Document ID: SEC-2011-1228-0001
Agency: sec
Document Type: Notice
Title: Applications: Northern Trust Investments, N.A., et al.
Posted Date: 2011-08-17T04:00Z

[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51068-51075]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-20870]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29752; File No. 812-13773]

Northern Trust Investments, N.A., et al.; Notice of Application

August 10, 2011.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') for an exemption from 
sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of the Act and rule 22c-1 
under the Act, under sections 6(c) and 17(b) of the Act for an 
exemption from sections 17(a)(1) and (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 
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. The order would supersede a 
prior order (the ``Prior Order'').\1\
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    \1\ NETS Trust, et al., Investment Company Act Release Nos. 
28166 (Feb. 25, 2008) (notice) and 28195 (Mar. 17, 2008) (order).
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    Applicants: Northern Trust Investments, Inc. (the ``Adviser''), 
FlexShares Trust (the ``Trust'') and Foreside Fund Services, LLC (the 
``Distributor'').

DATES:  Filing Dates: The application was filed on May 14, 2010, and 
amended on November 3, 2010, and August 2, 2011. 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 September 2, 2011, 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,

[[Page 51069]]

NE., Washington, DC 20549-1090; Applicants, c/o Peter K. Ewing and 
Craig R. Carberry, Esq., 50 S. LaSalle Street, Chicago, IL 60603.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel at 
(202) 551-6817, or Janet M. Grossnickle, Assistant Director, 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 a newly organized Maryland statutory trust and will 
be registered under the Act as an open-end management investment 
company. The Trust initially will offer five series (``Initial Funds'') 
whose performance will correspond generally to the price and yield 
performance of a specified securities index (``Underlying Index'').\2\
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    \2\ Markit North America, Inc. (``Markit'') and Morningstar Inc. 
(``Morningstar'') will serve as index providers for the Initial 
Funds. The Markit Underlying Indexes for the Initial Funds are iBoxx 
3-Year Target Duration TIPS Index, iBoxx 5-Year Target Duration TIPS 
Index, and iBoxx 7-Year Target Duration TIPS Index. The Morningstar 
Underlying Indexes for the Initial Funds are Morningside Global 
Upstream Natural Resources Index and Morningstar US Market Factor 
Tilt Index. Neither Markit nor Morningstar is affiliated with the 
Trust, the Adviser or the Distributor.
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    2. Applicants request that the order apply to the Initial Fund and 
any future 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 index comprised solely of securities 
(``Future Funds'' and collectively with the Initial Fund, the 
``Funds'').\3\ Any 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 equity securities 
(``Equity Funds''), Underlying Indexes comprised of fixed income 
securities (``Fixed Income Funds'') or Underlying Indexes comprised of 
equity securities or fixed income securities traded in foreign markets 
(``International Funds''). The Funds may also invest in a combination 
of equity, fixed income and U.S. money market securities and/or non-
U.S. money market securities.\4\ Funds may also invest in ``Depositary 
Receipts''.\5\ A Fund will not invest in any Depositary Receipts that 
the Adviser or Subadviser deems to be illiquid or for which pricing 
information is not readily available.
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    \3\ 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 Investing Fund (as defined below) 
may rely on the order only to invest in Funds and not in any other 
registered investment company.
    \4\ 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.
    \5\ Depositary Receipts are typically issued by a financial 
institution, a ``depositary'', and evidence ownership in a security 
or pool of securities that have been deposited with the depositary. 
No affiliated persons of applicants will serve as the depositary 
bank for any Depositary Receipts held by a Fund.
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    3. The Adviser is registered as an investment adviser under the 
Investment Advisers Act of 1940 (the ``Advisers Act''), and subject to 
approval by the Board of Trustees of the Trust or a Fund (the 
``Board'') 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 Funds.
    4. Each Fund will consist of a portfolio of securities and other 
instruments (``Portfolio Securities'') selected to correspond generally 
to the price and yield performance of a specified 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 price and yield 
performance of its Underlying Index.\6\ Each Fund will sell and redeem 
Creation Units on a ``Business Day,'' which is defined as any day that 
a Fund is required to be open under section 22(e) of the Act. 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 
hold some, but not necessarily all of the Component Securities of its 
Underlying Index.\7\ Applicants state that use of the representative 
sampling strategy may prevent a Fund from tracking the 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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    \6\ 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''), in the case of International 
Funds, Component Securities and Depositary Receipts (defined below) 
representing such Component Securities, or in the case of certain 
Fixed Income Funds, in Component Securities and 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.
    \7\ Securities are selected for inclusion in a Fund following a 
representative sampling strategy to have aggregate investment 
characteristics (based on market capitalization and industry 
weightings), fundamental characteristics (such as return 
variability, duration maturity, earnings valuation and yield) and 
liquidity measures similar to those of the Fund's Underlying Index 
taken in its entirety.
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    6. Creation Units are expected to consist of at least 25,000 Shares 
and to have an initial price in the range of $625,000 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 securities (the 
``Deposit Securities''), designated by the Adviser, together with the 
deposit or refund of a specified cash payment (``Cash Component'' and 
collectively with the Deposit Securities, ``Fund Deposit''). The Cash 
Component 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

[[Page 51070]]

Unit) of the Deposit Securities.\8\ Each Fund may permit a purchaser of 
Creation Units to substitute cash in lieu of depositing some or all of 
the Deposit Securities, under certain circumstances. To preserve 
maximum efficiency and flexibility, a Fund reserves the right to accept 
and deliver Creation Units entirely for cash (``All-Cash Payment''), if 
doing so would reduce the Fund's transaction costs or enhance the 
Fund's operating efficiency.
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    \8\ On each Business Day, prior to the opening of trading on the 
``Exchange'' (as defined below), a list of the names and the 
required number of shares of each Deposit Security to be included in 
the current Fund Deposit (based on the information at the end of the 
previous Business Day) 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 Association, an amount per 
individual Share representing the sum of the current value of the 
Deposit Securities and the estimated Cash Component.
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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.\9\ 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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    \9\ Where a Fund permits a purchaser to substitute cash in lieu 
of depositing a portion of the requisite Deposit Securities, the 
purchaser may be assessed a higher Transaction Fee to cover the cost 
of purchasing such Deposit Securities.
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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 Exchange 
market makers (``Market Makers''), will be assigned to the Shares and 
maintain a market for Shares trading on the Exchange. Prices of Shares 
trading on an Exchange will be based on the current bid/offer 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. Market Makers 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.\10\ 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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    \10\ 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 (``Fund Securities'') on the date that the request for 
redemption is submitted and (b) a ``Cash Redemption Amount,'' 
consisting of an amount calculated in the same manner as the Cash 
Amount. 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.\11\ 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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    \11\ Applicants state that a cash-in-lieu amount will replace 
any ``to-be-announced'' (``TBA'') transaction that is listed as a 
Deposit Security or Fund 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 Fund Security.
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    11. Applicants state that in accepting Deposit Securities and 
satisfying redemptions with Fund Securities, the relevant Funds will 
comply with the Federal securities laws, including that the Deposit 
Securities and Fund Securities are sold in transactions that would be 
exempt from registration under the Securities Act of 1933 (``Securities 
Act'').\12\ The specified Deposit Securities and Fund 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 Fund 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.\13\
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    \12\ In accepting Deposit Securities and satisfying redemptions 
with Fund 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.
    \13\ In either case, the Deposit Securities and Fund 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, (b) for temporary periods to effect changes in the 
Portfolio Securities as a result of the rebalancing of an Underlying 
Index; or (c) in the case of equity securities, when rounding is 
necessary to eliminate fractional shares or lots that are not 
tradeable round lots.
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    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 ``exchange-
traded fund'' or an ``ETF.'' 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

[[Page 51071]]

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 
International 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 14 calendar days. Applicants therefore request relief from section 
22(e) in order to provide for payment or satisfaction of redemptions 
within a longer number of calendar days as required for such payment or 
satisfaction in the principal local markets where transactions in the 
Portfolio Securities of each International Fund customarily clear and 
settle, but in all cases no later than 14 calendar days following the 
tender of a Creation Unit.\14\ With respect to Future Funds that are 
International 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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    \14\ 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 International 
Fund. Applicants are not seeking relief from section 22(e) with respect 
to International 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

[[Page 51072]]

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 (``Investing Management Companies'') and unit investment 
trusts (``Investing 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, 
``Investing 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 Investing Funds in excess of the limits 
of section 12(d)(1)(B).
    11. Each Investing Management Company will be advised by an 
investment adviser within the meaning of section 2(a)(20)(A) of the Act 
(the ``Investing 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 a ``Investing Fund Subadviser''). Any investment adviser to 
an Investing Fund will be registered under the Advisers Act. Each 
Investing 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 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 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 Investing Funds nor an 
Investing Fund Affiliate would be able to exert undue influence over 
the Funds.\15\ To limit the control that an Investing Fund may have 
over a Fund, applicants propose a condition prohibiting an Investing 
Fund Adviser or a Sponsor, any person controlling, controlled by, or 
under common control with the Investing 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 Investing Fund Adviser or Sponsor, or any person 
controlling, controlled by, or under common control with the Investing 
Fund Adviser or Sponsor (``Investing Fund's Advisory Group'') from 
controlling (individually or in the aggregate) a Fund within the 
meaning of section 2(a)(9) of the Act. The same prohibition would apply 
to any Investing Fund Subadviser, any person controlling, controlled by 
or under common control with the Investing 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 Investing 
Fund Subadviser or any person controlling, controlled by or under 
common control with the Investing Fund Subadviser (``Investing Fund's 
Subadvisory Group''). Applicants propose other conditions to limit the 
potential for undue influence over the Funds, including that no 
Investing Fund or Investing Fund Affiliate (except to the extent it is 
acting in its capacity as an investment adviser to a Fund) will cause a 
Fund to purchase a security in an offering of securities during the 
existence of an underwriting or selling syndicate of which a principal 
underwriter is an Underwriting Affiliate (``Affiliated Underwriting''). 
An ``Underwriting Affiliate'' is a principal underwriter in any 
underwriting or selling syndicate that is an officer, director, member 
of an advisory board, Investing Fund Adviser, Investing Fund 
Subadviser, Sponsor, or employee of the Investing Fund, or a person of 
which any such officer, director, member of an advisory board, 
Investing Fund Adviser, Investing 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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    \15\ An ``Investing Fund Affiliate'' is the Investing Fund 
Adviser, Investing Fund Subadviser(s), any Sponsor, promoter, or 
principal underwriter of an Investing 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 Investing Management Company, including a majority 
of the disinterested directors or trustees, will find that the advisory 
fees charged to the Investing 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 Investing Management Company may invest. In addition, under 
condition B.5, an Investing Fund Adviser or a trustee (``Trustee'') or 
Sponsor of an Investing Trust will, as applicable, waive fees otherwise 
payable to it by the Investing Fund in an amount at least equal to any 
compensation (including fees received pursuant to any plan adopted by a 
Fund under rule 12b-1 under the Act) received by the Investing Fund 
Adviser, Trustee or Sponsor or an affiliated person of the Investing 
Fund Adviser, Trustee or Sponsor, from the Funds in connection with the 
investment by the Investing Fund in the Fund. Applicants state that any 
sales charges or service fees charged with respect to shares of an 
Investing Fund will not exceed the limits applicable to a fund of funds 
set forth in NASD Conduct Rule 2830.\16\
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    \16\ Any references to NASD Conduct Rule 2830 include any 
successor or replacement rule to NASD Conduct Rule 2830 that may be 
adopted by Financial Industry Regulatory Authority.
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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 Investing Funds comply with the terms and 
conditions of the requested relief from section 12(d)(1), any Investing 
Fund that intends to invest in a Fund in reliance on the requested 
order will enter into an agreement (``FOF Participation Agreement'') 
between the Fund and the Investing Fund requiring the Investing Fund to 
adhere to the terms and conditions of the requested order. The FOF 
Participation Agreement also will include an acknowledgement from the 
Investing 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

[[Page 51073]]

Investing Fund. To the extent that an Investing 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 FOF Participation Agreement prior 
to any investment by an Investing 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 the Trust or 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. The 
composition of a Fund Deposit made by a purchaser or Fund Redemption 
given to a redeeming investor (except for any cash in lieu amounts) on 
any Business Day will be the same regardless of the investor's 
identity, and Fund Deposits and Fund Redemptions 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 Investing Fund to sell its Shares to 
and redeem its Shares from an Investing Fund, and to engage in the 
accompanying in-kind transactions with the Investing Fund.\17\ 
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 Investing Fund for the purchase or redemption 
of Shares directly from a Fund will be based on the NAV of the 
Shares.\18\ Applicants believe that any proposed transactions directly 
between the Funds and Investing Funds will be consistent with the 
policies of each Investing Fund. The purchase of Creation Units by an 
Investing Fund directly from a Fund will be accomplished in accordance 
with the investment restrictions of any such Investing Fund and will be 
consistent with the investment policies set forth in the Investing 
Fund's registration statement. The FOF Participation Agreement will 
require any Investing Fund that purchases Creation Units directly from 
a Fund to represent that the purchase of Creation Units from a Fund by 
an Investing Fund will be accomplished in compliance with the 
investment restrictions of the Investing Fund and will be consistent 
with the investment policies set forth in the Investing Fund's 
registration statement.
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    \17\ Applicants believe that an Investing 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 Investing Fund and redemptions of those 
Shares. The requested relief is intended to cover the transactions 
that would accompany such sales and redemptions.
    \18\ Applicants acknowledge that receipt of compensation by (a) 
an affiliated person of an Investing Fund, or an affiliated person 
of such person, for the purchase by the Investing Fund of Shares or 
(b) an affiliated person of a Fund, or an affiliated person of such 
person, for the sale by the Fund of its Shares to an Investing Fund 
may be prohibited by section 17(e)(1) of the Act. The FOF 
Participation Agreement also will include this acknowledgment.
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Applicants' Conditions

    Applicants agree that any order of the Commission granting the 
requested relief will be subject to the following conditions:

A. ETF Relief

    1. As long as the Trust operates in reliance on the requested 
order, the Shares of the Funds 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 the following information, 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 closing price or 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.

B. Section 12(d)(1) Relief

    1. The members of an Investing Fund's Advisory Group will not 
control (individually or in the aggregate) a Fund within the meaning of 
section 2(a)(9) of the Act. The members of an Investing Fund's 
Subadvisory Group will not control (individually or in the aggregate) a 
Fund within the meaning of section 2(a)(9) of the Act. If, as a result 
of a decrease in the outstanding Shares of a Fund, the Investing Fund's 
Advisory Group or the Investing Fund's Subadvisory Group, each in the 
aggregate, becomes a holder of more than 25% of the outstanding Shares 
of a Fund, it will vote its Shares in the same proportion as the vote 
of all other holders of the Fund's Shares. This condition does not 
apply to the Investing Fund's Subadvisory Group with respect to a Fund 
for which the Investing Fund Subadviser or a person controlling, 
controlled by, or under common control with the Investing Fund 
Subadviser acts as the investment adviser within the meaning of section 
2(a)(20)(A) of the Act.
    2. No Investing Fund or Investing Fund Affiliate will cause any 
existing or

[[Page 51074]]

potential investment by the Investing Fund in a Fund to influence the 
terms of any services or transactions between the Investing Fund or an 
Investing Fund Affiliate and the Fund or a Fund Affiliate.
    3. The board of directors or trustees of an Investing Management 
Company, including a majority of the disinterested directors or 
trustees, will adopt procedures reasonably designed to ensure that the 
Investing Fund Adviser and any Investing Fund Subadviser are conducting 
the investment program of the Investing Management Company without 
taking into account any consideration received by the Investing 
Management Company or an Investing Fund Affiliate from a Fund or a Fund 
Affiliate in connection with any services or transactions.
    4. Once an investment by an Investing Fund in Fund Shares exceeds 
the limit in section 12(d)(1)(A)(i) of the Act, the board of trustees 
of the Fund (``Board''), including a majority of the disinterested 
Board members, will determine that any consideration paid by the Fund 
to an Investing Fund or an Investing 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).
    5. The Investing Fund Adviser, Trustee or Sponsor, as applicable, 
will waive fees otherwise payable to it by the Investing Fund in an 
amount at least equal to any compensation (including fees received 
pursuant to any plan adopted by a Fund under rule 12b-1 under the Act) 
received from a Fund by the Investing Fund Adviser, Trustee or Sponsor, 
or an affiliated person of the Investing Fund Adviser, Trustee or 
Sponsor, other than any advisory fees paid to the Investing Fund 
Adviser, or Trustee or Sponsor, or its affiliated person by the Fund, 
in connection with the investment by the Investing Fund in the Fund. 
Any Investing Fund Subadviser will waive fees otherwise payable to the 
Investing Fund Subadviser, directly or indirectly, by the Investing 
Management Company in an amount at least equal to any compensation 
received from a Fund by the Investing Fund Subadviser, or an affiliated 
person of the Investing Fund Subadviser, other than any advisory fees 
paid to the Investing Fund Subadviser or its affiliated person by the 
Fund, in connection with any investment by the Investing Management 
Company in the Fund made at the direction of the Investing Fund 
Subadviser. In the event that the Investing Fund Subadviser waives 
fees, the benefit of the waiver will be passed through to the Investing 
Management Company.
    6. No Investing Fund or Investing Fund Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to a Fund) 
will cause the Fund to purchase a security in any Affiliated 
Underwriting.
    7. The Board of the Fund, including a majority of the disinterested 
Board members, will adopt procedures reasonably designed to monitor any 
purchases of securities by the Fund in an Affiliated Underwriting, once 
an investment by an Investing Fund in Fund Shares exceeds the limit of 
section 12(d)(1)(A)(i) of the Act, including any purchases made 
directly from an Underwriting Affiliate. The Board will review these 
purchases periodically, but no less frequently than annually, to 
determine whether the purchases were influenced by the investment by 
the Investing Fund in the Fund. The Board will consider, among other 
things: (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.
    8. Each Fund will maintain and preserve permanently in an easily 
accessible place a written copy of the procedures described in the 
preceding condition, and any modifications to such procedures, and will 
maintain and preserve for a period of not less than six years from the 
end of the fiscal year in which any purchase in an Affiliated 
Underwriting occurred, the first two years in an easily accessible 
place, a written record of each purchase of securities in Affiliated 
Underwritings, once an investment by an Investing Fund in the 
securities of the Fund exceeds the limit of section 12(d)(1)(A)(i) of 
the Act, setting forth from whom the securities were acquired, the 
identity of the underwriting syndicate's members, the terms of the 
purchase, and the information or materials upon which the Board's 
determinations were made.
    9. Before investing in Fund Shares in excess of the limits in 
section 12(d)(1)(A), an Investing Fund will execute a FOF Participation 
Agreement with the Fund stating, without limitation, that their 
respective boards of directors or trustees and their investment 
advisers or Trustee and Sponsor, as applicable, understand the terms 
and conditions of the order, and agree to fulfill their 
responsibilities under the order. At the time of its investment in Fund 
Shares in excess of the limit in section 12(d)(1)(A)(i), an Investing 
Fund will notify the Fund of the investment. At such time, the 
Investing Fund will also transmit to the Fund a list of the names of 
each Investing Fund Affiliate and Underwriting Affiliate. The Investing 
Fund will notify the Fund of any changes to the list as soon as 
reasonably practicable after a change occurs. The Fund and the 
Investing Fund will maintain and preserve a copy of the order, the FOF 
Participation Agreement, and the list with any updated information for 
the duration of the investment and for a period of not less than six 
years thereafter, the first two years in an easily accessible place.
    10. Before approving any advisory contract under section 15 of the 
Act, the board of directors or trustees of each Investing Management 
Company, including a majority of the disinterested directors or 
trustees, will find that the advisory fees charged under such 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 Investing Management Company may 
invest. These findings and their basis will be recorded fully in the 
minute books of the appropriate Investing Management Company.
    11. Any sales charges and/or service fees charged with respect to 
shares of an Investing Fund will not exceed the limits applicable to a 
fund of funds as set forth in NASD Conduct Rule 2830.
    12. No Fund will acquire securities of any investment company or 
company

[[Page 51075]]

relying on section 3(c)(1) or 3(c)(7) of the Act in excess of the 
limits contained in section 12(d)(1)(A) of the Act, except to the 
extent permitted by exemptive relief from the Commission permitting the 
Fund to purchase shares of other investment companies for short-term 
cash management purposes.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20870 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P