Document ID: SEC-2009-1591-0001
Agency: sec
Document Type: Notice
Title: FaithShares Trust, et al.; Notice of Application
Posted Date: 2009-11-12T05:00Z

[Federal Register: November 12, 2009 (Volume 74, Number 217)]
[Notices]               
[Page 58325-58332]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12no09-113]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28991; File No. 812-13638]

 
FaithShares Trust, et al.; Notice of Application

November 5, 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; and 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) for an exemption from sections 12(d)(1)(A) and 
12(d)(1)(B) of the Act.

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Applicants: FaithShares Trust (``Trust''), FaithShares Advisors, LLC 
(``Advisor'') and SEI Investments Distribution Company.

Summary of Application: Applicants request an order that would permit: 
(a) Series of an open-end management investment company to issue shares 
(``Fund Shares'') that can be redeemed only in large aggregations 
(``Creation Unit Aggregations''); (b) secondary market transactions in 
Fund Shares to occur at negotiated prices; (c) certain series to pay 
redemption proceeds, under certain circumstances, more than seven days 
after the tender of Fund Shares for redemption; (d) certain affiliated 
persons of the series to deposit securities into, and receive 
securities from, the series in connection with the purchase and 
redemption of Creation Unit Aggregations; and (e) certain registered 
management investment companies and unit investment trusts outside of 
the same group of investment companies as the series to acquire Fund 
Shares.

Filing Dates: The application was filed on March 4, 2009, and amended 
on April 21, 2009, October 23, 2009, and November 4, 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 November 30, 2009, and should be accompanied by proof of 
service on applicants, in the form of an affidavit, or for lawyers, a 
certificate of

[[Page 58326]]

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: FaithShares Trust 
and FaithShares Advisors, LLC, c/o Mr. J. Garrett Stevens, 3555 
Northwest 58th Street, Suite 410, Oklahoma City, OK 73112 and SEI 
Investments Distribution Company, c/o John Munch, Esq., 1 Freedom 
Valley Drive, Oaks, PA 19456.

FOR FURTHER INFORMATION CONTACT: Jean E. Minarick, Senior Counsel at 
(202) 551-6811 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 under the Act and is organized as a Delaware statutory trust. 
The Trust will initially offer Fund Shares of five series (``Initial 
Funds''), each of which will track a specified equity securities index 
(``Underlying Index'').\1\ Applicants may offer additional series of 
the Trust (together with any other future registered open-end 
investment company and its series advised by the Advisor or an entity 
controlling, controlled by, or under common control with the Advisor, 
the ``Future Funds,'' and the Future Funds together with the Initial 
Funds, the ``Funds'').\2\
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    \1\ The Initial Funds are: FaithShares Baptist Values Fund, 
FaithShares Catholic Values Fund, FaithShares Christian Values Fund, 
FaithShares Lutheran Values Fund and FaithShares Methodist Values 
Fund.
    \2\ All existing entities that currently intend to rely on the 
requested order have been named as applicants. Any other existing or 
future entity that relies on the order in the future will comply 
with the terms and conditions of the application.
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    2. The Advisor, an Oklahoma limited liability company, or an entity 
controlling, controlled by or under common control with the Advisor 
will be the investment adviser to the Funds. The Advisor is registered 
as an investment adviser under the Investment Advisers Act of 1940, as 
amended (the ``Advisers Act''). The Advisor may enter into sub-advisory 
agreements with one or more additional investment advisers to act as 
sub-advisors to one or more Funds (``Sub-Advisors''). Any Sub-Advisor 
will be registered under the Advisers Act. SEI Investments Distribution 
Company, a broker-dealer registered under the Securities Exchange Act 
of 1934 (the ``Exchange Act''), will act as the principal underwriter 
and distributor for the Creation Unit Aggregations of Fund Shares (each 
such broker-dealer, a ``Distributor''). Applicants request that the 
requested order also apply to any other Distributor to the Funds in the 
future that complies with the terms and conditions of the application.
    3. The Funds will seek investment results that correspond, before 
fees and expenses, generally to the price and yield performance of a 
specified Underlying Index.\3\ The Initial Funds' Underlying Indexes 
are comprised of domestic equity securities (securities which are 
issued by U.S. issuers and non-U.S. issuers meeting the requirements 
for trading in U.S. markets). A Future Fund's Underlying Index may be 
based on domestic equity securities or foreign equity securities 
(securities traded on a non-U.S. securities market) (such Future Fund, 
a ``Foreign Fund''). Any entity that creates, compiles, sponsors or 
maintains an Underlying Index (``Index Provider'') will not 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, the 
Advisor, any promoter of the Funds, Sub-Advisor or Distributor.\4\
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    \3\ The Underlying Indexes for the Initial Funds are the: 
FaithShares Baptist Values Index, FaithShares Catholic Values Index, 
FaithShares Christian Values Index, FaithShares Lutheran Values 
Index and FaithShares Methodist Values Index.
    \4\ The Index Provider to the Initial Funds is FTSE/KLD Research 
and Analytics, Inc.
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    4. The investment objective of each Fund will be to seek to track 
the performance, before fees and expenses, of its Underlying Index.\5\ 
Intra-day values of each Underlying Index will be disseminated every 15 
seconds throughout the trading day except for the values of Underlying 
Indices based on foreign equity securities which will be disseminated 
every 60 seconds throughout the trading day. A Fund will utilize either 
a replication or representative sampling strategy which will be 
disclosed with regard to each Fund in its prospectus 
(``Prospectus'').\6\ A Fund using a replication strategy will invest in 
the Component Securities in its Underlying Index in approximately the 
same proportions as in the Underlying Index. In certain circumstances, 
such as when there are practical difficulties or substantial costs 
involved in holding every security in an Underlying Index or when one 
or more Component Securities is less liquid, illiquid or unavailable, 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 anticipate that a Fund that utilizes a 
representative sampling strategy will not track the performance of its 
Underlying Index with the same degree of accuracy as an investment 
vehicle that invests in every Component Security of the Underlying 
Index with the same weighting as the Underlying Index. Applicants 
expect that each Fund will have an annual tracking error relative to 
the performance of its Underlying Index of less than 5 percent.
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    \5\ Applicants represent that each Fund will invest at least 80% 
of its assets in the component securities (``Component Securities'') 
of its Underlying Index. In the case of Foreign Funds, at least 80% 
of the Fund's assets will be invested in Component Securities and 
Depositary Receipts (as defined below) representing such Component 
Securities. A Fund may invest up to 20% of its assets in cash and 
cash equivalents, such as money market instruments or other types of 
investments not included in its Underlying Index, but which the 
Advisor or Sub-Advisor believes will help the Fund track its 
Underlying Index. ``Depositary Receipts'' will typically be American 
Depositary Receipts, as well as Global Depositary Receipts and Euro 
Depositary Receipts.
    \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\ Under the representative sampling strategy, the Advisor and 
any Sub-Advisor will seek to construct a Fund's portfolio so that 
its market capitalization, industry weightings, fundamental 
investment characteristics (such as return variability, earnings 
valuation and yield) and liquidity measures perform like those of 
the Underlying Index.
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    5. The Funds will issue Creation Unit Aggregations in groups of 
50,000 Fund Shares. Applicants expect that the initial price of a 
Creation Unit Aggregation will fall in the range of $1,000,000 to 
$2,000,000. All orders to purchase Creation Unit Aggregations must be 
placed with the Distributor, by or through a party that has entered 
into an agreement with the Distributor (``Authorized Participant''). 
The Distributor will be responsible for transmitting the orders to the 
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)

[[Page 58327]]

a participant in the Depository Trust Company (``DTC'', and such 
participant, ``DTC Participant''). Fund Shares of each Fund generally 
will be sold in Creation Unit Aggregations in exchange for an in-kind 
deposit by the purchaser of a portfolio of securities designated by the 
Advisor or Sub-Advisor to correspond generally to the price and yield 
performance of the relevant Underlying Index (the ``Deposit 
Securities''), together with the deposit of a specified cash payment 
(``Balancing Amount,'' together with the Deposit Securities, the 
``Portfolio Deposit''). The Balancing Amount is an amount equal to the 
difference between (a) the net asset value (``NAV'') (per Creation Unit 
Aggregation) of a Fund and (b) the total aggregate market value (per 
Creation Unit Aggregation) of the Deposit Securities.\8\ Each Fund may 
permit a purchaser of Creation Unit Aggregations to substitute cash in 
lieu of depositing some or all of the Deposit Securities if a Fund and 
the Advisor believe such method would reduce the Fund's transaction 
costs or enhance the Fund's operating efficiency.\9\
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    \8\ Each Fund will sell and redeem Creation Unit Aggregations 
only on a ``Business Day,'' which is any day that a Fund is required 
to be open under Section 22(e) of the Act. Each Business Day, prior 
to the opening of trading on the Exchange (defined below), the list 
of names and the required number of shares of each security included 
in the current Portfolio Deposit and the Balancing Amount will be 
made available. Any national securities exchange (as defined in 
section 2(a)(26) of the Act) (``Exchange'') on which Fund Shares are 
listed will disseminate, every 15 seconds during its regular trading 
hours, an amount per Fund Share representing the sum of the 
estimated Balancing Amount and the current value of the Deposit 
Securities.
    \9\ Applicants state that in some circumstances or in certain 
countries, it may not be practicable or convenient, or permissible 
under the laws of certain countries or the regulations of certain 
foreign stock exchanges, for a Foreign Fund to operate exclusively 
on an ``in-kind'' basis. Applicants also note that when a 
substantial rebalancing of a Fund's portfolio is required, the 
Advisor might prefer to receive cash rather than in-kind securities 
so that the Fund may avoid transaction costs involved in liquidating 
part of its portfolio to achieve the rebalancing.
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    6. An investor purchasing or redeeming a Creation Unit Aggregation 
from 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 Unit 
Aggregations.\10\ The maximum Transaction Fees, and any variations or 
waivers thereof, will be disclosed in each Fund's Prospectus. The 
Distributor will be responsible for delivering the Fund's Prospectus to 
those persons purchasing Creation Unit Aggregations, and for 
maintaining records of both the orders placed and the confirmations of 
acceptance furnished. In addition, the Distributor will maintain a 
record of the instructions given to the applicable Fund to implement 
the delivery of its Fund Shares.
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    \10\ 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, including operational 
processing and brokerage costs, and part or all of the spread 
between the expected bid and the offer side of the market relating 
to such Deposit Securities.
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    7. Purchasers of Fund Shares in Creation Unit Aggregations may hold 
such Fund Shares or may sell such Fund Shares into the secondary 
market. Fund Shares will be listed and traded on an Exchange. It is 
expected that one or more member firms of a listing Exchange will be 
designated to act as a specialist or a market maker (each, a ``Market 
Maker'') and maintain a market for Fund Shares trading on the listing 
Exchange. The price of Fund Shares trading on an Exchange will be based 
on the current bid/offer market. Fund Shares sold in the secondary 
market will be subject to customary brokerage commissions and charges.
    8. Applicants expect that purchasers of Creation Unit Aggregations 
will include institutional investors and arbitrageurs (which could 
include institutional investors). A Market Maker, in providing a fair 
and orderly secondary market for the Fund Shares, also may purchase 
Creation Unit Aggregations for use in its market-making activities. 
Applicants expect that secondary market purchasers of Fund Shares will 
include both institutional investors and retail investors.\11\ 
Applicants expect that the price at which Fund Shares trade will be 
disciplined by arbitrage opportunities created by the option to 
continually purchase or redeem Creation Unit Aggregations at their NAV, 
which should ensure that Fund Shares will not trade at a material 
discount or premium in relation to their NAV.
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    \11\ Fund Shares will be registered in book-entry form only. DTC 
or its nominee will be the registered owner of all outstanding Fund 
Shares. DTC or DTC Participants will maintain records reflecting 
beneficial owners of Fund Shares.
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    9. Fund Shares will not be individually redeemable, and owners of 
Fund Shares may acquire those Fund Shares from a Fund, or tender such 
Fund Shares for redemption to the Fund, in Creation Unit Aggregations 
only. To redeem, an investor will have to accumulate enough Fund Shares 
to constitute a Creation Unit Aggregation. Redemption orders must be 
placed by or through an Authorized Participant. An investor redeeming a 
Creation Unit Aggregation generally will receive (a) Portfolio 
Securities designated to be delivered for Creation Unit Aggregation 
redemptions on the date that the request for redemption is made (``Fund 
Securities'') \12\ and (b) a ``Cash Redemption Payment,'' consisting of 
an amount calculated in the same manner as the Balancing Amount, 
although the actual amount of the Cash Redemption Payment may differ if 
the Fund Securities are not identical to the Deposit Securities on that 
day. An investor may receive the cash equivalent of a Fund Security in 
certain circumstances, such as if the investor is constrained from 
effecting transactions in the security by regulation or policy.
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    \12\ The Funds will comply with the federal securities laws in 
accepting Deposit Securities and satisfying redemptions with Fund 
Securities, including that the Deposit Securities and Fund 
Securities are sold in transactions that would be exempt from 
registration under the Securities Act of 1933. As a general matter, 
the Deposit Securities and Fund Securities will correspond pro rata 
to the securities held by a Fund, although Fund Securities received 
on redemption may not be identical to Deposit Securities deposited 
in connection with the purchase of Creation Unit Aggregations for 
the same day.
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    10. No Fund will be advertised or 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 ``ETF,'' 
``investment company'' and ``fund.'' All marketing materials that 
describe the features or method of obtaining, buying or selling 
Creation Unit Aggregations or Fund Shares, or refer to redeemability, 
will prominently disclose that Fund Shares are not individually 
redeemable and that the owners of Fund Shares may acquire or redeem 
Fund Shares from the Fund in Creation Unit Aggregations only. The same 
approach will be followed in the statement of additional information 
(``SAI''), shareholder reports and investor educational materials 
issued or circulated in connection with the Fund Shares. Each Fund will 
provide copies of its 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.

[[Page 58328]]

    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 purposes 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 holder, upon 
its presentation to the issuer, is entitled to receive approximately 
the holder's proportionate share of the issuer's current net assets, or 
the cash equivalent. Because Fund Shares will not be individually 
redeemable, applicants request an order that would permit each Fund to 
issue Fund Shares that are redeemable in Creation Unit Aggregations 
only. Applicants state that investors may purchase Fund Shares in 
Creation Unit Aggregations and redeem Creation Unit Aggregations from 
each Fund. Applicants state that because Creation Unit Aggregations may 
always be purchased and redeemed at NAV, the market price of Fund 
Shares should not vary substantially from their NAV.

Section 22(d) of the Act and Rule 22c-1 under the Act

    4. Section 22(d) of the Act, among other things, prohibits a dealer 
from selling a redeemable security, which is currently being offered to 
the public by or through a principal underwriter, except at a current 
public offering price described in the prospectus. Rule 22c-1 under the 
Act generally requires that a dealer selling, redeeming or repurchasing 
a redeemable security do so only at a price based on its NAV. 
Applicants state that secondary market trading in Fund Shares will take 
place at negotiated prices, not at a current offering price described 
in a Fund's Prospectus, and not at a price based on NAV. Thus, 
purchases and sales of Fund Shares in the secondary market will not 
comply with section 22(d) of the Act and rule 22c-1 under the Act. 
Applicants request an exemption under section 6(c) from these 
provisions.
    5. Applicants assert that the concerns sought to be addressed by 
section 22(d) of the Act and rule 22c-1 under the Act with respect to 
pricing are equally satisfied by the proposed method of pricing Fund 
Shares. Applicants maintain that while there is little legislative 
history regarding section 22(d), its provisions, as well as those of 
rule 22c-1, appear to have been designed to (a) prevent dilution caused 
by certain riskless-trading schemes by principal underwriters and 
contract dealers, (b) prevent unjust discrimination or preferential 
treatment among buyers, and (c) ensure an orderly distribution of 
investment company shares by eliminating price competition from dealers 
offering shares at less than the published sales price and repurchasing 
shares at more than the published redemption price.
    6. Applicants believe that none of these purposes will be thwarted 
by permitting Fund Shares to trade in the secondary market at 
negotiated prices. Applicants state that (a) secondary market trading 
in Fund Shares do not directly involve Fund assets and will not cause 
dilution of an investment in Fund Shares, and (b) to the extent 
different prices exist during a given trading day, or from day to day, 
such variances occur as a result of third-party market forces, such as 
supply and demand. Therefore, applicants assert that secondary market 
transactions in Fund Shares will not lead to discrimination or 
preferential treatment among purchasers. Finally, applicants contend 
that the proposed distribution system will be orderly because 
competitive forces will ensure that the difference between the market 
price of Fund 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 
state that settlement of redemptions for the Foreign Funds is 
contingent not only on the settlement cycle of the United States 
market, but also on the delivery cycles in local markets for the 
underlying foreign securities held by Foreign Funds. Applicants state 
that delivery cycles currently practicable for transferring Fund 
Securities to redeeming investors, coupled with local market holiday 
schedules, will, in certain circumstances, require a delivery process 
longer than seven calendar days for Foreign Funds. Applicants request 
relief under section 6(c) of the Act from section 22(e) to permit 
Foreign Funds to pay redemption proceeds up to a maximum of 14 calendar 
days following the tender of a Creation Unit Aggregation of such Funds. 
Except as disclosed in a Foreign Fund's Prospectus and/or SAI, 
applicants expect that each Foreign 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 where more than seven days will be needed to deliver 
redemption proceeds and the maximum number of days needed to deliver 
the proceeds. Applicants are not seeking relief from section 22(e) with 
respect to Foreign Funds that do not effect redemptions of Creation 
Unit Aggregations 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, or any other broker or dealer from selling

[[Page 58329]]

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,'' and collectively with the Investing 
Management Companies, ``Investing Funds'') registered under the Act 
that are not sponsored or advised by the Advisor or any entity 
controlling, controlled by, or under common control with the Advisor 
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 to acquire 
Fund Shares beyond the limits of section 12(d)(1)(A). Investing Funds 
do not include the Funds. In addition, applicants seek relief to permit 
the Distributor and any broker or dealer that is registered under the 
Exchange Act to sell Fund 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 Advisor'') and may be sub-advised by one or more 
investment advisers within the meaning of section 2(a)(20)(B) of the 
Act (each an ``Investing Fund Sub-Advisor''). Any Investing Fund 
Advisor or Investing Fund Sub-Advisor 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 Advisor or a Sponsor, any person controlling, controlled by, or 
under common control with an Investing Fund Advisor 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 Advisor or Sponsor, or any person 
controlling, controlled by, or under common control with an Investing 
Fund Advisor 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 Sub-Advisor, any person controlling, controlled 
by or under common control with the Investing Fund Sub-Advisor, 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 Sub-Advisor or any person controlling, controlled by or under 
common control with the Investing Fund Sub-Advisor (``Investing Fund's 
Sub-Advisor Group'').
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    \14\ An ``Investing Fund Affiliate'' is an Investing Fund 
Advisor, Investing Fund Sub-Advisor, 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 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 Advisor, Investing Fund Sub-
Advisor, employee or Sponsor of an Investing Fund, or a person of which 
any such officer, director, member of an advisory board, Investing Fund 
Advisor, Investing Fund Sub-Advisor, 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).
    15. 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 directors or trustees who are not ``interested persons'' within 
the meaning of section 2(a)(19) of the Act (``independent 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, except as provided in condition 11, an 
Investing Fund Advisor or a trustee (``Trustee'') or Sponsor of an 
Investing Trust, 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 by the Investing Fund Advisor or 
Trustee or Sponsor or an affiliated person of the Investing Fund 
Advisor, Trustee or Sponsor, from a Fund in connection with the 
investment by the Investing Fund in the Fund. Applicants also 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 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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    16. Applicants submit that the proposed conditions address the 
concern about complexity. Applicants note that no Fund may acquire 
securities of any investment company or company relying on sections 
3(c)(1) or 3(c)(7) of the Act in excess of the limits contained in 
section 12(d)(1)(A) of the Act except as permitted pursuant to rule 
12d1-1 under 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 written agreement with such Fund 
regarding the terms of such Investing Fund's investment 
(``Participation Agreement'') requiring the Investing Fund to adhere to 
the terms and conditions of the requested order. The 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.

[[Page 58330]]

    17. Applicants also note that a Fund may choose to reject a direct 
purchase of Fund Shares in Creation Unit Aggregations by an Investing 
Fund. To the extent that an Investing Fund purchases Fund Shares in the 
secondary market, a Fund would still retain its ability to reject 
purchases of Fund Shares made in reliance on the requested order by 
declining to enter into the 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

    18. Section 17(a) of the Act generally prohibits an affiliated 
person of a registered investment company, or an affiliated person of 
such a person (``Second-Tier 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.
    19. Applicants request an exemption from section 17(a) of the Act 
pursuant to sections 6(c) and 17(b) of the Act to permit persons to 
effectuate in-kind purchases and redemptions with a Fund when they are 
affiliated persons or Second-Tier Affiliates of the Funds solely by 
virtue of one or more of the following: (a) Holding 5% or more, or in 
excess of 25%, of the outstanding Fund Shares of one or more 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 any other registered investment company (or series thereof) 
advised by the Advisor or an entity controlling, controlled by or under 
common control with the Advisor.
    20. Applicants assert that no useful purpose would be served by 
prohibiting these types of affiliated persons from purchasing or 
redeeming Creation Unit Aggregations through ``in-kind transactions.'' 
The procedures for both in-kind purchases and in-kind redemptions of 
Creation Unit Aggregations will be the same for all purchases and 
redemptions. Deposit Securities and Fund Securities will be valued in 
the same manner as Portfolio Securities. Therefore, applicants state 
that in-kind purchases and redemptions will afford no opportunity for 
the specified affiliated persons, or Second-Tier Affiliates, of a Fund 
to effect a transaction detrimental to other holders of Fund Shares. 
Applicants also believe that in-kind purchases and redemptions will not 
result in self-dealing or overreaching of a Fund.
    21. Applicants also seek relief from section 17(a) to permit a Fund 
that is an affiliated person of an Investing Fund to sell its Fund 
Shares to and redeem its Fund 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 Fund Shares directly from a Fund will be based on the NAV 
of the Fund.\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 purchase of Creation Unit 
Aggregations 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 Participation 
Agreement will require any Investing Fund that purchases Creation Unit 
Aggregations directly from a Fund to represent that the purchase of 
Creation Unit Aggregations 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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    \16\ 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 Fund 
Shares or (b) an affiliated person of a Fund, or an affiliated 
person of such person, for the sale by the Fund of its Fund Shares 
to an Investing Fund may be prohibited by section 17(e)(1) of the 
Act. The Participation Agreement also will include this 
acknowledgment.
    \17\ Applicants believe that most Investing Funds will purchase 
Fund Shares in the secondary market and will not purchase Creation 
Unit Aggregations directly from a Fund. However, the requested 
relief would apply to direct sales of Creation Unit Aggregations by 
a Fund to an Investing Fund and redemptions of those Fund Shares.
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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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ETF Relief

    1. Each Fund's Prospectus will clearly disclose that, for purposes 
of the Act, the Fund Shares are issued by the Funds, which are 
registered investment companies, and that the acquisition of Fund 
Shares by investment companies is subject to the restrictions of 
section 12(d)(1) of the Act, except as permitted by an exemptive order 
that permits registered investment companies to invest in 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 Participation Agreement with the Fund regarding the terms of the 
investment.
    2. As long as a Fund operates in reliance on the requested order, 
its Fund Shares 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 Fund's Prospectus 
will prominently disclose that Fund Shares are not individually 
redeemable shares and will disclose that the owners of Fund Shares may 
acquire those Fund Shares from the Fund and tender those Fund Shares 
for redemption to the Fund in Creation Unit Aggregations only. Any 
advertising material that describes the purchase or sale of Creation 
Unit Aggregations or refers to redeemability will prominently disclose 
that Fund Shares are not individually redeemable, and that owners of 
Fund Shares may acquire those Fund Shares from the Fund and tender 
those Fund Shares for redemption to the Fund in Creation Unit 
Aggregations only.
    4. The Web sites maintained for the Funds, which are and will be 
publicly accessible at no charge, will contain the following 
information, on a per Fund Share basis: (a) The prior Business Day's 
NAV and the mid-point of the bid-ask spread at the time of the 
calculation of NAV (``Bid/Ask Price''), and a calculation of the 
premium or discount of the Bid/Ask Price at the time of calculation of 
the NAV against such NAV; and (b) data in chart format displaying the 
frequency distribution of discounts and premiums of the daily Bid/Ask 
Price against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters.
    5. Each Fund's Prospectus and annual report will also include: (a) 
The

[[Page 58331]]

information listed in condition 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, as 
applicable; and (b) the following data, calculated on a per Fund Share 
basis for one, five and ten year periods (or life of the 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 ETFs.

Section 12(d)(1) Relief

    7. The members of an Investing Fund's Advisory Group will not 
control (individually or in the aggregate) any Fund within the meaning 
of section 2(a)(9) of the Act. The members of an Investing Fund's Sub-
Advisor Group will not control (individually or in the aggregate) any 
Fund within the meaning of section 2(a)(9) of the Act. If, as a result 
of a decrease in the outstanding Fund Shares, an Investing Fund's 
Advisory Group or an Investing Fund's Sub-Advisor Group, each in the 
aggregate, becomes a holder of more than 25 percent of the Fund Shares, 
it will vote its Fund Shares in the same proportion as the vote of all 
other holders of the Fund Shares. This condition does not apply to the 
Investing Fund's Sub-Advisor Group if the Investing Fund Sub-Advisor or 
a person controlling, controlled by, or under common control with the 
Investing Fund Sub-Advisor acts as the investment adviser within the 
meaning of section 2(a)(20)(A) of the Act.
    8. 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 Investing Fund Affiliate and the Fund or Fund 
Affiliate.
    9. 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 ensure that the Investing 
Fund's Advisor and any Investing Fund Sub-Advisor 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.
    10. 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 directors 
or trustees of a Fund (``Board''), including a majority of the 
directors or trustees that are not ``interested persons'' within the 
meaning of section 2(a)(19) of the Act (``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: (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.
    11. An Investing Fund Advisor, Trustee or Sponsor will waive fees 
otherwise payable to it by the Investing Management Company or 
Investing Trust in an amount at least equal to any compensation 
(including fees received pursuant to any plan adopted by the Fund under 
rule 12b-1 under the Act) received from a Fund by the Investing Fund 
Advisor or Trustee or Sponsor, or an affiliated person of the Investing 
Fund Advisor, Trustee or Sponsor, other than any advisory fees paid to 
the Investing Fund Advisor, Trustee or Sponsor by the Fund, in 
connection with the investment by the Investing Management Company or 
Investing Trust in the Fund. Any Investing Fund Sub-Advisor will waive 
fees otherwise payable to the Investing Fund Sub-Advisor, 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 
Sub-Advisor, or an affiliated person of the Investing Fund Sub-Advisor, 
other than any advisory fees paid to the Investing Fund Sub-Advisor or 
its affiliated person by a Fund, in connection with the investment by 
the Investing Management Company in a Fund made at the direction of the 
Investing Fund Sub-Advisor. In the event that the Investing Fund Sub-
Advisor waives fees, the benefit of the waiver will be passed through 
to the Investing Management Company.
    12. 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.
    13. The Board, including a majority of the independent Board 
members, will adopt procedures reasonably designed to monitor any 
purchases of securities by a Fund in an Affiliated Underwriting once an 
investment by an Investing Fund in the 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 interests of 
shareholders.
    14. 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 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 Fund Shares 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 material 
upon which the Board's determinations were made.

[[Page 58332]]

    15. Before investing in a Fund in excess of the limits in section 
12(d)(1)(A), the Investing Fund and the Fund will execute a 
Participation Agreement stating, without limitation, that their boards 
of directors or trustees and their investment advisers, and the 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 such 
Fund a list of names of each Investing Fund Affiliate and Underwriting 
Affiliate. The Investing Fund will notify the Fund of any changes to 
the list of names as soon as reasonably practicable after a change 
occurs. The Fund and the Investing Fund will maintain and preserve a 
copy of the order, the 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.
    16. 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 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.
    17. 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.
    18. No Fund will acquire securities of any investment company or 
companies relying on sections 3(c)(1) or 3(c)(7) of the Act in excess 
of the limits contained in section 12(d)(1)(A) of the Act, except as 
permitted pursuant to rule 12d1-1 under the Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-27130 Filed 11-10-09; 8:45 am]

BILLING CODE 8011-01-P