Document ID: SEC-2010-1798-0001
Agency: sec
Document Type: Notice
Title: Applications: ETSpreads, LLC, et al.
Posted Date: 2010-11-24T05:00Z

[Federal Register: November 24, 2010 (Volume 75, Number 226)]
[Notices]               
[Page 71746-71753]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24no10-134]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29501; File No. 812-13774]

 
ETSpreads, LLC, et al.; Notice of Application

November 18, 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

[[Page 71747]]

``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 (a)(2) of 
the Act, and under section 12(d)(1)(J) 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) Series of certain open-end management investment companies whose 
portfolios will consist of the component securities of certain 
domestic, global or international fixed income securities indexes to 
issue shares (``Shares'') redeemable in large aggregations only 
(``Creation Units''); (b) secondary market transactions in Shares to 
occur at negotiated market prices; (c) certain series to pay redemption 
proceeds, under certain circumstances, more than seven days after the 
tender of Shares for redemption; (d) certain affiliated persons of the 
series to deposit securities into, and receive securities from, the 
series in connection with the purchase and redemption of Creation 
Units; and (e) certain registered management investment companies and 
unit investment trusts outside of the same group of investment 
companies as the series to acquire Shares.

Applicants: ETSpreads, LLC (the ``Adviser''), Exchange Traded Spreads 
Trust (the ``Trust'') and ALPS Distributors, Inc. (the 
``Distributor'').

Filing Dates: The application was filed on May 18, 2010 and amended on 
September 27, 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 December 13, 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, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090; Applicants, 44 Montgomery Street, Suite 
2100, San Francisco, California 94104.

FOR FURTHER INFORMATION CONTACT: Keith A. Gregory, Senior Counsel at 
(202) 551-6815, or Mary Kay Frech, Branch Chief, at (202) 551-6820 
(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 that will offer 
an unlimited number of series. The Trust initially will offer one 
series (``Initial Fund'') whose performance will correspond generally 
to the total return of a specified fixed income securities index 
(``Underlying Index'').\1\
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    \1\ The Underlying Index for the Initial Fund is the Markit 
iBoxx TIPS Inflation-Linked 5-10 Index.
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    2. Applicants request that the order apply to the Initial Fund and 
any additional series of the Trust and any other open-end management 
investment companies or series thereof, that may be created in the 
future and that track a specified fixed income securities Underlying 
Index (``Future Funds'').\2\ Any Future Fund will be (a) advised by the 
Adviser or an entity controlling, controlled by, or under common 
control with the Adviser, and (b) comply with the terms and conditions 
of the application. Future Funds may be based on Underlying Indexes 
comprised of domestic fixed income securities (``Domestic Funds'') or 
Underlying Indexes comprised of global or international fixed income 
securities (``Global Funds''). The Initial Fund and Future Funds, 
together, are the ``Funds.'' \3\
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    \2\ All entities that currently intend to rely on the 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. An Acquiring Fund (as defined below) 
may rely on the order only to invest in Funds and not in any other 
registered investment company.
    \3\ Each Fund will comply with the disclosure requirements 
adopted by the Commission in Investment Company Act Release No. 
28584 (Jan. 13, 2009) before offering Shares.
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    3. The Adviser is registered as an investment adviser under the 
Investment Advisers Act of 1940 (the ``Advisers Act''), and will serve 
as investment adviser to the Funds. The Adviser may enter into sub-
advisory agreements with one or more investment advisers each of which 
will serve as a sub-adviser to a Fund (each, a ``Subadviser''). Each 
Subadviser 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 Shares.
    4. Each Fund will consist of a portfolio of securities (``Portfolio 
Securities'') selected to correspond generally to the total return of a 
specified fixed income Underlying Index. No entity that creates, 
compiles, sponsors or maintains an Underlying Index (``Index 
Provider'') is or will be an affiliated person, as defined in section 
2(a)(3) of the Act, or an affiliated person of an affiliated person, of 
the Trust, a Fund, the Adviser, any Subadviser, or promoter of a Fund, 
or of the Distributor.
    5. The investment objective of each Fund will be to provide 
investment results that closely correspond to the total return of its 
Underlying Index.\4\ The value of the Underlying Index will be 
disseminated once each ``Business Day,'' which is defined as any day 
that a Fund is required to be open under section 22(e) of the Act, at 
the end of the Business Day. A Fund will utilize either a replication 
or representative sampling strategy to track its Underlying Index. A 
Fund using a replication strategy will invest in substantially all of 
the Component Securities in its Underlying Index in the same 
approximate proportions as in the Underlying Index. A Fund using a 
representative sampling strategy will attempt to match the risk and 
return characteristics of a Fund's portfolio to the risk and return 
characteristics of its Underlying Index.\5\ Applicants state that use 
of the representative sampling strategy may prevent a Fund from 
tracking the

[[Page 71748]]

performance of its Underlying Index with the same degree of accuracy as 
would a Fund that invests in every Component Security of 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 (exclusive of collateral held from securities 
lending) in the component securities that comprise its Underlying 
Index (``Component Securities'') or TBAs (as defined below) 
representing Component Securities. Each Fund also may invest up to 
20% of its total assets in futures contracts, options on future 
contracts, options and swaps, cash, cash equivalents, other 
investment companies, and securities that are not Component 
Securities but which the Adviser believes will assist the Fund in 
tracking the performance of its Underlying Index.
    \5\ Under the representative sampling strategy, the Adviser will 
seek to construct a Fund's portfolio so that its duration, sector, 
credit rating, coupon and option characteristics closely correlate 
to those characteristics of the Underlying Index.
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    6. Creation Units are expected to consist of 100,000 Shares and to 
have an initial price 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 a participant in the Depository Trust Company 
(``DTC'', and such participant, ``DTC Participant''). Shares of the 
Fund generally will be sold in Creation Units in exchange for an in-
kind deposit by the purchaser of a portfolio of fixed-income securities 
designated by the Adviser to correspond generally to the total return 
of the relevant Underlying Index (the ``Deposit Securities''), together 
with the deposit of a specified cash payment (``Cash Amount'' and 
collectively with the Deposit Securities, ``Creation Deposit''). The 
Cash 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.\6\ 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 method would reduce the Fund's transaction costs or 
enhance the Fund's operating efficiency. To preserve maximum efficiency 
and flexibility, a Fund reserves the right to accept and deliver 
Creation Units entirely for cash (``All-Cash Payment'').
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    \6\ Each Fund will sell and redeem Creation Units only on a 
Business Day. Each Business Day, prior to the opening of trading on 
the ``Primary Listing Exchange'' (as defined below), a list of 
securities and the required number of shares of each Deposit 
Security to be included in the Creation Deposit for each Fund or 
cash information for each Fund, including when the purchase of 
Creation Units from the Fund is an All-Cash Payment (as defined 
below), will be made available. In addition, the All-Cash Payment 
will be disclosed, if applicable. Any national securities exchange 
(as defined in section 2(a)(26) of the Act) (``Exchange'') on which 
Shares are listed will disseminate, every 15 seconds during its 
regular trading hours, through the facilities of the Consolidated 
Tape, an amount per individual Share representing the sum of the 
estimated Cash Amount and the current value of the Deposit 
Securities. The Primary Listing Exchange is the Exchange on which 
the Shares of a Fund are primarily listed.
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    7. An investor acquiring 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.\7\ The 
Distributor also will be responsible for delivering the Fund's 
prospectus to those persons acquiring Shares in Creation Units and for 
maintaining records of both the orders placed with it and the 
confirmations of acceptance furnished by it. In addition, the 
Distributor will maintain a record of the instructions given to the 
applicable Fund to implement the delivery of its Shares.
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    \7\ 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.
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    8. Purchasers of Shares in Creation Units may hold such Shares or 
may sell such Shares into the secondary market. Shares will be listed 
and traded on an Exchange. It is expected that one or more member firms 
of an Exchange will be designated to act as a market maker (each, a 
``Market Maker'') and maintain a market for Shares trading on the 
Exchange. Prices of Shares trading on an Exchange will be based on the 
current bid/ask market. Shares sold in the secondary market will be 
subject to customary brokerage commissions and charges.
    9. Applicants expect that purchasers of Creation Units will include 
institutional investors and arbitrageurs (which could include 
institutional investors). Authorized Participants also may purchase 
Creation Units for use in market-making activities. Applicants expect 
that secondary market purchasers of Shares will include both 
institutional investors and retail investors.\8\ Applicants expect that 
the price at which 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 Shares will not 
trade at a material discount or premium in relation to their NAV.
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    \8\ Shares will be registered in book-entry form only. DTC or 
its nominee will be the registered owner of all outstanding Shares. 
DTC or DTC Participants will maintain records reflecting beneficial 
owners of Shares.
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    10. Shares will not be individually redeemable, and owners of 
Shares may acquire those Shares from the Fund, or tender such Shares 
for redemption to the Fund, in Creation Units only. To redeem, an 
investor will have to accumulate enough 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 
redemptions (``Redemption Securities'') on the date that the request 
for redemption is submitted and (b) a ``Cash Redemption Payment,'' 
consisting of an amount calculated in the same manner as the Cash 
Amount, although the actual amount of the Cash Redemption Payment may 
differ if the Redemption Securities are not identical to the Deposit 
Securities on that day. An investor may receive the cash equivalent of 
a Redemption Security in certain circumstances, such as if the investor 
is constrained from effecting transactions in the security by 
regulation or policy.\9\ A redeeming investor may pay a Transaction 
Fee, calculated in the same manner as a Transaction Fee payable in 
connection with purchases of Creation Units.
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    \9\ Applicants state that a cash-in-lieu amount will replace any 
``to-be-announced'' (``TBA'') transaction that is listed as a 
Deposit Security or Redemption Security of any Fund. A TBA 
transaction is a method of trading mortgage-backed securities where 
the buyer and seller agree upon general trade parameters such as 
agency, settlement date, par amount and price. The actual pools 
delivered generally are determined two days prior to the settlement 
date. The amount of substituted cash in the case of TBA transactions 
will be equivalent to the value of the TBA transaction listed as a 
Deposit Security or a Redemption Security.
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    11. Applicants state that in accepting Deposit Securities and 
satisfying redemptions with Redemption Securities, the relevant Funds 
will comply with the federal securities laws, including that the 
Deposit Securities and Redemption Securities are sold in transactions 
that would be exempt from registration under the Securities Act of 1933 
(``Securities Act'').\10\ The specified Deposit Securities and 
Redemption Securities either (a) will correspond pro rata to the 
Portfolio Securities of a Fund, or (b) will not correspond pro rata to 
the Portfolio Securities, provided that the Deposit Securities and 
Redemption Securities (i) Consist of the same representative sample of 
Portfolio Securities designed to generate performance that is highly 
correlated to the performance of the Portfolio Securities, (ii) consist 
only of securities that are already included among the existing 
Portfolio Securities, and (iii) are the same for all Authorized 
Participants on a given Business Day.\11\
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    \10\ In accepting Deposit Securities and satisfying redemptions 
with Redemption Securities that are restricted securities eligible 
for resale pursuant to rule 144A under the Securities Act, the 
relevant Funds will comply with the conditions of rule 144A.
    \11\ The Deposit Securities and Redemption Securities may differ 
from each other (and from the Portfolio Securities) (a) to reflect 
minor differences when it is not possible to break up bonds beyond 
certain minimum sizes needed for transfer and settlement, or (b) for 
temporary periods to effect changes in the Portfolio Securities as a 
result of the rebalancing of an Underlying Index.

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[[Page 71749]]

    12. Neither the Trust nor any individual 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 Shares traded on an Exchange, or refer to 
redeemability, will prominently disclose that Shares are not 
individually redeemable and that the owners of Shares may purchase or 
redeem Shares from the Fund in Creation Units only. The same approach 
will be followed in the shareholder reports and investor educational 
materials issued or circulated in connection with the 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 12(d)(1)(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 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 Shares that are 
redeemable in Creation Units only. Applicants state that investors may 
purchase Shares in Creation Units 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 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 Shares will take 
place at negotiated prices, not at a current offering price described 
in a Fund's prospectus, and not at a price based on NAV. Thus, 
purchases and sales of Shares in the secondary market will not comply 
with section 22(d) of the Act and rule 22c-1 under the Act. Applicants 
request an exemption under section 6(c) from these provisions.
    5. Applicants assert that the concerns sought to be addressed by 
section 22(d) of the Act and rule 22c-1 under the Act with respect to 
pricing are equally satisfied by the proposed method of pricing Shares. 
Applicants maintain that while there is little legislative history 
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to (a) Prevent dilution caused by 
certain riskless trading schemes by principal underwriters and contract 
dealers, (b) prevent unjust discrimination or preferential treatment 
among buyers, and (c) ensure an orderly distribution 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 Shares to trade in the secondary market at negotiated 
prices. Applicants state that (a) secondary market trading in Shares 
does not involve a Fund as a party and will not result in dilution of 
an investment in Shares, and (b) to the extent different prices exist 
during a given trading day, or from day to day, such variances occur as 
a result of third party market forces, such as supply and demand. 
Therefore, applicants assert that secondary market transactions in 
Shares will not lead to discrimination or preferential treatment among 
purchasers. Finally, applicants contend that the proposed distribution 
system will be orderly because competitive forces will ensure that the 
difference between the market price of 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 
observe that the settlement of redemptions of Creation Units of the 
Global Funds is contingent not only on the settlement cycle of the U.S. 
securities markets, but also on the delivery cycles present in 
international markets in which those Funds invest. Applicants have been 
advised that, under certain circumstances, the delivery cycles for 
transferring Portfolio Securities to redeeming investors, coupled with 
local market holiday schedules, will require a delivery process of up 
to 12 calendar days. Applicants therefore request relief from section 
22(e) in order to provide for payment or satisfaction of redemptions 
within the maximum number of calendar days required for such payment or 
satisfaction in the principal local markets where transactions in the 
Portfolio Securities of each Global Fund customarily clear and settle, 
but in all cases no later than 12 calendar days following the tender of 
a Creation Unit.\12\ With respect to Future Funds

[[Page 71750]]

that are Global Funds, applicants seek the same relief from section 
22(e) only to the extent that circumstances exist similar to those 
described in the application.
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    \12\ Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will affect any obligations applicants 
may have under rule 15c6-1 under the Exchange Act. Rule 15c6-1 
requires that most securities transactions be settled within three 
business days of the trade.
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    8. Applicants submit that section 22(e) was designed to prevent 
unreasonable, undisclosed and unforeseen delays in the actual payment 
of redemption proceeds. Applicants state that allowing redemption 
payments for Creation Units of a Fund to be made within the number of 
days indicated above would not be inconsistent with the spirit and 
intent of section 22(e). Applicants state that the SAI will disclose 
those local holidays (over the period of at least one year following 
the date of the SAI), if any, that are expected to prevent the delivery 
of redemption proceeds in seven calendar days, and the maximum number 
of days needed to deliver the proceeds for each affected Global Fund. 
Applicants are not seeking relief from section 22(e) with respect to 
Global Funds that do not effect creations and redemptions of Creation 
Units in-kind.

Section 12(d)(1)

    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 (``Acquiring Management Companies'') and unit investment 
trusts (``Acquiring 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 Funds (collectively, 
``Acquiring Funds'') to acquire shares of a Fund beyond the limits of 
section 12(d)(1)(A). In addition, applicants seek relief to permit a 
Fund or broker-dealer that is registered under the Exchange Act 
(``Broker'') to sell Shares to Acquiring Funds in excess of the limits 
of section 12(d)(1)(B).
    11. Each Acquiring Management Company will be advised by an 
investment adviser within the meaning of section 2(a)(20)(A) of the Act 
(the ``Acquiring Fund Adviser'') and may be sub-advised by one or more 
investment advisers within the meaning of section 2(a)(20)(B) of the 
Act (each an ``Acquiring Fund SubAdviser''). Any investment adviser to 
an Acquiring Fund will be registered under the Advisers Act. Each 
Acquiring Trust will be sponsored by a sponsor (``Sponsor'').
    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 Acquiring Funds nor an 
Acquiring Fund Affiliate would be able to exert undue influence over 
the Funds.\13\ To limit the control that an Acquiring Fund may have 
over a Fund, applicants propose a condition prohibiting an Acquiring 
Fund Adviser or a Sponsor, any person controlling, controlled by, or 
under common control with the Acquiring Fund Adviser or Sponsor, and 
any investment company or issuer that would be an investment company 
but for section 3(c)(1) or 3(c)(7) of the Act that is advised or 
sponsored by the Acquiring Fund Adviser or Sponsor, or any person 
controlling, controlled by, or under common control with the Acquiring 
Fund Adviser or Sponsor (``Acquiring 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 Acquiring Fund SubAdviser, any person controlling, controlled by 
or under common control with the Acquiring Fund SubAdviser, and any 
investment company or issuer that would be an investment company but 
for section 3(c)(1) or 3(c)(7) of the Act (or portion of such 
investment company or issuer) advised or sponsored by the Acquiring 
Fund SubAdviser or any person controlling, controlled by or under 
common control with the Acquiring Fund SubAdviser (``Acquiring Fund's 
SubAdvisory Group''). Applicants propose other conditions to limit the 
potential for undue influence over the Funds, including that no 
Acquiring Fund or Acquiring Fund Affiliate (except to the extent it is 
acting in its capacity as an investment adviser to a Fund) will cause a 
Fund to purchase a security in an offering of securities during the 
existence of an underwriting or selling syndicate of which a principal 
underwriter is an Underwriting Affiliate (``Affiliated Underwriting''). 
An ``Underwriting Affiliate'' is a principal underwriter in any 
underwriting or selling syndicate that is an officer, director, member 
of an advisory board, Acquiring Fund Adviser, Acquiring Fund 
SubAdviser, Sponsor, or employee of the Acquiring Fund, or a person of 
which any such officer, director, member of an advisory board, 
Acquiring Fund Adviser, Acquiring Fund SubAdviser, Sponsor, or employee 
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\ An ``Acquiring Fund Affiliate'' is the Acquiring Fund 
Adviser, Acquiring Fund SubAdviser(s), any Sponsor, promoter, or 
principal underwriter of a Fund, and any person controlling, 
controlled by, or under common control with any of those entities. A 
``Fund Affiliate'' is the 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 Acquiring Management Company, including a majority 
of the disinterested directors or trustees, will find that the advisory 
fees charged to the Acquiring 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 Acquiring Management Company may invest. In addition, except as 
provided in condition 13, an Acquiring Fund Adviser or a trustee 
(``Trustee'') or Sponsor of an Acquiring Trust will, as applicable, 
waive fees otherwise payable to it by the Acquiring 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 Acquiring Fund Adviser, Trustee or Sponsor or an affiliated person 
of the Acquiring Fund

[[Page 71751]]

Adviser, Trustee or Sponsor, from the Funds in connection with the 
investment by the Acquiring Fund in the Fund. Applicants state that any 
sales charges or service fees charged with respect to shares of an 
Acquiring Fund will not exceed the limits applicable to a fund of funds 
set forth in NASD Conduct Rule 2830.\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 FINRA.
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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 
section 3(c)(1) or 3(c)(7) of the Act in excess of the limits contained 
in section 12(d)(1)(A) of the Act, except to the extent permitted by 
exemptive relief from the Commission permitting the Fund to purchase 
shares of other investment companies for short-term cash management 
purposes. To ensure that Acquiring Funds comply with the terms and 
conditions of the requested relief from section 12(d)(1), any Acquiring 
Fund that intends to invest in a Fund in reliance on the requested 
order will enter into an agreement (``Acquiring Fund Agreement'') 
between the Fund and the Acquiring Fund requiring the Acquiring Fund to 
adhere to the terms and conditions of the requested order. The 
Acquiring Fund Agreement also will include an acknowledgement from the 
Acquiring Fund that it may rely on the requested order only to invest 
in Funds and not in any other investment company.
    16. Applicants also note that a Fund may choose to reject a direct 
purchase of Shares in Creation Units by an Acquiring Fund. To the 
extent that an Acquiring Fund purchases Shares in the secondary market, 
a Fund would still retain its ability to reject initial purchases of 
Shares made in reliance on the requested order by declining to enter 
into the Acquiring Fund Agreement prior to any investment by an 
Acquiring 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 acquiring 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.
    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 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 Adviser.
    19. Applicants assert that no useful purpose would be served by 
prohibiting these types of affiliated persons from acquiring 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 Redemption 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 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 an Acquiring Fund to sell its Shares to 
and redeem its Shares from an Acquiring Fund, and to engage in the 
accompanying in-kind transactions with the Acquiring Fund.\15\
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    \15\ Applicants believe that an Acquiring Fund likely will 
purchase Shares of the Funds 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 Shares in Creation 
Units by a Fund to an Acquiring Fund and redemptions of those 
Shares. The requested relief is intended to cover the in-kind 
transactions that would accompany such sales and redemptions.
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    Applicants state that the terms of the transactions are fair and 
reasonable and do not involve overreaching. Applicants note that any 
consideration paid by an Acquiring Fund for the purchase or redemption 
of 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 Acquiring Funds will be consistent with the 
policies of each Acquiring Fund. The purchase of Creation Units by an 
Acquiring Fund directly from a Fund will be accomplished in accordance 
with the investment restrictions of any such Acquiring Fund and will be 
consistent with the investment policies set forth in the Acquiring 
Fund's registration statement. The Acquiring Fund Agreement will 
require any Acquiring Fund that purchases Creation Units directly from 
a Fund to represent that the purchase of Creation Units from a Fund by 
an Acquiring Fund will be accomplished in compliance with the 
investment restrictions of the Acquiring Fund and will be consistent 
with the investment policies set forth in the Acquiring Fund's 
registration statement.
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    \16\ Applicants acknowledge that receipt of compensation by (a) 
an affiliated person of an Acquiring Fund, or an affiliated person 
of such person, for the purchase by the Acquiring Fund of Shares or 
(b) an affiliated person of a Fund, or an affiliated person of such 
person, for the sale by the Fund of its Shares to an Acquiring Fund 
may be prohibited by section 17(e)(1) of the Act. The Acquiring Fund 
Agreement also will include this acknowledgment.
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    Applicants' Conditions:
    Applicants agree that any order of the Commission granting the 
requested relief will be subject to the following conditions:

ETF Relief

    1. As long as the Trust operates in reliance on the requested 
order, the 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. Any advertising 
material that describes the purchase or sale of Creation Units or 
refers to redeemability will prominently disclose that Shares are not 
individually redeemable and that owners of Shares may acquire those 
Shares from a Fund and tender those Shares for redemption to a Fund in 
Creation Units only.
    3. The Web site for the Funds, which is and will be publicly 
accessible at no charge, will contain, on a per Share basis for each 
Fund, the prior Business Day's NAV and the market closing price or the 
midpoint of the bid/ask spread at the time of the calculation of such 
NAV (``Bid/Ask Price''), and a calculation of the premium or discount 
of the market

[[Page 71752]]

closing price or the Bid/Ask Price against such NAV.
    4. The requested relief to permit ETF operations will expire on the 
effective date of any Commission rule under the Act that provides 
relief permitting the operation of index-based exchange-traded funds.

Section 12(d)(1) Relief

    5. The members of an Acquiring 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 an Acquiring Fund's 
SubAdvisory Group will not control (individually or in the aggregate) a 
Fund within the meaning of section 2(a)(9) of the Act. If, as a result 
of a decrease in the outstanding voting securities of a Fund, the 
Acquiring Fund's Advisory Group or the Acquiring Fund's SubAdvisory 
Group, each in the aggregate, becomes a holder of more than 25% of the 
outstanding voting securities of a Fund, it will vote its Shares in the 
same proportion as the vote of all other holders of the Shares. This 
condition does not apply to the Acquiring Fund's SubAdvisory Group with 
respect to a Fund for which the Acquiring Fund SubAdviser or a person 
controlling, controlled by, or under common control with the Acquiring 
Fund SubAdviser acts as the investment adviser within the meaning of 
section 2(a)(20)(A) of the Act.
    6. No Acquiring Fund or Acquiring Fund Affiliate will cause any 
existing or potential investment by the Acquiring Fund in a Fund to 
influence the terms of any services or transactions between the 
Acquiring Fund or an Acquiring Fund Affiliate and the Fund or a Fund 
Affiliate.
    7. The board of directors or trustees of an Acquiring Management 
Company, including a majority of the disinterested directors or 
trustees, will adopt procedures reasonably designed to ensure that the 
Acquiring Fund Adviser and any Acquiring Fund SubAdviser are conducting 
the investment program of the Acquiring Management Company without 
taking into account any consideration received by the Acquiring 
Management Company or an Acquiring Fund Affiliate from a Fund or a Fund 
Affiliate in connection with any services or transactions.
    8. Once an investment by an Acquiring Fund in Shares exceeds the 
limits in section 12(d)(1)(A)(i) of the Act, the board of trustees of 
the Trust (``Board''), including a majority of the disinterested 
trustees, will determine that any consideration paid by the Fund to an 
Acquiring Fund or an Acquiring 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).
    9. No Acquiring Fund or Acquiring Fund Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to a Fund) 
will cause the Fund to purchase a security in any Affiliated 
Underwriting.
    10. The Board, including a majority of the disinterested trustees, 
will adopt procedures reasonably designed to monitor any purchases of 
securities by the Fund in an Affiliated Underwriting, once an 
investment by an Acquiring 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 Acquiring Fund in the Fund. The Board will consider, among other 
things: (a) Whether the purchases were consistent with the investment 
objectives and policies of the Fund; (b) how the performance of 
securities purchased in an Affiliated Underwriting compares to the 
performance of comparable securities purchased during a comparable 
period of time in underwritings other than Affiliated Underwritings or 
to a benchmark such as a comparable market index; and (c) whether the 
amount of securities purchased by the Fund in Affiliated Underwritings 
and the amount purchased directly from an Underwriting Affiliate have 
changed significantly from prior years. The Board will take any 
appropriate actions based on its review, including, if appropriate, the 
institution of procedures designed to assure that purchases of 
securities in Affiliated Underwritings are in the best interest of 
shareholders of the Fund.
    11. Each Fund will maintain and preserve permanently in an easily 
accessible place a written copy of the procedures described in the 
preceding condition, and any modifications to such procedures, and will 
maintain and preserve for a period of not less than six years from the 
end of the fiscal year in which any purchase in an Affiliated 
Underwriting occurred, the first two years in an easily accessible 
place, a written record of each purchase of securities in Affiliated 
Underwritings, once an investment by an Acquiring Fund in the 
securities of the Fund exceeds the limit of section 12(d)(1)(A)(i) of 
the Act, setting forth from whom the securities were acquired, the 
identity of the underwriting syndicate's members, the terms of the 
purchase, and the information or materials upon which the 
determinations of the Board were made.
    12. Before investing in Shares in excess of the limits in section 
12(d)(1)(A), each Acquiring Fund and the Fund will execute an Acquiring 
Fund Agreement stating, without limitation, that their boards of 
directors or trustees and their investment adviser(s) or their Sponsors 
or 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 Shares in excess of the limit in section 
12(d)(1)(A)(i), an Acquiring Fund will notify the Fund of the 
investment. At such time, the Acquiring Fund will also transmit to the 
Fund a list of the names of each Acquiring Fund Affiliate and 
Underwriting Affiliate. The Acquiring Fund will notify the Fund of any 
changes to the list of names as soon as reasonably practicable after a 
change occurs. The Fund and the Acquiring Fund will maintain and 
preserve a copy of the order, the Acquiring 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.
    13. The Acquiring Fund Adviser, Trustee or Sponsor, as applicable, 
will waive fees otherwise payable to it by the Acquiring Fund in an 
amount at least equal to any compensation (including fees received 
pursuant to any plan adopted under rule 12b-1 under the Act) received 
from the Fund by the Acquiring Fund Adviser, Trustee or Sponsor, or an 
affiliated person of the Acquiring Fund Adviser, Trustee or Sponsor, 
other than any advisory fees paid to the Acquiring Fund Adviser, 
Trustee, or Sponsor, or its affiliated person by the Fund, in 
connection with the investment by the Acquiring Fund in the Fund. Any 
Acquiring Fund SubAdviser will waive fees otherwise payable to the 
Acquiring Fund SubAdviser, directly or indirectly, by the Acquiring 
Management Company in

[[Page 71753]]

an amount at least equal to any compensation received from a Fund by 
the Acquiring Fund SubAdviser, or an affiliated person of the Acquiring 
Fund Sub-Adviser, other than any advisory fees paid to the Acquiring 
Fund Sub-Adviser or its affiliated person by the Fund, in connection 
with any investment by the Acquiring Management Company in the Fund 
made at the direction of the Acquiring Fund SubAdviser. In the event 
that the Acquiring Fund SubAdviser waives fees, the benefit of the 
waiver will be passed through to the Acquiring Management Company.
    14. Any sales charges and/or service fees charged with respect to 
shares of an Acquiring Fund will not exceed the limits applicable to a 
fund of funds as set forth in NASD Conduct Rule 2830.
    15. No Fund will acquire securities of any other investment company 
or company relying on section 3(c)(1) or 3(c)(7) of the Act in excess 
of the limits contained in section 12(d)(1)(A) of the Act, except to 
the extent permitted by exemptive relief from the Commission permitting 
the Fund to purchase shares of other investment companies for short-
term cash management purposes.
    16. Before approving any advisory contract under section 15 of the 
Act, the board of directors or trustees of each Acquiring Management 
Company, including a majority of the disinterested directors or 
trustees, will find that the advisory fees charged under such advisory 
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 Acquiring Management Company may 
invest. These findings and their basis will be recorded fully in the 
minute books of the appropriate Acquiring Management Company.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29589 Filed 11-23-10; 8:45 am]
BILLING CODE 8011-01-P