Document ID: SEC-2009-1404-0001
Agency: sec
Document Type: Notice
Title: Charles Schwab Investment Management, Inc., et al.; Notice of Application
Posted Date: 2009-10-05T04:00Z

[Federal Register: October 5, 2009 (Volume 74, Number 191)]
[Notices]               
[Page 51197-51203]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05oc09-94]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28933; File No. 812-13628]

 
Charles Schwab Investment Management, Inc., et al.; Notice of 
Application

September 28, 2009.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') for an exemption from 
sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of the Act and rule 22c-1 
under the Act, under sections 6(c) and 17(b) of the Act for an 
exemption from sections 17(a)(1) and 17(a)(2) of the Act, and under 
section 12(d)(1)(J) of the Act for an exemption from sections 
12(d)(1)(A) and 12(d)(1)(B) of the Act.

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SUMMARY OF APPLICATION: Applicants request an order that would permit 
(a) certain open-end management investment companies and their series 
to issue shares (``Shares'') that can be redeemed only in large 
aggregations (``Creation Units''); (b) secondary market transactions in 
Shares to occur at negotiated 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: Schwab Strategic Trust (``Trust'') and Charles Schwab 
Investment Management, Inc. (``Adviser'').

FILING DATES: The application was filed on January 30, 2009, and 
amended on June 30, 2009, and September 25, 2009.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on October 22, 2009, and should be accompanied by proof of service 
on applicants, in the form of an affidavit, or for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090; Applicants, c/o Charles Schwab 
Investment Management, Inc., 101 Montgomery Street, SF120 KNY-14-101, 
San Francisco, CA 94104.

FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Sr., Senior Counsel 
at (202) 551-6868, or Julia Kim Gilmer, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Office of Investment Company 
Regulation).

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

Applicants' Representations

    1. The Trust is registered as an open-end management investment 
company that will offer multiple series and is organized as a Delaware 
statutory trust. The Trust will initially offer Shares of eight series 
(the ``Initial Funds'').\1\ Applicants request that the order apply to 
any future series of the Trust or of other open-end management 
companies, advised by the Adviser or an entity controlling, controlled 
by or under common control with the Adviser, that comply with the terms 
and conditions of this application whose performance will closely 
correspond to the price and yield performance of securities indices 
(collectively with the Initial Funds, the ``Funds'').\2\
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    \1\ The Initial Funds are the: Schwab U.S. Broad Market ETF 
TM, Schwab U.S. Large-Cap ETF TM, Schwab U.S. 
Large-Cap Growth ETF TM, Schwab U.S. Large-Cap Value ETF 
TM, Schwab U.S. Small-Cap ETF TM 
(collectively, the ``Domestic Initial Funds''), Schwab International 
Equity ETF TM, Schwab International Small-Cap Equity ETF 
TM and Schwab Emerging Markets Equity ETF TM.
    \2\ All entities that intend to rely on the order are named as 
applicants. Any other entity that relies on the order in the future 
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 the Funds and not in any other registered investment 
company.
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    2. The Adviser or an entity controlling, controlled by or under 
common control with the Adviser will serve as the investment adviser to 
the Funds. The Adviser is registered as an investment adviser under the 
Investment Advisers Act of 1940, as amended (the ``Advisers Act''). In 
the future, the Adviser may enter into sub-advisory agreements with one 
or more additional investment advisers to act as subadvisers to Funds 
(``Subadvisers''). Any Subadviser will be registered under the Advisers 
Act. A broker-dealer registered under the Securities Exchange Act of 
1934 (the ``Exchange Act'') will act as distributor and the principal 
underwriter of the Funds (a ``Distributor''). The Distributor will not 
be affiliated with the Adviser or a national securities exchange as 
defined in section 2(a)(26) of the Act (``Exchange'').
    3. Each Fund will consist of a portfolio of securities and other 
instruments (``Portfolio Securities'') selected to correspond to the 
price and yield performance of a specified securities index (each 
securities index is an ``Underlying Index'').\3\ Certain of the Funds 
may invest in equity securities or fixed income securities traded in 
foreign markets and seek investment results that closely correspond to 
the price and yield performance of Underlying Indices whose component 
securities include

[[Page 51198]]

such securities (``International Funds''). No entity that creates, 
compiles, sponsors or maintains an Underlying Index (``Index 
Provider'') is or will be an affiliated person, as defined in section 
2(a)(3) of the Act, or an affiliated person of an affiliated person, of 
the Trust or a Fund, a promoter, the Adviser, a Subadviser, or a 
Distributor.\4\
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    \3\ Applicants represent that each Fund will invest at least 80% 
of its total assets in the component securities that comprise its 
Underlying Index (``Component Securities'') and depositary receipts 
representing such securities. ``Depositary Receipts'' will typically 
be American Depositary Receipts, but may also include Global 
Depositary Receipts and European Depositary Receipts. Each Fund also 
may invest up to 20% of its assets in futures, options and swap 
contracts, cash and cash equivalents, as well as in stocks not 
included in its Underlying Index, but which the Adviser or 
Subadviser believes will help the Fund track its Underlying Index.
    \4\ The Index Providers to the Initial Funds are Dow Jones & 
Company, the Financial Times Limited and the London Exchange plc.
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    4. The investment objective of each Fund will be to provide 
investment returns that closely correspond to the price and yield 
performance of its Underlying Index.\5\ The value of an Underlying 
Index will be updated at regular intervals throughout the trading day. 
For Domestic Initial Funds, the Underlying Index value will be 
disseminated every 15 seconds, and for International Funds the 
underlying index value will be disseminated every 60 seconds throughout 
the trading day. Each Fund's prospectus (``Prospectus'') will indicate 
whether the Fund will follow a replication or representative sampling 
strategy.\6\ A Fund using a replication strategy will invest in 
substantially all of the securities comprising its Underlying Index in 
the same approximate proportions as in the Underlying Index. In certain 
circumstances, such as when there are practical difficulties or 
substantial costs involved in compiling an entire Underlying Index or 
when a Component Security of an Underlying Index is illiquid, a Fund 
may use a representative sampling strategy pursuant to which it will 
invest in some, but not all of the Component Securities of its 
Underlying Index.\7\ Applicants expect that each Fund will have a 
tracking error relative to the performance of its Underlying Index of 
no more than 5 percent.
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    \5\ The Underlying Indices for the Initial Funds are the: Dow 
Jones U.S. Broad Stock Market Index \SM\, Dow Jones U.S. Large-Cap 
Total Stock Market Index \SM\, Dow Jones U.S. Large-Cap Growth Total 
Stock Market Index \SM\, Dow Jones U.S. Large-Cap Value Total Stock 
Market Index \SM\, Dow Jones U.S. Small-Cap Total Stock Market Index 
\SM\, FTSE Developed ex-US Index, FTSE Developed Small Cap ex-US 
Liquid Index and FTSE All-Emerging Index.
    \6\ All representations and conditions contained in the 
application that require a Fund to disclose particular information 
in the Fund's Prospectus and/or annual report shall be effective 
with respect to the Fund until the time that the Fund complies with 
the disclosure requirements adopted by the Commission in Investment 
Company Act Release No. 28584 (Jan. 13, 2009).
    \7\ Using the sampling strategy, the Adviser or Subadviser will 
select each security for inclusion in the Fund's portfolio to have 
aggregate investment characteristics, fundamental characteristics, 
and liquidity measures similar to those of the Fund's Underlying 
Index, taken in its entirety.
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    5. The initial price of Shares is expected to range between $25 and 
$100, and the initial price of Creation Units is expected to range from 
$625,000 to $10,000,000. Creation Units will be aggregations of least 
25,000 Shares. Orders to purchase Creation Units must be placed with 
the Distributor, by or through a party that has entered into an 
agreement with the Distributor (``Authorized Participant''). The 
Distributor will be responsible for transmitting the orders to the 
Funds. An Authorized Participant must be either: (a) A broker-dealer or 
other participant in the continuous net settlement system of the 
National Securities Clearing Corporation, a clearing agency registered 
with the Commission, or (b) a participant in the Depository Trust 
Company (``DTC,'' and such participant, ``DTC Participant''). Shares of 
each Fund generally will be sold in Creation Units in exchange for an 
in-kind deposit by the purchaser of a portfolio of securities 
designated by the Adviser (the ``Deposit Securities''), together with 
the deposit or refund of a specified cash payment (``Cash Component''). 
The Cash Component is an amount equal to the difference between, if 
any, (a) the net asset value (``NAV'') (per Creation Unit) of a Fund 
and (b) the market value (per Creation Unit) of the Deposit 
Securities.\8\ Each Fund may permit or require, under certain 
circumstances, an in-kind purchaser of Creation Units to substitute 
cash in lieu of depositing some or all of the Deposit Securities if the 
Adviser believes such method would substantially minimize the Fund's 
transactional costs or would enhance the Fund's operational 
efficiencies.\9\
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    \8\ Each Fund will sell and redeem Creation Units on each day 
that a Fund is open, which includes any day that a Fund is required 
to be open under Section 22(e) of the Act (``Business Day''). Each 
Business Day, prior to the opening of trading on the Exchange, the 
list of names and amount of each security constituting the current 
Deposit Securities and the Cash Component will be made available. 
Any 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 representing, on a per 
Share basis, the sum of the current value of the Deposit Securities 
and the estimated Cash Component.
    \9\ When a rebalancing of a Fund's portfolio is required, the 
Adviser might prefer to receive cash rather than in-kind stocks so 
that the Fund may avoid transaction costs involved in liquidating 
part of its portfolio to achieve the rebalancing. Additionally, in 
some circumstances or in certain countries, it may not be 
practicable or convenient, or permissible under the laws of certain 
countries or the regulations of certain foreign stock exchanges for 
an International Fund to operate exclusively on an in-kind basis.
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    6. An investor purchasing or redeeming a Creation Unit from a Fund 
will be charged a fee (``Transaction Fee'') to prevent the dilution of 
the interests of the remaining shareholders resulting from costs in 
connection with the purchase or redemption of Creation Units.\10\ The 
Transaction Fees relevant to each Fund and the method of calculating 
these Transaction Fees, which will be the same for purchase and 
redemption transactions, will be fully disclosed in the Prospectus of 
such Fund or statement of additional information (``SAI''). The 
Distributor will be responsible for delivering the Fund's Prospectus to 
those persons purchasing Creation Units and for maintaining records of 
both the orders placed with it and the confirmations of acceptance 
furnished by it. In addition, the Distributor will maintain a record of 
the instructions given to the applicable Fund to implement the delivery 
of its Shares.
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    \10\ Where a Fund permits an in-kind purchaser to substitute 
cash in lieu of depositing a portion of the Deposit Securities, the 
purchaser may be assessed a higher Transaction Fee to cover the cost 
of purchasing those securities including operational processing and 
brokerage costs, and part or all of the spread between the bid and 
the offer side of the market.
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    7. 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 on which the Shares are listed will be designated to act 
as a specialist or a market maker and maintain a market for Shares 
trading on such 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.
    8. Applicants expect that purchasers of Creation Units will include 
institutional investors and arbitrageurs. A specialist or market maker, 
in providing a fair and orderly secondary market for the Shares, also 
may purchase Creation Units for use in its market-making activities. 
Applicants expect that secondary market purchasers of Shares will 
include both institutional investors and retail investors.\11\ 
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

[[Page 51199]]

discount or premium in relation to their NAV.
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    \11\ 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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    9. 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) a particular portfolio of securities designated to be 
delivered for Creation Unit redemptions (``Fund Securities'') on the 
Business Day that the request for redemption is submitted \12\ and (b) 
a ``Cash Redemption Amount,'' consisting of an amount equal to the 
difference between the NAV of the Shares being redeemed and the market 
value of the Fund Securities. An investor may receive the cash 
equivalent of a Fund Security in certain circumstances, such as if the 
investor is constrained from effecting transactions in the security by 
regulation or policy.
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    \12\ As a general matter, the Deposit Securities and Fund 
Securities will correspond pro rata to a Fund's portfolio, but Fund 
Securities received on redemption may not always be identical to 
Deposit Securities deposited in connection with the purchase of 
Creation Units for the same day. A Fund will comply with the federal 
securities laws in accepting Deposit Securities and satisfying 
redemptions with Fund Securities, including that the Deposit 
Securities and Fund Securities are sold in transactions that would 
be exempt from registration under the Securities Act.
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    10. Neither the Trust nor any 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.'' All 
marketing materials that describe the features or method of obtaining, 
buying or selling Creation Units 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 
Prospectus, SAI, shareholder reports and any marketing or advertising 
materials. The Funds will provide copies of their annual and semi-
annual shareholder reports to DTC Participants for distribution to 
shareholders.

Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act for an 
exemption from sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of the Act 
and rule 22c-1 under the Act, under sections 6(c) and 17(b) of the Act 
for an exemption from sections 17(a)(1) and 17(a)(2) of the Act, and 
under section 12(d)(1)(J) of the Act for an exemption from sections 
12(d)(1)(A) and (B) of the Act.
    2. Section 6(c) of the Act provides that the Commission may exempt 
any person, security or transaction, or any class of persons, 
securities or transactions, from any provision of the Act, if and to 
the extent that such exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act. 
Section 17(b) of the Act authorizes the Commission to exempt a proposed 
transaction from section 17(a) of the Act if evidence establishes that 
the terms of the transaction, including the consideration to be paid or 
received, are reasonable and fair and do not involve overreaching on 
the part of any person concerned, and the proposed transaction is 
consistent with the policies of the registered investment company and 
the general provisions of the Act. Section 12(d)(1)(J) of the Act 
provides that the Commission may exempt any person, security, or 
transaction, or any class or classes of persons, securities or 
transactions, from any provisions of section 12(d)(1) if the exemption 
is consistent with the public interest and the protection of investors.

Sections 5(a)(1) and 2(a)(32) of the Act

    3. Section 5(a)(1) of the Act defines an ``open-end company'' as a 
management investment company that is offering for sale or has 
outstanding any redeemable security of which it is the issuer. Section 
2(a)(32) of the Act defines a redeemable security as any security, 
other than short-term paper, under the terms of which the owner, upon 
its presentation to the issuer, is entitled to receive approximately 
his proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Shares will not be individually redeemable, 
applicants request an order that would permit the Trust or a Fund to 
register as an open-end management investment company 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) assure 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 arbitrage activity should 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

[[Page 51200]]

redemption or postponing the date of payment of redemption proceeds for 
more than seven days after the tender of a security for redemption. 
Applicants state that settlement of redemptions of Creation Units of 
the International Funds is contingent not only on the settlement cycle 
of the United States securities markets, but also on the delivery 
cycles present in foreign markets for underlying foreign Portfolio 
Securities held by the International Funds. Applicants state that in 
certain circumstances delivery cycles for transferring Fund Securities 
to redeeming investors, coupled with local market holiday schedules, 
will require a delivery process of up to twelve calendar days for 
certain International Funds. Applicants request relief under section 
6(c) of the Act from section 22(e) to allow the International Funds to 
pay redemption proceeds up to twelve calendar days after a redemption 
request is received and in proper form. Except as disclosed in the 
relevant International Fund's Prospectus and/or SAI, applicants expect 
that each International Fund will be able to deliver redemption 
proceeds within seven days.\13\
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    \13\ Rule 15c6-1 under the Exchange Act requires that most 
securities transactions be settled within three business days of the 
trade. Applicants acknowledge that no relief obtained from the 
requirements of Section 22(e) will affect any obligations applicants 
may have under Rule 15c6-1.
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    8. Applicants state that section 22(e) was designed to prevent 
unreasonable, undisclosed and unforeseen delays in the payment of 
redemption proceeds. Applicants assert that the requested relief will 
not lead to the problems that section 22(e) was designed to prevent. 
Applicants state that the SAI will disclose those local holidays in a 
given year that are expected to prevent the delivery of redemption 
proceeds in seven calendar days, and the maximum number of days, up to 
twelve calendar days, needed to deliver the proceeds for the relevant 
International Fund. Applicants are not seeking relief from section 
22(e) with respect to International Funds that do not effect 
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 and unit investment 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 and that have entered 
into a participation agreement with a Fund (such agreement, a ``FOF 
Participation Agreement,'' such management investment companies, the 
``Investing Management Companies,'' such unit investment trusts, the 
``Investing Trusts,'' and the Investing Trusts, together with the 
Investing Management Companies, the ``Investing Funds'') to acquire 
shares of a Fund beyond the limits of section 12(d)(1)(A). Investing 
Funds do not include the Funds. In addition, applicants seek relief to 
permit the Funds, the Distributor and any other broker or dealer that 
is registered under the Exchange Act to sell Shares to an Investing 
Fund 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 subadvised by one or more 
investment advisers within the meaning of section 2(a)(20)(B) of the 
Act (each an ``Investing Fund Subadviser''). Each Investing Fund 
Adviser and any Investing Fund Subadviser 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 
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 Investing Funds nor an 
Investing Fund Affiliate would be able to exert undue influence over 
the Funds.\14\ 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 an Investing Fund Adviser or Sponsor, and any 
investment company and any issuer that would be an investment company 
but for sections 3(c)(1) or 3(c)(7) of the Act that is advised or 
sponsored by an Investing Fund Adviser or Sponsor, or any person 
controlling, controlled by, or under common control with an 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 sections 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 any offering of securities during the 
existence of any underwriting or selling syndicate of which a principal 
underwriter is an Underwriting Affiliate (``Affiliated Underwriting''). 
An ``Underwriting Affiliate'' is a principal underwriter in any 
underwriting or selling syndicate that is an officer, director, member 
of an advisory board, Investing Fund Adviser, Investing Fund 
Subadviser, employee or Sponsor of the Investing Fund, or a person of 
which any such officer, director, member of an advisory board,

[[Page 51201]]

Investing Fund Adviser, Investing Fund Subadviser, employee, or Sponsor 
is an affiliated person (except that any person whose relationship to 
the Fund is covered by section 10(f) of the Act is not an Underwriting 
Affiliate).
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    \14\ An ``Investing Fund Affiliate'' is an Investing Fund 
Adviser, Investing Fund Subadviser, Sponsor, promoter, and principal 
underwriter of an Investing Fund, and any person controlling, 
controlled by, or under common control with any of these entities. A 
``Fund Affiliate'' is an investment adviser, promoter, or principal 
underwriter of a Fund and any person controlling, controlled by or 
under common control with any of these entities.
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    14. Applicants assert that several 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 directors or trustees who are not ``interested persons'' within 
the meaning of section 2(a)(19) of the Act (``independent directors or 
trustees''), will be required to 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, except as provided in 
condition B.5, an Investing Fund Adviser or a trustee of an Investing 
Fund (``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 or Trustee or Sponsor or an 
affiliated person of the Investing Fund Adviser, Trustee or Sponsor, 
from the Fund in connection with the investment by the Investing Fund 
in the Fund. Applicants state that any sales loads 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 Conduct Rule 2830 of 
the National Association of Securities Dealers (``NASD'').\15\
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    \15\ Any references to NASD Conduct Rule 2830 include any 
successor or replacement Rule to NASD Conduct Rule 2830 that may be 
adopted by the Financial Industry Regulatory 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 will 
acquire securities of any investment company or company relying on 
sections 3(c)(1) or 3(c)(7) of the Act in excess of the limits 
contained in section 12(d)(1)(A) of the Act. 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 a FOF Participation 
Agreement 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 the Funds and not in any 
other investment company.
    16. Applicants also note that a Fund may choose to reject a direct 
purchase of in Creation Units by an 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 purchasing any security from the company. Section 2(a)(3) of the Act 
defines ``affiliated person'' to include (a) any person directly or 
indirectly owning, controlling or holding with power to vote 5% or more 
of the outstanding voting securities of the other person, (b) any 
person 5% or more of whose outstanding voting securities are directly 
or indirectly owned, controlled or held with the power to vote by the 
other person, and (c) any person directly or indirectly controlling, 
controlled by or under common control with the other person. Section 
2(a)(9) of the Act provides that a control relationship will be 
presumed where one person owns more than 25% of another person's voting 
securities.
    18. Applicants request an exemption from section 17(a) of the Act 
pursuant to sections 17(b) and 6(c) of the Act in order to permit in-
kind purchases and redemptions of Creation Units from the Funds by 
persons that 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 or an 
entity controlling, controlled by or under common control with Adviser.
    19. Applicants assert that no useful purpose would be served by 
prohibiting these types of affiliated persons from purchasing or 
redeeming Creation Units through ``in-kind'' transactions. The 
composition of the basket of securities and cash for both in-kind 
purchases and in-kind redemptions of Creation Units will be the same 
for all purchasers and redeemers. Deposit Securities and Fund 
Securities will be valued in the same manner as Portfolio Securities. 
Therefore, applicants state that in-kind purchases and redemptions will 
afford no opportunity for the specified affiliated persons, or Second-
Tier Affiliates, of a Fund to effect a transaction detrimental to other 
holders of 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.\16\ 
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.\17\ Applicants believe that any proposed transactions directly 
between the Funds and Investing Funds will be consistent with the 
policies of each Investing Fund. The proposed transactions will comply 
with the investment restrictions of the Investing Fund and be 
consistent with its investment policies as set forth in its 
registration statement. The FOF Participation Agreement will require 
any Investing Fund that relies on the relief to purchase Shares 
directly from a Fund to represent that its purchases are permitted 
under its investment restrictions and consistent with the investment 
policies described in its registration statement.
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    \16\ Applicants acknowledge that the 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 of a Fund or (b) an affiliated person of a Fund, or an 
affiliated person of such person, for the sale by the Fund of its 
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.
    \17\ Applicants believe that an Investing Fund generally will 
purchase Shares in the secondary market and will not purchase or 
redeem Creation Units directly from a Fund. However, the requested 
relief would apply to direct sales of Creation Units by a Fund to an 
Investing Fund and in-kind redemptions of those Shares.

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[[Page 51202]]

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions: \18\
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    \18\ See note 6, supra.
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A. Exchange-Traded Fund Relief

    1. Each Prospectus will clearly disclose that, for purposes of the 
Act, Shares are issued by a registered investment company and that the 
acquisition of Shares by investment companies and companies relying on 
sections 3(c)(1) or 3(c)(7) of the Act is subject to the restrictions 
of section 12(d)(1) of the Act, except as permitted by an exemptive 
order that permits registered investment companies to invest in a Fund 
beyond the limits in section 12(d)(1), subject to certain terms and 
conditions, including that the registered investment company enter into 
a FOF Participation Agreement with the Fund regarding the terms of the 
investment.
    2. As long as the Funds operate in reliance on the requested order, 
the Shares of the Funds will be listed on an Exchange.
    3. Neither the Trust nor any Fund will be advertised or marketed as 
an open-end investment company or a mutual fund. Each Prospectus will 
prominently disclose that the Shares are not individually redeemable 
shares and will disclose that the owners of the Shares may acquire 
those Shares from the Fund and tender those Shares for redemption to 
the Fund in Creation Units only. Any advertising material that 
describes the purchase or sale of Creation Units or refers to 
redeemability will prominently disclose that the Shares are not 
individually redeemable and that owners of the Shares may acquire those 
Shares from the Fund and tender those Shares for redemption to the Fund 
in Creation Units only.
    4. 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: (a) the prior Business Day's NAV and 
the Bid/Ask Price, and a calculation of the premium or discount of the 
Bid/Ask Price against such NAV; and (b) data in chart format displaying 
the frequency distribution of discounts and premiums of the daily Bid/
Ask Price against the NAV, within appropriate ranges, for each of the 
four previous calendar quarters (or for the life of the Fund, if 
shorter).
    5. The Prospectus and annual report for each Fund will also 
include: (a) the information listed in condition A.4(b), (i) in the 
case of the Prospectus, for the most recently completed year (and the 
most recently completed quarter or quarters, as applicable) and (ii) in 
the case of the annual report, for the immediately preceding five years 
(or for the life of the Fund, if shorter), and (b) calculated on a per 
Share basis for one, five and ten year periods (or life of the Fund), 
(i) the cumulative total return and the average annual total return 
based on NAV and Bid/Ask Price, and (ii) the cumulative total return of 
the relevant Underlying Index.
    6. The requested relief to permit ETF operations will expire on the 
effective date of any Commission rule under the Act that provides 
relief permitting the operation of index-based exchange-traded funds.

B. Section 12(d)(1) Relief

    1. The members of the 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 the 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 percent of the outstanding 
Shares of a Fund, it will vote its Shares of the Fund 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 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 independent directors or trustees, 
will adopt procedures reasonably designed to assure 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 l2(d)(1)(A)(i) of the Act, the Board of a Fund, 
including a majority of the independent Board members, will determine 
that any consideration paid by the Fund to the Investing Fund or an 
Investing Fund Affiliate in connection with any services or 
transactions: (i) Is fair and reasonable in relation to the nature and 
quality of the services and benefits received by the Fund; (ii) 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 (iii) 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, or 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-l under 
the Act) received from a Fund by the Investing Fund Adviser, or Trustee 
or Sponsor, or an affiliated person of the Investing Fund Adviser, or 
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 the 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 a Fund to purchase a security in an Affiliated Underwriting.

[[Page 51203]]

    7. The Board of the Fund, including a majority of the independent 
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: (i) Whether the purchases were consistent with the investment 
objectives and policies of the Fund; (ii) 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 (iii) 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 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 independent directors or trustees, 
will find that the advisory fees charged under such contract are based 
on services provided that will be in addition to, rather than 
duplicative of, the services provided under the advisory contract(s) of 
any Fund in which the 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 Conduct Rule 2830 of the NASD.
    12. No Fund will 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.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Florence E. Harmon,
 Deputy Secretary.
[FR Doc. E9-23891 Filed 10-2-09; 8:45 am]

BILLING CODE 8011-01-P