Document ID: SEC-2007-0513-0001
Agency: sec
Document Type: Notice
Title: First Trust Exchange-Traded Fund, et al.; Notice of Application
Posted Date: 2007-04-06T04:00Z

[Federal Register: April 6, 2007 (Volume 72, Number 66)]
[Notices]               
[Page 17207-17208]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06ap07-92]                         

[[Page 17207]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27772; 812-13262]

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

March 30, 2007.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application to amend a prior order under section 
6(c) of the Investment Company Act of 1940 (``Act'') for an exemption 
from sections 2(a)(32), 5(a)(1), 22(d), 22(e), and 24(d) of the Act and 
rule 22c-1 under the Act, and under sections 6(c) and 17(b) of the Act 
for an exemption from sections 17(a)(1) and (a)(2) of the Act.

-----------------------------------------------------------------------

    Summary of Application: Applicants request an order to amend a 
prior order that permits (a) Open-end management investment companies 
that include series (``Domestic Index Funds'') based on domestic equity 
securities indexes to issue shares (``Shares'') that can be redeemed 
only in large aggregations (``Creation Unit Aggregations''); (b) 
secondary market transactions in Shares to occur at negotiated prices; 
(c) dealers to sell Shares to purchasers in the secondary market 
unaccompanied by a prospectus when prospectus delivery is not required 
by the Securities Act of 1933; and (d) certain affiliated persons of 
the series to deposit securities into, and receive securities from, the 
series in connection with the purchase and redemption of Creation Unit 
Aggregations (``Prior Order'').\1\ Applicants seek to amend the Prior 
Order in order to offer two new series (the ``New Funds'') and future 
series (``Future International Index Funds,'' and together with the New 
Funds, the ``International Index Funds'') based on foreign equity 
securities indexes.\2\ In addition the order would delete a condition 
related to future relief in the Prior Order and amend condition 2 in 
the Prior Order.
---------------------------------------------------------------------------

    \1\ First Trust Exchange-Traded Fund, et al., Investment Company 
Act Release Nos. 27051 (Aug. 26, 2005) (notice) and 27068 (Sept. 20, 
2005) (order).
    \2\ International Index Funds and Domestic Index Funds are 
referred to collectively as ``Funds.'' Future International Funds 
and future Domestic Index Funds are referred to collectively as 
``Future Index Funds.''
---------------------------------------------------------------------------

    Applicants: First Trust Exchange-Traded Fund (``Initial Trust''), 
First Trust Exchange-Traded Fund II; First Trust Exchange-Traded 
AlphaDEX Fund (collectively, the ``Trusts''), First Trust Advisors, 
L.P. (``Advisor''), and First Trust Portfolios, L.P. (``Distributor'').
    Filing Dates: The application was filed on February 13, 2006, and 
amended on March 30, 2007. 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 April 24, 2007, and should be accompanied by proof of 
service on applicants, in the form of an affidavit, or for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-1090; Applicants, 1001 Warrenville 
Road, Lisle, IL 60532.

FOR FURTHER INFORMATION CONTACT: John Yoder, Senior Counsel, at (202) 
551-6878, or Stacy L. Fuller, 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 for a fee at the 
Public Reference Desk, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington DC 20549-0102 (telephone (202) 551-5850).

Applicants' Representations

    1. The Trusts, Massachusetts business trusts, are each open-end 
management investment companies registered under the Act. The Trusts 
are organized as series funds with multiple series. The Initial Trust 
currently offers twelve Funds. The Advisor, which is registered as an 
investment adviser under the Investment Advisers Act of 1940 
(``Advisers Act''), or an entity controlling, controlled by or under 
common control with the Advisor (included in the term ``Advisor''), 
will serve as investment adviser to each Fund. The Advisor may in the 
future retain one or more sub-advisers (``Sub-Advisors'') to manage 
particular Funds'' portfolios. Any Sub-Advisor will be registered under 
the Advisers Act or exempt from registration. The Distributor, a 
broker-dealer registered under the Securities Exchange Act of 1934 
(``Exchange Act''), serves as the principal underwriter and distributor 
for the Funds.
    2. The Trusts and other registered open-end management investment 
companies (``Future Trusts,'' included in the term ``Trusts'') are 
currently permitted to offer Funds based on domestic equity securities 
indexes (``Domestic Underlying Indexes'') in reliance on the Prior 
Order. Applicants seek to amend the Prior Order to permit the Trusts to 
offer the International Index Funds, which are based on foreign equity 
securities indexes (``International Underlying Indexes,'' and together 
with Domestic Underlying Indexes, the ``Underlying Indexes''). The 
International Index Funds would operate in a manner identical to the 
existing Funds, except as described in the application (and summarized 
in this notice).
    3. The New Funds will invest in portfolios of securities consisting 
predominantly of the component securities of the Dow Jones STOXX Select 
Dividend 30 Index and FTSE EPRA/NAREIT Global Real Estate Index (each 
included in the term International Underlying Index). The Dow Jones 
STOXX Select Dividend 30 Index is a dividend weighted index designed to 
measure the performance of European companies, which pay dividends, 
relative to their home markets. The FTSE EPRA/NAREIT Global Real Estate 
Index is an index designed to track the performance of certain listed 
real estate companies and real estate investment trusts in North 
America, Europe and Asia. No entity that creates, compiles, sponsors, 
or maintains an Underlying Index 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 a Trust, the Advisor, any Sub-Advisor, the 
promoter or Distributor of a Fund.
    4. Under the Prior Order, each Fund is subject to the 
representation that it will invest at least 90% of its assets in the 
component securities of its Underlying Index (``Component 
Securities''). Applicants request relief to permit each International 
Index Fund, for purposes of satisfying this requirement, to count 
certain depositary receipts (``Depositary Receipts'') that represent 
Component Securities as well as Component Securities. Applicants 
represent that each International Index Fund would thus invest at least 
90% of its assets in the Component Securities of its International 
Underlying Index and Depositary Receipts representing such

[[Page 17208]]

Component Securities.\3\ Applicants state that an International Index 
Fund generally would only hold Depositary Receipts if the Advisor 
believed that holding the Depositary Receipts, rather than holding the 
Component Securities, would benefit the International Index Fund.
---------------------------------------------------------------------------

    \3\ Applicants state that the Depositary Receipts will be listed 
on a national securities exchange, as defined in section 2(a)(26) of 
the Act (``Exchange'') or a foreign exchange. The Advisor, Sub-
Advisor and their affiliated persons will not serve as the 
depositary bank for any Depositary Receipts held by an International 
Index Fund.
---------------------------------------------------------------------------

    5. Applicants state that all discussions contained in the 
application for the Prior Order are equally applicable to the 
International Index Funds, except as specifically noted by applicants 
(as summarized in this notice). Applicants assert that the 
International Index Funds will operate in a manner identical to the 
Funds and will comply with all of the terms, provisions and conditions 
of the Prior Order, as amended by the present application. Applicants 
believe that the requested relief continues to meet the necessary 
exemptive standards.

Applicants' Legal Analysis

Section 22(e) of the Act

    1. In connection with applicants' request for relief to permit the 
operations of International Index Funds, applicants seek to amend the 
Prior Order to add relief from section 22(e) of the Act. Section 22(e) 
generally prohibits a registered investment company from suspending the 
right of redemption or postponing the date of payment of redemption 
proceeds for more than seven days after the tender of a security for 
redemption. The principal reason for the requested exemption is that 
settlement of redemptions for the International Index Funds is 
contingent not only on the settlement cycle of the United States 
market, but also on currently practicable delivery cycles in local 
markets for underlying foreign securities held by the International 
Index Funds. Applicants state that local market delivery cycles for 
transferring certain foreign securities to investors redeeming Creation 
Unit Aggregations, together with local market holiday schedules, will 
under certain circumstances require a delivery process in excess of 
seven calendar days for the International Index Funds. Applicants 
request relief under section 6(c) of the Act from section 22(e) in such 
circumstances to allow the International Index Funds to pay redemption 
proceeds up to 12 calendar days after the tender of any Creation Unit 
Aggregation for redemption. At all other times and except as disclosed 
in the relevant statement of additional information (``SAI''), 
applicants expect that each International Index Fund will be able to 
deliver redemption proceeds within seven days.\4\ With respect to 
Future International Index Funds, applicants seek the same relief from 
section 22(e) only to the extent that circumstances similar to those 
described in the application exist.
---------------------------------------------------------------------------

    \4\ 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.
---------------------------------------------------------------------------

    2. 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 for each International Index Fund 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 the relevant 
International Index Fund.

Future Relief

    3. Applicants also seek to amend the Prior Order to modify the 
terms under which a Trust may offer Future Index Funds. The Prior Order 
is currently subject to a condition that does not permit relief for 
Future Index Funds unless applicants request and receive with respect 
to such Future Index Fund, either exemptive relief from the Commission 
or a no-action letter from the Division of Investment Management of the 
Commission, or the Future Index Fund could be listed on an Exchange 
without the need for a filing pursuant to rule 19b-4 under the Exchange 
Act.
    4. The order would amend the Prior Order to delete this condition. 
Any Future Index Funds will: (a) Be advised by the Advisor; (b) track 
Underlying Indexes that are created, compiled, sponsored or maintained 
by an entity that is not an affiliated person, as defined in section 
2(a)(3) of the Act, or an affiliated person of an affiliated person, of 
the Advisor, the Distributor, a Trust or any Sub-Advisor or promoter of 
a Fund; and (c) comply with the respective terms and conditions of the 
Prior Order, as amended by the present application.
    5. Applicants believe that the modification of the future relief 
available under the Prior Order would be consistent with sections 6(c) 
and 17(b) of the Act and that granting the requested relief will 
facilitate the timely creation of Future Index Funds by removing the 
need to seek additional exemptive relief. Applicants submit that the 
terms and conditions of the Prior Order have been appropriate for the 
existing Funds and would remain appropriate for Future Index Funds. 
Applicants also submit that tying exemptive relief under the Act to the 
ability of a Future Index Fund to be listed on an Exchange without the 
need for a rule 19b-4 filing under the Exchange Act is not necessary to 
meet the standards under sections 6(c) and 17(b) of the Act.

Condition to Prior Order

    6. Applicants also seek to amend the Prior Order by replacing 
existing condition 2 to the Prior Order. Existing condition 2 to the 
Prior Order currently provides that each Fund's prospectus 
(``Prospectus'') and product description (``Product Description'') will 
clearly disclose that, for purposes of the Act, Shares are issued by 
the Fund and the acquisition of Shares by investment companies is 
subject to the restrictions of section 12(d)(1) of the Act. Applicants 
wish to replace this condition in the Prior Order with the condition 
stated below.

Applicants' Condition

    Applicants agree that any order granting the requested relief will 
be subject to the same conditions as the Prior Order, except for 
condition 1 to the Prior Order, which will be deleted, and condition 2 
to the Prior Order, which will be replaced with the following 
condition:
    Each Fund's Prospectus and Product Description will clearly 
disclose that, for purposes of the Act, Shares are issued by the Fund, 
which is a registered investment company, and the acquisition of Shares 
by investment companies is subject to the restrictions of section 
12(d)(1) of the Act, except as permitted by an exemptive order that 
permits registered investment companies to invest in the Fund beyond 
the limits of section 12(d)(1), subject to certain terms and 
conditions, including that the registered investment company enter into 
an agreement with the Fund regarding the terms of the investment.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-6392 Filed 4-5-07; 8:45 am]

BILLING CODE 8010-01-P