Document ID: SEC-2010-0182-0001
Agency: sec
Document Type: Notice
Title: Applications for Orders for Exemptions under Section 6(c) of 1940 Investment Company Act: ShariahShares Exchange-Traded Fund Trust, etal.
Posted Date: 2010-02-04T05:00Z

[Federal Register: February 4, 2010 (Volume 75, Number 23)]
[Notices]               
[Page 5814-5821]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04fe10-80]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29127; 812-13559]

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

January 29, 2010.
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 section 12(d)(1)(J) of the Act for an exemption 
from sections 12(d)(1)(A) and (B) of 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.

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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 Unit Aggregations''); (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 Unit Aggregations; 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: ShariahShares Exchange-Traded Fund Trust (the ``Trust'') 
and Florentez Investment Management, Inc. (the ``Adviser'').

Filing Dates: The application was filed on July 31, 2008, and amended 
on September 16, 2009, and January 29, 2010. 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 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 February 19, 2010 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-

[[Page 5815]]

1090; Applicants, 12 Brillantez, Irvine, CA 92620.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel at 
(202) 551-6817, 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 Delaware statutory trust. The Trust will 
initially offer two series (``Initial Index Funds''), each of which 
will track an index of selected equity securities.\1\ Applicants may 
establish one or more registered investment companies in addition to 
the Trust that may be formed as a separate trust or a separate series 
of the Trust, or one or more trusts in the future (``Future Index 
Funds,'' collectively with the Initial Index Funds, the ``Index 
Funds''). Each Future Index Fund will be advised by the Adviser or an 
entity controlling, controlled by, or under common control with the 
Adviser, and comply with the terms and conditions stated in the 
application.\2\
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    \1\ The Initial Index Funds are ShariahShares FTSE USA Fund and 
ShariahShares FTSE Developed ex-U.S. Fund.
    \2\ 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 Adviser will serve as the investment adviser to the Index 
Funds. The Adviser will be registered as an investment adviser under 
the Investment Advisers Act of 1940 (``Advisers Act'') prior to the 
commencement of investment operations of any Index Fund. The Adviser 
may enter into sub-advisory agreements with one or more sub-advisers 
with respect to the Index Funds (the ``Sub-Advisers''). Each Sub-
Adviser will be registered under the Advisers Act. A broker-dealer 
registered under the Securities Exchange Act of 1934 (the ``Exchange 
Act'' and such broker-dealer, a ``Broker'') will serve as the principal 
underwriter and distributor for the Creation Unit Aggregations of Fund 
Shares (``Distributor''). The Distributor will not be affiliated with 
the Adviser or a national securities exchange as defined in section 
2(a)(26) of the Act (``Exchange'').
    3. Each Index Fund will hold certain equity securities (``Portfolio 
Securities'') selected to correspond generally to the price and yield 
performance, before fees and expenses, of a specified equity securities 
index (an ``Underlying Index'').\3\ Certain of the Underlying Indicies 
will be comprised of equity securities issued by domestic issuers and 
non-domestic issuers meeting the requirements for trading in U.S. 
markets (``Domestic Index''). Other Underlying Indicies may be 
comprised of foreign equity securities or a combination of domestic and 
foreign equity securities (``Foreign Index''). Index Funds that track 
Domestic Indices are referred to as ``Domestic Funds'' and Index Funds 
that track Foreign Indices are referred to as ``Foreign Funds.'' No 
entity that creates, compiles, sponsors or maintains an Underlying 
Index (``Index Provider'') is or will be an affiliated person, as 
defined in section 2(a)(3) of the Act, or an affiliated person of an 
affiliated person, of the Trust, an Index Fund, the Adviser, any Sub-
Adviser to or promoter of an Index Fund, or the Distributor. The Index 
Provider to the Initial Index Funds is FTSE Group.
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    \3\ The Underlying Indicies for the Initial Index Funds are FTSE 
Shariah USA Index and FTSE Shariah Developed ex U.S. Index.
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    4. The investment objective of each Index Fund will be to provide 
investment results, before fees and expenses, that correspond generally 
to the price and yield performance of its Underlying Index.\4\ The 
value of each Index Fund's Underlying Index will be disseminated every 
15 seconds throughout the trading day. An Index Fund will utilize 
either a ``replication'' or ``representative sampling'' strategy which 
will be disclosed with regard to each Index Fund in its prospectus 
(``Prospectus'').\5\ An Index 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. An Index 
Fund using a representative sampling strategy will invest in some, but 
not necessarily all of the Component Securities.\6\ This may be the 
case, for example, when there are practical difficulties or substantial 
costs involved in compiling an entire Underlying Index basket that 
contains hundreds of Component Securities, or in certain instances, 
when a Component Security is illiquid. Applicants anticipate that an 
Index Fund that uses representative sampling 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 Index 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 an Index Fund will invest at least 
80% of its total assets, exclusive of securities lending collateral, 
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 may include Global Depositary Receipts and 
Euro Depositary Receipts. Each Index Fund also may invest up to 20% 
of its assets in certain futures, stock options, options on stock 
index futures and swap contracts as related to its respective 
Underlying Index and its Component Securities, cash and cash 
equivalents, as well as in stocks not included in its Underlying 
Index, but which the Adviser or Sub-Adviser believes will help the 
Index Fund track its Underlying Index.
    \5\ All representations and conditions contained in the 
application that require an Index Fund to disclose particular 
information in the Index Fund's Prospectus and/or annual report 
shall be effective with respect to the Index Fund until the time 
that the Index Fund complies with disclosure requirements adopted by 
the Commission in Investment Company Act Release No. 28584 (Jan. 13, 
2009).
    \6\ Under the representative sampling strategy, stocks are 
selected for inclusion in an Index Fund to have aggregate investment 
characteristics, fundamental characteristics, and liquidity measures 
similar to those of the Index Fund's Underlying Index taken in its 
entirety.
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    5. Funds Shares will be sold at a price between $40 and $250 in 
Creation Unit Aggregations which will have an initial price range of 
$1,000,000 to $25,000,000. All orders to purchase Creation Unit 
Aggregations 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 Index Funds. An Authorized Participant must be 
either: (a) A broker-dealer or other participant in the continuous net 
settlement system of the National Securities Clearing Corporation, a 
clearing agency registered with the Commission, or (b) a participant in 
the Depository Trust Company (``DTC'', and such participant, ``DTC 
Participant''). Fund Shares generally will be sold in Creation Unit 
Aggregations in exchange for an in-kind deposit by the purchaser of a 
portfolio of securities designated by the Adviser or the Sub-Adviser 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

[[Page 5816]]

(a) the net asset value (``NAV'') (per Creation Unit Aggregation) of an 
Index Fund and (b) the total aggregate market value (per Creation Unit 
Aggregation) of the Deposit Securities.\7\ An Index Fund may permit a 
purchaser of Creation Unit Aggregations to substitute cash in lieu of 
depositing some or all of the requisite Deposit Securities if the 
Adviser or Sub-Adviser believed such method would reduce the Index 
Fund's transaction costs or enhance the Index Fund's operating 
efficiency.\8\
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    \7\ Each Index Fund will sell and redeem Creation Unit 
Aggregations on a ``Business Day'' which includes any day that an 
Index Fund is required to be open under Section 22(e) of the Act. 
Each Business Day, prior to the opening of trading on the primary 
listing Exchange, the list of names and amount of each security 
constituting the current Deposit Securities and the Balancing 
Amount, effective as of the previous Business Day, will be made 
available. Any Exchange on which Fund Shares are listed will 
disseminate, every 15 seconds during its regular trading hours, 
through the facilities of the Consolidated Tape Association, an 
amount per Fund Share 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 Foreign Fund's portfolio is required, 
the Adviser or Sub-Adviser might prefer to receive cash rather than 
stocks so that the Foreign Fund may avoid transaction costs involved 
in liquidating part of its portfolio to achieve the rebalancing.
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    6. An investor purchasing or redeeming a Creation Unit Aggregation 
from an Index 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 Unit Aggregations.\9\ The exact amounts of Transaction Fees 
relevant to each Index Fund (including the maximum Transaction Fee) 
will be fully disclosed in the Prospectus of such Index Fund. The 
method for calculating the Transaction Fees will be disclosed in each 
Prospectus or statement of additional information (``SAI''). The 
Distributor will be responsible for delivering a Prospectus to those 
persons purchasing Creation Unit Aggregations, and for maintaining 
records of both the orders placed with it and the confirmations of 
acceptance furnished. In addition, the Distributor will maintain a 
record of the instructions given to the applicable Index Fund to 
implement the delivery of Fund Shares.
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    \9\ Where an Index 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 Unit Aggregations 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 market maker and maintain a market 
for Fund Shares trading on the Exchange (each a ``Market Maker''). 
Prices of Fund Shares trading on an Exchange will be based on the 
current bid/offer market. Fund Shares sold in the secondary market will 
be subject to customary brokerage commissions and charges.
    8. Applicants expect that purchasers of Creation Unit Aggregations 
will include institutional investors and arbitrageurs (which could 
include institutional investors). A Market Maker, in providing a fair 
and orderly secondary market for the Fund Shares, also may purchase 
Creation Unit Aggregations 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 ability to 
continually purchase or redeem Creation Unit Aggregations at their NAV, 
which should ensure that Fund Shares will not trade at a material 
discount or premium.
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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 Index Fund, or 
tender such Fund Shares for redemption to the Index Fund, in Creation 
Unit Aggregations only. To redeem, an investor will have to accumulate 
enough Fund Shares to constitute a Creation Unit Aggregation. 
Redemption orders must be placed by or through an Authorized 
Participant. An investor redeeming a Creation Unit Aggregation 
generally will receive (a) Portfolio Securities designated to be 
delivered for Creation Unit Aggregation redemptions (``Fund 
Securities'') on the date that the request for redemption is made\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 from the 
Balancing Amount 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 securities held by each 
Index Fund, but Fund Securities received on redemption may not 
always be identical to Deposit Securities deposited in connection 
with the purchase of Creation Unit Aggregations for the same day. 
The Index 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 of 1933.
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    10. Neither the Trust nor any Index Fund will be marketed or 
otherwise held out as an ``open-end investment company'' or a ``mutual 
fund.'' Instead, each Index Fund will be marketed as an ``exchange-
traded fund,'' an ``investment company,'' a ``fund,'' or a ``trust.'' 
All marketing materials that describe the features or method of 
obtaining, buying or selling Creation Unit Aggregations 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 Index 
Fund in Creation Unit Aggregations 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 
Index 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

[[Page 5817]]

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 Index Funds to 
register as open-end management investment companies and issue Fund 
Shares that are redeemable in Creation Unit Aggregations only. 
Applicants state that investors may purchase Fund Shares in Creation 
Unit Aggregations and redeem Creation Unit Aggregations from each Index 
Fund. Applicants further state that because Creation Unit Aggregations 
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 an Index 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 who could 
pay investors a little 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 directly involve Index Fund assets 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 in the marketplace will ensure that the difference 
between the market price of Fund Shares and their NAV remains narrow.

Section 22(e)

    7. Section 22(e) 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 a Foreign Fund will be contingent not only on the 
securities settlement cycle of the United States market, but also on 
the delivery cycles in local markets for the underlying foreign 
securities held by a Foreign Fund. Applicants state that delivery 
cycles for transferring Portfolio Securities to redeeming investors, 
coupled with local market holiday schedules, may require a delivery 
process longer than seven calendar days for the 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 a Creation Unit Aggregation 
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 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 each Foreign Fund. 
Applicants are not seeking relief from section 22(e) with respect to 
Foreign Funds that will not effect in-kind purchases and redemptions of 
Creation Unit Aggregations.

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

[[Page 5818]]

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 Adviser or any entity controlling, 
controlled by, or under common control with the Adviser and are not 
part of the same ``group of investment companies,'' as defined in 
section 12(d)(1)(G)(ii) of the Act, as the Index Funds (collectively, 
``Purchasing Funds'') to acquire Fund Shares beyond the limits of 
section 12(d)(1)(A). Purchasing Funds do not include the Index Funds. 
In addition, applicants seek relief to permit the Index Funds or any 
Broker 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 Adviser'') and may be sub-advised by an 
adviser(s) within the meaning of section 2(a)(20)(B) of the Act 
(``Purchasing Fund Sub-Adviser''). Any investment adviser to a 
Purchasing Fund will be registered under the Advisers Act. Each 
Purchasing Trust will be sponsored by a sponsor (``Sponsor'').
    12. Applicants submit that the proposed conditions to the relief 
requested, including the requirement that Purchasing Funds enter into 
an agreement with an Index Fund for the purchase of Fund Shares (a 
``Purchasing Fund Agreement''), adequately address the concerns 
underlying the limits in section 12(d)(1)(A) and (B), which include 
concerns about undue influence by a fund of funds over underlying 
funds, excessive layering of fees and overly complex 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 Index Funds.\13\ To limit the control that a Purchasing Fund may 
have over an Index Fund, applicants propose a condition prohibiting a 
Purchasing Fund Adviser or a Sponsor, any person controlling, 
controlled by, or under common control with a Purchasing Fund Adviser 
or Sponsor, 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 that 
is advised or sponsored by a Purchasing Fund Adviser or Sponsor, or any 
person controlling, controlled by, or under common control with a 
Purchasing Fund Adviser or Sponsor (``Purchasing Fund Advisory Group'') 
from controlling (individually or in the aggregate) an Index Fund 
within the meaning of section 2(a)(9) of the Act. The same prohibition 
would apply to any Purchasing Fund Sub-Adviser, any person controlling, 
controlled by or under common control with the Purchasing Fund Sub-
Adviser, 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-Adviser or any person controlling, controlled 
by or under common control with the Purchasing Fund Sub-Adviser 
(``Purchasing Fund Sub-Advisory Group'').
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    \13\ A ``Purchasing Fund Affiliate'' is a Purchasing Fund 
Adviser, Purchasing Fund Sub-Adviser, Sponsor, promoter, and 
principal underwriter of a Purchasing Fund, and any person 
controlling, controlled by, or under common control with any of 
those entities. A ``Fund Affiliate'' is an investment adviser, 
promoter, or principal underwriter of an Index Fund and any person 
controlling, controlled by, or under common control with any of 
these entities.
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    14. Applicants propose other conditions to limit the potential for 
undue influence over the Index 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 an Index Fund) will cause an Index 
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 Adviser, Purchasing Fund Sub-
Adviser, employee or Sponsor of the Purchasing Fund, or a person of 
which any such officer, director, member of an advisory board, 
Purchasing Fund Adviser, Purchasing Fund Sub-Adviser, employee, or 
Sponsor is an affiliated person (except that any person whose 
relationship to the Index Fund is covered by section 10(f) of the Act 
is not an Underwriting Affiliate).
    15. 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 Index Fund in which the Purchasing 
Management Company may invest. In addition, except as provided by 
condition 12, a Purchasing Fund Adviser 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 
an Index Fund under rule 12b-1 under the Act) received by the 
Purchasing Fund Adviser or Trustee or Sponsor or an affiliated person 
of the Purchasing Fund Adviser, Trustee or Sponsor, from the Index Fund 
in connection with the investment by the Purchasing Fund in the Index 
Fund. Applicants state that any sales charges 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 National Association of 
Securities Dealers (``NASD'') Conduct Rule 2830.\14\
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    \14\ All references to NASD Conduct Rule 2830 also includes any 
successor or replacement rule that may be adopted by the Financial 
Industry Regulatory Authority.
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    16. Applicants submit that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that no Index 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 Index 
Fund to purchase shares of other investment companies 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 an Index Fund in reliance 
on the requested order will be required to enter

[[Page 5819]]

into a Purchasing Fund Agreement between the Index Fund and the 
Purchasing Fund requiring the Purchasing Fund to adhere to the terms 
and conditions of the requested relief. 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 Index Funds and 
not in any other investment company.
    17. Applicants also note that an Index Fund may choose to reject a 
direct purchase of Fund Shares in Creation Unit Aggregations by a 
Purchasing Fund. To the extent that a Purchasing Fund purchases Fund 
Shares in the secondary market, an Index 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).

Section 17(a)(1) and (2) of the Act

    18. 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 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 (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.
    19. 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 an Index Fund when 
they are affiliated persons, or second-tier affiliates of an Index Fund 
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 Index 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 Fund Shares of one or more other registered investment 
companies (or series thereof) advised by the Adviser, or an entity 
controlling, controlled by, or under common control with the Adviser.
    20. Applicants assert that no useful purpose would be served by 
prohibiting these types of affiliated persons from purchasing or 
redeeming Creation Unit Aggregations through ``in-kind'' transactions. 
The deposit procedures for both in-kind purchases and in-kind 
redemptions of Creation Unit Aggregations 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 an Index 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 Index Funds.
    21. Applicants also seek relief from section 17(a) to permit an 
Index 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 transaction 
are fair and reasonable. Applicants note that any consideration paid by 
a Purchasing Fund for the purchase or redemption of Fund Shares 
directly from an Index Fund will be based on the NAV of the Index 
Fund.\16\ Applicants believe that any proposed transactions directly 
between the Index Funds and Purchasing Funds will be consistent with 
the policies of each Purchasing Fund. The purchase of Creation Unit 
Aggregations by a Purchasing Fund directly from an Index 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 
Unit Aggregations directly from an Index Fund to represent that the 
purchase of Creation Unit Aggregations from an Index 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 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 or (b) an affiliated person of an Index Fund, or an 
affiliated person of such person, for the sale by the Index 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 acknowledgement.
    \16\ Applicants believe that a Purchasing Fund will purchase 
Fund Shares in the secondary market and will not purchase or redeem 
Creation Unit Aggregations directly from an Index Fund. However, the 
requested relief would apply to direct sales of Creation Unit 
Aggregations by an Index Fund to a Purchasing Fund and direct 
redemptions of Fund Shares.
---------------------------------------------------------------------------

Applicants' Conditions

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

ETF Relief

    1. As long as the Index Funds operate in reliance on the requested 
order, the Fund Shares will be listed on an Exchange.
    2. Neither the Trust nor any Index Fund will be advertised or 
marketed as an open-end investment company or a mutual fund. Each Index 
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 such Index Fund and 
tender those Fund Shares for redemption to the Index Fund in Creation 
Unit Aggregations only. Any advertising material that describes the 
purchase or sale of Creation Unit Aggregations 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 an Index Fund and tender those Fund Shares for 
redemption to such Index Fund in Creation Unit Aggregations only.
    3. The Web site maintained for the Index Funds, which will be 
publicly accessible at no charge, will contain the following 
information, on a per Fund Share basis, for each Index Fund: (a) The 
prior Business Day's NAV and the mid-point of the bid-ask spread at the 
time of the calculation of 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.

[[Page 5820]]

    4. Each Index Fund's Prospectus and annual report will also 
include: (a) The information listed in condition 3(b), (i) in the case 
of the Index 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 Fund Share basis for one, five and ten year periods 
(or life of the Index 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 Index Fund's Prospectus will clearly disclose that, for 
purposes of the Act, Fund Shares are issued by such Index 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 an Index 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 Index 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) an Index 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) an Index 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 an 
Index 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% of the outstanding Fund Shares of an Index 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 an Index Fund for which the 
Purchasing Fund's Sub-Adviser or a person controlling, controlled by, 
or under common control with the Purchasing Fund Sub-Adviser 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 an Index 
Fund to influence the terms of any services or transactions between the 
Purchasing Fund or Purchasing Fund Affiliate and the Index 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 Adviser and Purchasing Fund Sub-Adviser 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 an Index 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 an 
Index Fund) will cause an Index Fund to purchase a security in any 
Affiliated Underwriting.
    11. Before investing in an Index Fund in excess of the limits in 
section 12(d)(1)(A), each Purchasing Fund and the Index 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 in excess 
of the limit in section 12(d)(1)(A)(i), a Purchasing Fund will notify 
the Index Fund of the investment. At such time, the Purchasing Fund 
will also transmit to the Index Fund a list of the names of each 
Purchasing Fund Affiliate and Underwriting Affiliate. The Purchasing 
Fund will notify the Index Fund of any changes to the list of names as 
soon as reasonably practicable after a change occurs. The relevant 
Index 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 Adviser, 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 an Index Fund under rule 12b-1 under the Act) 
received from an Index Fund by the Purchasing Fund Adviser, Trustee or 
Sponsor, or an affiliated person of the Purchasing Fund Adviser, 
Trustee or Sponsor, other than any advisory fees paid to the Purchasing 
Fund Adviser, Trustee or Sponsor, or its affiliated person by an Index 
Fund, in connection with the investment by the Purchasing Fund in the 
Index Fund. Any Purchasing Fund Sub-Adviser will waive fees otherwise 
payable to the Purchasing Fund Sub-Adviser, directly or indirectly, by 
the Purchasing Management Company in an amount at least equal to any 
compensation received from an Index Fund by the Purchasing Fund Sub-
Adviser, or an affiliated person of the Purchasing Fund Sub-Adviser, 
other than any advisory fees paid to the Purchasing Fund Sub-Adviser or 
its affiliated person by the Index Fund, in connection with any 
investment by the Purchasing Management Company in an Index Fund made 
at the direction of the Purchasing Fund Sub-Adviser. In the event that 
the Purchasing Fund Sub-Adviser 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 Fund Shares exceeds 
the limits of section 12(d)(1)(A)(i) of the Act, the board of 
directors/trustees of an Index Fund (``Board''), 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 Index 
Fund to a Purchasing Fund or a 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 such Index Fund; (b) is within the range of consideration 
that the Index 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 an Index Fund and its investment adviser(s), or any person 
controlling, controlled by, or under common control with such 
investment adviser(s).

[[Page 5821]]

    15. The Board, including a majority of the disinterested Board 
members, will adopt procedures reasonably designed to monitor any 
purchases of securities by an Index Fund in an Affiliated Underwriting 
once the investment by a Purchasing Fund in an Index 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 an Index Fund. The Board will consider, among 
other things: (a) Whether the purchases were consistent with the 
investment objectives and policies of the Index Fund; (b) how the 
performance of securities purchased in an Affiliated Underwriting 
compares to the performance of comparable securities purchased during a 
comparable period of time in underwritings other than Affiliated 
Underwritings or to a benchmark such as a comparable market index; and 
(c) whether the amount of securities purchased by the Index 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 Index Fund.
    16. Each Index 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 a Purchasing Fund in shares of the 
Index 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 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 Index 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 Index Fund will acquire securities of any other 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 Index 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. 2010-2381 Filed 2-3-10; 8:45 am]
BILLING CODE 8011-01-P