dealing or overreaching of the Fund.
    20. Applicants also seek relief from section 17(a) to permit a Fund 
that is an affiliated person of a Purchasing Fund to sell its Fund 
Shares to and redeem its Fund Shares from a Purchasing Fund, and to 
engage in the accompanying in-kind transactions with the Purchasing 
Fund.\15\ Applicants state that the terms of the transactions are fair 
and reasonable and do not involve overreaching. Applicants note that 
any consideration paid by a Purchasing Fund for the purchase or 
redemption of Fund Shares directly from a Fund will be based on the NAV 
of the Fund.\16\ Applicants believe that any proposed transactions 
directly between the Funds and Purchasing Funds will be consistent with 
the policies of each Purchasing Fund. The purchase of Creation Units by 
a Purchasing Fund directly from a Fund will be accomplished in 
accordance with the investment restrictions of any such Purchasing Fund 
and will be consistent with the investment policies set forth in the 
Purchasing Fund's registration statement. The Purchasing Fund Agreement 
will require any Purchasing Fund that purchases Creation Units directly 
from a Fund to represent that the purchase of Creation Units from a 
Fund by a Purchasing Fund will be accomplished in compliance with the 
investment restrictions of the Purchasing Fund and will be consistent 
with the investment policies set forth in the Purchasing Fund's 
registration statement.
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    \15\ Applicants acknowledge that the receipt of compensation by 
(a) an affiliated person of a Purchasing Fund, or an affiliated 
person of such person, for the purchase by the Purchasing Fund of 
Fund 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 
Fund Shares to a Purchasing Fund, may be prohibited by section 
17(e)(1) of the Act. The Purchasing Fund Agreement also will include 
this acknowledgment.
    \16\ Applicants believe that a Purchasing Fund will purchase 
Fund Shares in the secondary market and will not purchase or redeem 
Creation Units directly from a Fund. However, the requested relief 
would apply to direct sales of Creation Units by a Fund to a 
Purchasing Fund and redemptions of those Fund Shares.
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Applicants' Conditions

    Applicants agree that any order of granting the requested relief 
will be subject to the following conditions: \17\
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    \17\ See note 5, supra.
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ETF Relief

    1. As long as the Funds operate in reliance on the requested order, 
Fund Shares will be listed on an Exchange.
    2. Neither the Trust nor any Fund will be advertised or marketed as 
an open-end investment company or a mutual fund. Each Fund's Prospectus 
will prominently disclose that Fund Shares are not individually 
redeemable shares and will disclose that the owners of Fund Shares may 
acquire those Fund Shares from the Fund and tender those Fund 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 Fund Shares are 
not individually redeemable, and that owners of Fund Shares may acquire 
those Fund Shares from the Fund and tender those Fund Shares for 
redemption to the Fund in Creation Units only.
    3. The Web site maintained for each Fund, which will be publicly 
accessible at no charge, will contain the following information, on a 
per individual Fund Share basis, for each Fund: (a) The prior Business 
Day's NAV and the mid-point of the bid-ask spread at the time of the 
calculation of the NAV (``Bid/Ask Price''), and a calculation of the 
premium or discount of the Bid/Ask Price at the time of calculation of 
the NAV 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.
    4. The Prospectus and annual report for each Fund also will 
include: (a) The information listed in condition 3(b), (i) in the case 
of the Fund's 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, as applicable; and (b) the following data, calculated on a per 
individual Fund Share basis for one, five and ten year periods (or life 
of the Fund), (i) the cumulative total return and the average annual 
total return based on NAV and Bid/Ask Price, and (ii) the cumulative 
total return of the relevant Underlying Index.
    5. Each Fund's Prospectus will clearly disclose that, for purposes 
of the Act, Fund Shares are issued by the Fund, which is a registered 
investment company, and that the acquisition of Fund Shares by 
investment companies 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 Purchasing Fund 
Agreement with the Fund regarding the terms of the investment.
    6. 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

    7. The members of a Purchasing 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 a Purchasing Fund's Sub-
Advisory 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 Fund Shares of a Fund, a Purchasing 
Fund's Advisory Group or a Purchasing Fund's Sub-Advisory Group, each 
in the aggregate, becomes a holder of more than 25 percent of the 
outstanding Fund Shares of a Fund, it will vote its Fund Shares in the 
same proportion as the vote of all other holders of the Fund Shares. 
This condition does not apply to the Purchasing Fund's Sub-Advisory 
Group with respect to a Fund for which the Purchasing Fund's Sub-
Advisor or a

[[Page 37264]]

person controlling, controlled by, or under common control with the 
Purchasing Fund Sub-Advisor acts as the investment adviser within the 
meaning of section 2(a)(20)(A) of the Act.
    8. No Purchasing Fund or Purchasing Fund Affiliate will cause any 
existing or potential investment by the Purchasing Fund in a Fund to 
influence the terms of any services or transactions between the 
Purchasing Fund or Purchasing Fund Affiliate and the Fund or a Fund 
Affiliate.
    9. The board of directors or trustees of a Purchasing Management 
Company, including a majority of the disinterested directors or 
trustees, will adopt procedures reasonably designed to ensure that the 
Purchasing Fund Advisor and Purchasing Fund Sub-Advisor are conducting 
the investment program of the Purchasing Management Company without 
taking into account any consideration received by the Purchasing 
Management Company or a Purchasing Fund Affiliate from a Fund or a Fund 
Affiliate in connection with any services or transactions.
    10. No Purchasing Fund or Purchasing 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 any Affiliated 
Underwriting.
    11. Before investing in the Fund Shares of a Fund in excess of the 
limits in section 12(d)(1)(A), each Purchasing Fund and the Fund will 
execute a Purchasing Fund Agreement stating, without limitation, that 
their boards of directors or trustees and their investment advisers or 
Sponsors and Trustees, 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 Fund Shares of a Fund 
in excess of the limit in section 12(d)(1)(A)(i), a Purchasing Fund 
will notify such Fund of the investment. At such time, the Purchasing 
Fund will also transmit to the Fund a list of names of each Purchasing 
Fund Affiliate and Underwriting Affiliate. The Purchasing Fund will 
notify the Fund of any changes to the list of the names as soon as 
reasonably practicable after a change occurs. The relevant Fund and the 
Purchasing Fund will maintain and preserve a copy of the order, the 
Purchasing Fund Agreement, and the list with any updated information 
for the duration of the investment and for a period of not less than 
six years thereafter, the first two years in an easily accessible 
place.
    12. The Purchasing Fund Advisor, Trustee or Sponsor, as applicable, 
will waive fees otherwise payable to it by the Purchasing Fund in an 
amount at least equal to any compensation (including fees received 
under any plan adopted by a Fund under rule 12b-1 under the Act) 
received from a Fund by the Purchasing Fund Advisor, Trustee or 
Sponsor, or an affiliated person of the Purchasing Fund Advisor, 
Trustee or Sponsor, other than any advisory fees paid to the Purchasing 
Fund Advisor, Trustee or Sponsor, or its affiliated person by a Fund, 
in connection with the investment by the Purchasing Fund in the Fund. 
Any Purchasing Fund Sub-Advisor will waive fees otherwise payable to 
the Purchasing Fund Sub-Advisor, directly or indirectly, by the 
Purchasing Management Company in an amount at least equal to any 
compensation received from a Fund by the Purchasing Fund Sub-Advisor, 
or an affiliated person of the Purchasing Fund Sub-Advisor, other than 
any advisory fees paid to the Purchasing Fund Sub-Advisor or its 
affiliated person by a Fund, in connection with any investment by the 
Purchasing Management Company in a Fund made at the direction of the 
Purchasing Fund Sub-Advisor. In the event that the Purchasing Fund Sub-
Advisor waives fees, the benefit of the waiver will be passed through 
to the Purchasing Management Company.
    13. Any sales charges and/or service fees charged with respect to 
shares of a Purchasing Fund will not exceed the limits applicable to a 
fund of funds as set forth in NASD Conduct Rule 2830.
    14. Once an investment by a Purchasing Fund in the Fund Shares of a 
Fund exceeds the limit in section 12(d)(1)(A)(i) of the Act, the Board 
of a Fund, including a majority of the directors or trustees that are 
not ``interested persons'' within the meaning of section 2(a)(19) of 
the Act (``disinterested Board members''), will determine that any 
consideration paid by the Fund to a Purchasing Fund or Purchasing Fund 
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).
    15. The Board, including a majority of the disinterested Board 
members, will adopt procedures reasonably designed to monitor any 
purchases of securities by a Fund in an Affiliated Underwriting once an 
investment by the Purchasing 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 Purchasing Fund in a 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 a Fund in Affiliated Underwritings 
and the amount purchased directly from an Underwriting Affiliate have 
changed significantly from prior years. The Board will take any 
appropriate actions based on its review, including, if appropriate, the 
institution of procedures designed to assure that purchases of 
securities in Affiliated Underwritings are in the best interest of 
shareholders of the Fund.
    16. 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 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 a Purchasing Fund in the Fund Shares 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.
    17. Before approving any advisory contract under section 15 of the 
Act, the board of directors or trustees of each Purchasing Management 
Company, including a majority of the disinterested

[[Page 37265]]

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 Purchasing Management 
Company may invest. These findings and their basis will be recorded 
fully in the minute books of the appropriate Purchasing Management 
Company.
    18. No Fund will acquire securities of any investment company or 
companies relying on sections 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 a money market fund 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. E9-17884 Filed 7-27-09; 8:45 am]

BILLING CODE 8010-01-P