Document ID: SEC-2011-1532-0001
Agency: sec
Document Type: Notice
Title: Applications: Global X Funds, et al.
Posted Date: 2011-10-07T04:00Z

[Federal Register Volume 76, Number 195 (Friday, October 7, 2011)]
[Notices]
[Pages 62475-62481]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-25928]

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

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29829; File No. 812-13830]

Global X Funds, et al.; Notice of Application

September 30, 2011.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order to supersede a prior 
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.

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

SUMMARY: Summary of Application: Applicants request an order that would 
permit (a) series of certain open-end management investment companies 
to issue shares (``Shares'') redeemable in large aggregations only 
(``Creation Units''); (b) secondary market transactions in Shares to 
occur at negotiated market prices; (c) certain series to pay redemption 
proceeds, under certain circumstances, more than seven days after the 
tender of Creation Units for redemption; (d) certain affiliated persons 
of the series to deposit securities into, and receive securities from, 
the series in connection with the purchase and redemption of Creation 
Units; and (e) certain registered management investment companies and 
unit investment trusts outside of the same group of investment 
companies as the series to acquire Shares. The order would supersede a 
prior order.\1\
---------------------------------------------------------------------------

    \1\ Global X Funds and Global X Management Company LLC, 
Investment Company Act Release Nos. 28378 (Sep. 10, 2008) (notice) 
and 28433 (Oct. 3, 2008) (order).

Applicants: Global X Funds (the ``Trust''), Global X Management Company 
LLC (the ``Adviser'') and SEI Investments Distribution Company (the 
---------------------------------------------------------------------------
``Distributor'').

DATES: Filing Dates: The application was filed on October 4, 2010, and 
amended on March 11, 2011, July 29, 2011 and September 30, 2011.

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 27, 2011, and should be accompanied by proof of service 
on applicants, in the form of an affidavit, or for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090; Applicants: Global X Funds and Global X 
Management Company LLC, 399 Park Avenue, 32nd Floor, New York, NY 
10022; and SEI Investments Distribution Company, One Freedom Valley 
Drive, Oaks, PA 19456.

FOR FURTHER INFORMATION CONTACT: Laura J. Riegel, Senior Counsel at 
(202) 551-6873, or Dalia Osman Blass, 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, a statutory trust organized under the laws of 
Delaware, is registered with the Commission as an open-end management 
investment company. The Trust consists of 86 series (``Current Funds'') 
whose performance correspond to the price and yield performance of a 
specified securities index (each, an ``Underlying Index'').
    2. Applicants request that the order apply to the Current Funds or 
any future series of the Trust or any other open-end management 
investment companies or series thereof 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 the application 
and whose performance will closely correspond to the price and yield 
performance of their Underlying Index (each such company or series, a 
``Future Fund'' and together with the Current Funds, the ``Funds'').
    3. The Current Funds are based on Underlying Indexes comprised 
solely of equity securities. The Future Funds will invest primarily in 
equity securities and seek investment returns that closely correspond 
to the price and yield performance of Underlying Indexes comprised of 
equity securities (``Equity Funds''), or invest primarily in Underlying 
Indexes comprised of fixed income securities and seek investment 
returns that closely correspond to the price and yield performance of 
Underlying Indexes comprised of fixed income indices (``Fixed Income 
Funds''). Certain of the Funds may invest in equity securities or fixed 
income securities traded in foreign markets and seek investment results 
that correspond closely to the price and yield performance of 
Underlying Indexes whose component securities include such securities 
(``International Funds''). The Funds may also invest in a combination 
of equity, fixed income and U.S. money market securities and/or non-
U.S. money market securities. The Funds may also invest in ``Depositary 
Receipts.'' \2\ A Fund will not invest in any Depositary Receipts that 
the Adviser or Subadviser deems to be illiquid or for which pricing 
information is not readily available.
---------------------------------------------------------------------------

    \2\ Depositary Receipts are typically issued by a financial 
institution, a ``depositary'', and evidence ownership in a security 
or pool of securities that have been deposited with the depositary. 
No affiliated persons of applicants will serve as the depositary 
bank for any Depositary Receipts held by a Fund.
---------------------------------------------------------------------------

    4. The Adviser is registered as an investment adviser under the 
Investment Advisers Act of 1940 (the ``Advisers Act''). The Adviser or 
any entity controlling, controlled by or under common control with the 
Adviser (also included in the term ``Adviser'') serves or will serve as 
investment adviser to the Funds, subject to approval by the Board of 
Trustees of the Trust

[[Page 62476]]

(the ``Board''). The Adviser and the Trust may hire one or more 
subadvisers for the Funds (each, a ``Subadviser''). Any Subadviser will 
be registered under the Advisers Act. The Distributor is a broker-
dealer registered under the Securities Exchange Act of 1934 (the 
``Exchange Act'') and will act as the principal underwriter and 
distributor for the Shares.
    5. 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 Underlying Index. No entity 
that creates, compiles, sponsors or maintains an Underlying Index 
(``Index Provider'') is or will be an affiliated person, as defined in 
section 2(a)(3) of the Act, or an affiliated person of an affiliated 
person, of the Trust or a Fund, a promoter of a Fund, the Adviser, any 
Subadviser, or a Distributor.
    6. The investment objective of each Fund will be to provide 
investment results that closely correspond to the price and yield 
performance of its Underlying Index.\3\ Each Fund will sell and redeem 
Creation Units on a ``Business Day,'' which is defined as any day that 
a Fund is required to be open under section 22(e) of the Act. A Fund 
will utilize either a replication or representative sampling strategy 
to track its Underlying Index. A Fund using a replication strategy 
invests or will invest in substantially all of the Component Securities 
in its Underlying Index in the same approximate proportions as in the 
Underlying Index. A Fund using a representative sampling strategy holds 
or will hold some, but not necessarily all of the Component Securities 
of its Underlying Index.\4\ Applicants state that use of the 
representative sampling strategy may prevent a Fund from tracking the 
performance of its Underlying Index with the same degree of accuracy as 
would a Fund that invests in every Component Security of the Underlying 
Index. Applicants expect that each Fund will have a tracking error 
relative to the performance of its Underlying Index of no more than 5 
percent.
---------------------------------------------------------------------------

    \3\ Applicants represent that each Fund will invest at least 80% 
of its total assets (exclusive of collateral held from securities 
lending) in the component securities that comprise its Underlying 
Index (``Component Securities''), in the case of International 
Funds, in Component Securities and Depositary Receipts representing 
such Component Securities, or in the case of certain Fixed Income 
Funds, in Component Securities and TBAs (as defined below) 
representing Component Securities. Each Fund also may invest up to 
20% of its total assets in futures contracts, options on future 
contracts, options and swaps, cash, cash equivalents, other 
investment companies, and securities that are not Component 
Securities but which the Adviser or Subadviser believes will assist 
the Fund in tracking the performance of its Underlying Index.
    \4\ Securities are selected for inclusion in a Fund following a 
representative sampling strategy to have aggregate investment 
characteristics, fundamental characteristics, and liquidity measures 
similar to those of the Fund's Underlying Index taken in its 
entirety.
---------------------------------------------------------------------------

    7. Creation Units are expected to consist of at least 25,000 Shares 
and to have an initial price in the range of $375,000 to $10,000,000. 
All orders to purchase Creation Units must be placed with the 
Distributor by or through a party that has entered into an agreement 
with the Distributor (``Authorized Participant''). The Distributor will 
be responsible for transmitting the orders to the Funds. An Authorized 
Participant must be a participant in the Depository Trust Company 
(``DTC'', and such participant, ``DTC Participant''). The Distributor 
also will be responsible for delivering the Fund's prospectus to those 
persons acquiring Shares in Creation Units and for maintaining records 
of both the orders placed with it and the confirmations of acceptance 
furnished by it. In addition, the Distributor will maintain a record of 
the instructions given to the applicable Fund to implement the delivery 
of its Shares.
    8. Shares of the Fund generally will be sold in Creation Units in 
exchange for an in-kind deposit by the purchaser of a portfolio of 
securities (the ``Deposit Securities''), designated by the Adviser, 
together with the deposit or refund of a specified cash payment (``Cash 
Component'' and collectively with the Deposit Securities, ``Fund 
Deposit''). The Cash Component is an amount equal to the difference 
between (a) the net asset value (``NAV'') per Creation Unit of a Fund 
and (b) the total aggregate market value per Creation Unit of the 
Deposit Securities.\5\ Each Fund may permit a purchaser of Creation 
Units to substitute cash in lieu of depositing some or all of the 
Deposit Securities, under certain circumstances. To preserve maximum 
efficiency and flexibility, a Fund reserves the right to accept and 
deliver Creation Units entirely for cash (``All-Cash Payment''), if 
doing so would reduce the Fund's transaction costs or enhance the 
Fund's operating efficiency.
---------------------------------------------------------------------------

    \5\ On each Business Day, prior to the opening of trading on the 
Exchange, a list of the names and the required number of shares of 
each Deposit Security to be included in the current Fund Deposit 
(based on the information at the end of the previous Business Day) 
for each Fund or cash information for each Fund, including when the 
purchase of Creation Units from the Fund is an All-Cash Payment (as 
defined below), will be made available. In addition, the All-Cash 
Payment will be disclosed, if applicable. The national securities 
exchange (as defined in section 2(a)(26) of the Act) (``Exchange'') 
on which Shares are listed will disseminate every 15 seconds 
throughout the trading day through the facilities of the 
Consolidated Tape Association, an amount representing on a per Share 
basis, the sum of the current value of the Fund Deposit.
---------------------------------------------------------------------------

    9. An investor acquiring or redeeming a Creation Unit from a Fund 
will be charged a fee (``Transaction Fee'') to prevent the dilution of 
the interests of the remaining shareholders resulting from costs in 
connection with the purchase or redemption of Creation Units.\6\ 
Variations in the Transaction Fees may be imposed from time to time in 
accordance with rule 22d-1 under the Act. Transaction Fees will be 
limited to amounts that have determined by the Adviser to be 
appropriate and will take into account transaction costs associated 
with the relevant Deposit Securities and Fund Securities (as defined 
below) of the Funds. In all cases, such Transaction Fees will be 
limited in accordance with requirements of the Commission applicable to 
management investment companies offering redeemable securities.
---------------------------------------------------------------------------

    \6\ 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.
---------------------------------------------------------------------------

    10. Purchasers of Shares in Creation Units may hold the Shares or 
may sell the Shares into the secondary market. Shares will be listed 
and traded on an Exchange.\7\ It is expected that one or more Exchange 
market makers (``Market Makers''), will be assigned to the Shares and 
maintain a market for Shares trading on the Exchange. Prices of Shares 
trading on an Exchange will be based on the current bid/offer market. 
Shares sold in the secondary market will be subject to customary 
brokerage commissions and charges.
---------------------------------------------------------------------------

    \7\ Shares of the Current Funds are listed and traded on NYSE 
Arca, Inc.
---------------------------------------------------------------------------

    11. Applicants expect that purchasers of Creation Units will 
include institutional investors and arbitrageurs. Market Makers also 
may purchase Creation Units for use in market-making activities. 
Applicants expect that secondary market purchasers of Shares will 
include both institutional investors and retail investors.\8\ 
Applicants expect that the price at which Shares trade will be 
disciplined by arbitrage opportunities created by the option to 
continually purchase or redeem Creation Units at their NAV, which 
should ensure that Shares will not trade

[[Page 62477]]

at a material discount or premium in relation to their NAV.
---------------------------------------------------------------------------

    \8\ Shares will be registered in book-entry form only. DTC or 
its nominee will be the registered owner of all outstanding Shares. 
DTC or DTC Participants will maintain records reflecting beneficial 
owners of Shares.
---------------------------------------------------------------------------

    12. Shares will not be individually redeemable, and owners of 
Shares may acquire those Shares from the Fund, or tender the Shares for 
redemption to the Fund, in Creation Units only. To redeem, an investor 
will have to accumulate enough Shares to constitute a Creation Unit. 
Redemption orders must be placed by or through an Authorized 
Participant. An investor redeeming a Creation Unit generally will 
receive (a) Portfolio Securities designated by the Adviser to be 
delivered for redemptions (``Fund Securities'') on the date that the 
request for redemption is submitted and (b) a ``Cash Redemption 
Amount,'' consisting of an amount calculated in the same manner as the 
Cash Component. An investor may receive the cash equivalent of a 
Redemption Security upon request because it is constrained from 
effecting transactions in the security by regulation or policy.\9\ A 
redeeming investor may pay a Transaction Fee, calculated in the same 
manner as a Transaction Fee payable in connection with purchases of 
Creation Units.
---------------------------------------------------------------------------

    \9\ Applicants state that Fixed Income Funds may substitute a 
cash-in-lieu amount to replace any ``to-be-announced'' (``TBA'') 
transaction that is listed as a Deposit Security or Fund Security of 
any Fund. A TBA transaction is a method of trading mortgage-backed 
securities where the buyer and seller agree upon general trade 
parameters such as agency, settlement date, par amount and price. 
The actual pools delivered generally are determined two days prior 
to the settlement date. The amount of substituted cash in the case 
of TBA transactions will be equivalent to the value of the TBA 
transaction listed as a Deposit Security or a Fund Security.
---------------------------------------------------------------------------

    13. Applicants state that in accepting Deposit Securities and 
satisfying redemptions with Fund Securities, the relevant Funds will 
comply with the federal securities laws, including that the Deposit 
Securities and Fund Securities are sold in transactions that would be 
exempt from registration under the Securities Act of 1933 (``Securities 
Act'').\10\ The specified Deposit Securities and Fund Securities either 
(a) will correspond pro rata to the Portfolio Securities of a Fund, or 
(b) will not correspond pro rata to the Portfolio Securities, provided 
that the Deposit Securities and Fund Securities (i) consist of the same 
representative sample of Portfolio Securities designed to generate 
performance that is highly correlated to the performance of the 
Portfolio Securities, (ii) consist only of securities that are already 
included among the existing Portfolio Securities, and (iii) are the 
same for all Authorized Participants on a given Business Day.\11\
---------------------------------------------------------------------------

    \10\ In accepting Deposit Securities and satisfying redemptions 
with Fund Securities that are restricted securities eligible for 
resale pursuant to rule 144A under the Securities Act, the relevant 
Funds will comply with the conditions of rule 144A.
    \11\ In either case, a basket of Deposit Securities and basket 
of Fund Securities (and a true pro rata slice of the Portfolio 
Securities) may differ solely to the extent necessary (a) Because it 
is impossible to break up bonds beyond certain minimum sizes needed 
for transfer and settlement, (b) because, in the case of equity 
securities, rounding is necessary to eliminate fractional shares or 
lots that are not tradable round lots, or (c) for temporary periods, 
to effect changes in the Portfolio Securities as a result of the 
rebalancing of an Underlying Index. A tradable round lot for an 
equity security will be the standard unit of trading in that 
particular type of security in its primary market.
---------------------------------------------------------------------------

    14. Neither the Trust nor any individual Fund will be advertised, 
marketed or otherwise held out as an open-end fund or a mutual fund. 
Instead, each Fund will be marketed as an ``exchange-traded fund'' or 
an ``ETF.'' All marketing materials that describe the features or 
method of obtaining, buying or selling Creation Units or Shares traded 
on an Exchange, or refer to redeemability, will prominently disclose 
that Shares are not individually redeemable and that the owners of 
Shares may purchase or redeem Shares from the Fund in Creation Units 
only. The The Funds will provide copies of their annual and semi-annual 
shareholder reports to DTC Participants for distribution to 
shareholders.

Applicants' Legal Analysis

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

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

    3. Section 5(a)(1) of the Act defines an ``open-end company'' as a 
management investment company that is offering for sale or has 
outstanding any redeemable security of which it is the issuer. Section 
2(a)(32) of the Act defines a redeemable security as any security, 
other than short-term paper, under the terms of which the owner, upon 
its presentation to the issuer, is entitled to receive approximately 
his proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Shares will not be individually redeemable, 
applicants request an order that would permit the Funds to register as 
open-end management investment companies and issue Shares that are 
redeemable in Creation Units only. Applicants state that investors may 
purchase Shares in Creation Units and redeem Creation Units from each 
Fund. Applicants state that because the market price of Creation Units 
will be disciplined by arbitrage opportunities, investors should be 
able to sell Shares at market prices that do 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

[[Page 62478]]

with respect to pricing are equally satisfied by the proposed method of 
pricing Shares. Applicants maintain that while there is little 
legislative history regarding section 22(d), its provisions, as well as 
those of rule 22c-1, appear to have been designed to (a) prevent 
dilution caused by certain riskless trading schemes by principal 
underwriters and contract dealers, (b) prevent unjust discrimination or 
preferential treatment among buyers, and (c) ensure an orderly 
distribution of investment company shares by eliminating price 
competition from dealers offering shares at less than the published 
sales price and repurchasing shares at more than the published 
redemption price.
    6. Applicants believe that none of these purposes will be thwarted 
by permitting Shares to trade in the secondary market at negotiated 
prices. Applicants state that (a) secondary market trading in Shares 
does not involve a Fund as a party and will not result in dilution of 
an investment in Shares, and (b) to the extent different prices exist 
during a given trading day, or from day to day, such variances occur as 
a result of third party market forces, such as supply and demand. 
Therefore, applicants assert that secondary market transactions in 
Shares will not lead to discrimination or preferential treatment among 
purchasers. Finally, applicants contend that the proposed distribution 
system will be orderly because competitive forces will ensure that the 
difference between the market price of Shares and their NAV remains 
narrow.

Section 22(e)

    7. Section 22(e) of the Act generally prohibits a registered 
investment company from suspending the right of redemption or 
postponing the date of payment of redemption proceeds for more than 
seven days after the tender of a security for redemption. Applicants 
observe that the settlement of redemptions of Creation Units of the 
International Funds is contingent not only on the settlement cycle of 
the U.S. securities markets, but also on the delivery cycles present in 
international markets in which those Funds invest. Applicants have been 
advised that, under certain circumstances, the delivery cycles for 
transferring Fund Securities to redeeming investors, coupled with local 
market holiday schedules, will require a delivery process of up to 14 
calendar days. Applicants therefore request relief from section 22(e) 
in order to provide for payment or satisfaction of redemptions within a 
longer number of calendar days as required for such payment or 
satisfaction in the principal local markets where transactions in the 
Portfolio Securities of each International Fund customarily clear and 
settle, but in all cases no later than 14 calendar days following the 
tender of a Creation Unit.\12\
---------------------------------------------------------------------------

    \12\ Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will affect any obligations applicants 
may have under rule 15c6-1 under the Exchange Act. Rule 15c6-1 
requires that most securities transactions be settled within three 
business days of the trade.
---------------------------------------------------------------------------

    8. Applicants submit that section 22(e) was designed to prevent 
unreasonable, undisclosed and unforeseen delays in the actual payment 
of redemption proceeds. Applicants state that allowing redemption 
payments for Creation Units of a Fund to be made within 14 calendar 
days would not be inconsistent with the spirit and intent of section 
22(e). Applicants state that an International Fund's statement of 
additional information will disclose those local holidays, if any, that 
are expected to prevent the delivery of redemption proceeds in seven 
calendar days, and the maximum number of days, up to 14 calendar days, 
needed to deliver the proceeds for each affected International Fund. 
Applicants are not seeking relief from section 22(e) with respect to 
International Funds that do not effect creations and redemptions of 
Creation Units in-kind.

Section 12(d)(1)

    9. Section 12(d)(1)(A) of the Act, in relevant part, prohibits a 
registered investment company from acquiring securities of an 
investment company if such securities represent more than 3% of the 
total outstanding voting stock of the acquired company, more than 5% of 
the total assets of the acquiring company, or, together with the 
securities of any other investment companies, more than 10% of the 
total assets of the acquiring company. Section 12(d)(1)(B) of the Act 
prohibits a registered open-end investment company, its principal 
underwriter and any other broker-dealer from selling the investment 
company's shares to another investment company if the sale will cause 
the acquiring company to own more than 3% of the acquired company's 
voting stock, or if the sale will cause more than 10% of the acquired 
company's voting stock to be owned by investment companies generally.
    10. Applicants request an exemption to permit management investment 
companies (``Investing Management Companies'') and unit investment 
trusts (``Investing Trusts'') registered under the Act that are not 
sponsored or advised by the Adviser or any entity controlling, 
controlled by, or under common control with the Adviser and are not 
part of the same ``group of investment companies,'' as defined in 
section 12(d)(1)(G)(ii) of the Act, as the Funds (collectively, 
``Investing Funds'') to acquire shares of a Fund beyond the limits of 
section 12(d)(1)(A). In addition, applicants seek relief to permit a 
Fund or broker-dealer that is registered under the Exchange Act 
(``Broker'') to sell Shares to Investing Funds in excess of the limits 
of section 12(d)(1)(B).
    11. Each Investing Management Company will be advised by an 
investment adviser within the meaning of section 2(a)(20)(A) of the Act 
(the ``Investing Fund Adviser'') and may be sub-advised by one or more 
investment advisers within the meaning of section 2(a)(20)(B) of the 
Act (each an ``Investing Fund Subadviser''). Any investment adviser to 
an Investing Fund will be registered under the Advisers Act. Each 
Investing Trust will be sponsored by a sponsor (``Sponsor'').
    12. Applicants submit that the proposed conditions to the requested 
relief adequately address the concerns underlying the limits in 
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.\13\ To limit the control that an Investing Fund may have 
over a Fund, applicants propose a condition prohibiting an Investing 
Fund Adviser or a Sponsor, any person controlling, controlled by, or 
under common control with the Investing Fund Adviser or Sponsor, and 
any investment company or issuer that would be an investment company 
but for section 3(c)(1) or 3(c)(7) of the Act that is advised or 
sponsored by the Investing Fund Adviser or Sponsor, or any person 
controlling, controlled by, or under common control with the Investing 
Fund Adviser or Sponsor (``Investing Fund's Advisory Group'')

[[Page 62479]]

from controlling (individually or in the aggregate) a Fund within the 
meaning of section 2(a)(9) of the Act. The same prohibition would apply 
to any Investing Fund Subadviser, any person controlling, controlled by 
or under common control with the Investing Fund Subadviser, and any 
investment company or issuer that would be an investment company but 
for section 3(c)(1) or 3(c)(7) of the Act (or portion of such 
investment company or issuer) advised or sponsored by the Investing 
Fund Subadviser or any person controlling, controlled by or under 
common control with the Investing Fund Subadviser (``Investing Fund's 
Subadvisory Group''). Applicants propose other conditions to limit the 
potential for undue influence over the Funds, including that no 
Investing Fund or Investing Fund Affiliate (except to the extent it is 
acting in its capacity as an investment adviser to a Fund) will cause a 
Fund to purchase a security in an offering of securities during the 
existence of an underwriting or selling syndicate of which a principal 
underwriter is an Underwriting Affiliate (``Affiliated Underwriting''). 
An ``Underwriting Affiliate'' is a principal underwriter in any 
underwriting or selling syndicate that is an officer, director, member 
of an advisory board, Investing Fund Adviser, Investing Fund 
Subadviser, Sponsor, or employee of the Investing Fund, or a person of 
which any such officer, director, member of an advisory board, 
Investing Fund Adviser, Investing Fund Subadviser, Sponsor, or employee 
is an affiliated person (except that any person whose relationship to 
the Fund is covered by section 10(f) of the Act is not an Underwriting 
Affiliate).
---------------------------------------------------------------------------

    \13\ An ``Investing Fund Affiliate'' is the Investing Fund 
Adviser, Investing Fund Subadviser(s), any Sponsor, promoter, or 
principal underwriter of an Investing Fund, and any person 
controlling, controlled by, or under common control with any of 
those entities. A ``Fund Affiliate'' is the investment adviser, 
promoter, or principal underwriter of a Fund and any person 
controlling, controlled by or under common control with any of these 
entities.
---------------------------------------------------------------------------

    14. Applicants assert that the proposed conditions address any 
concerns regarding excessive layering of fees. The board of directors 
or trustees of any Investing Management Company, including a majority 
of the disinterested directors or trustees, will find that the advisory 
fees charged to the Investing Management Company are based on services 
provided that will be in addition to, rather than duplicative of, 
services provided under the advisory contract(s) of any Fund in which 
the Investing Management Company may invest. In addition, under 
condition B.5, an Investing Fund Adviser or a trustee (``Trustee'') or 
Sponsor of an Investing Trust will, as applicable, waive fees otherwise 
payable to it by the Investing Fund in an amount at least equal to any 
compensation (including fees received pursuant to any plan adopted by a 
Fund under rule 12b-1 under the Act) received by the Investing Fund 
Adviser, Trustee or Sponsor or an affiliated person of the Investing 
Fund Adviser, Trustee or Sponsor, from the Funds in connection with the 
investment by the Investing Fund in the Fund. Applicants state that any 
sales charges or service fees charged with respect to shares of an 
Investing Fund will not exceed the limits applicable to a fund of funds 
set forth in NASD Conduct Rule 2830.\14\
---------------------------------------------------------------------------

    \14\ Any references to NASD Conduct Rule 2830 include any 
successor or replacement rule to NASD Conduct Rule 2830 that may be 
adopted by Financial Industry Regulatory Authority.
---------------------------------------------------------------------------

    15. Applicants submit that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that no Fund may 
acquire securities of any investment company or company relying on 
section 3(c)(1) or 3(c)(7) of the Act in excess of the limits contained 
in section 12(d)(1)(A) of the Act. To ensure that Investing Funds 
comply with the terms and conditions of the requested relief from 
section 12(d)(1), any Investing Fund that intends to invest in a Fund 
in reliance on the requested order will enter into an agreement (``FOF 
Participation Agreement'') between the Fund and the Investing Fund 
requiring the Investing Fund to adhere to the terms and conditions of 
the requested order. The FOF Participation Agreement also will include 
an acknowledgement from the Investing Fund that it may rely on the 
requested order only to invest in Funds and not in any other investment 
company.
    16. Applicants also note that a Fund may choose to reject a direct 
purchase of Shares in Creation Units by an 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).

Sections 17(a)(1) and (2) of the Act

    17. Section 17(a) of the Act generally prohibits an affiliated 
person of a registered investment company, or an affiliated person of 
such a person (``second-tier affiliate''), from selling any security to 
or acquiring any security from the company. Section 2(a)(3) of the Act 
defines ``affiliated person'' to include (a) any person directly or 
indirectly owning, controlling or holding with power to vote 5% or more 
of the outstanding voting securities of the other person, (b) any 
person 5% or more of whose outstanding voting securities are directly 
or indirectly owned, controlled or held with the power to vote by the 
other person, and (c) any person directly or indirectly controlling, 
controlled by or under common control with the other person. Section 
2(a)(9) of the Act provides that a control relationship will be 
presumed where one person owns more than 25% of another person's voting 
securities. The Funds may be deemed to be controlled by the Adviser or 
an entity controlling, controlled by or under common control with the 
Adviser and hence affiliated persons of each other. In addition, the 
Funds may be deemed to be under common control with any other 
registered investment company (or series thereof) advised by the 
Adviser or an entity controlling, controlled by or under common control 
with the Adviser (an ``Affiliated Fund'').
    18. Applicants request an exemption from section 17(a) of the Act 
pursuant to sections 17(b) and 6(c) of the Act to permit persons to 
effectuate in-kind purchases and redemptions with a Fund when they are 
affiliated persons of the Fund or second-tier affiliates solely by 
virtue of one or more of the following: (a) Holding 5% or more, or in 
excess of 25%, of the outstanding Shares of one or more Funds; (b) 
having an affiliation with a person with an ownership interest 
described in (a); or (c) holding 5% or more, or more than 25%, of the 
shares of one or more Affiliated Funds.
    19. Applicants assert that no useful purpose would be served by 
prohibiting these types of affiliated persons from acquiring or 
redeeming Creation Units through ``in-kind'' transactions. The deposit 
procedures for both in kind purchases and in-kind redemptions of 
Creation Units will be the same for all purchases and redemptions. The 
composition of a Fund Deposit made by a purchaser or Fund Redemption 
given to a redeeming investor (except for any cash in lieu amounts) on 
any Business Day will be the same regardless of the investor's 
identity, and Fund Deposits and Fund Redemptions will be valued in the 
same manner as Portfolio Securities. Therefore, applicants state that 
in-kind purchases and redemptions will afford no opportunity for the 
specified affiliated persons, or second-tier affiliates, of a Fund to 
effect a transaction detrimental to other holders of Shares. Applicants 
also believe that in-kind purchases and redemptions will not result in 
self-dealing or overreaching of the Fund.
    20. Applicants also seek relief from section 17(a) to permit a Fund 
that is an affiliated person of an Investing Fund to sell its Shares to 
and redeem its Shares

[[Page 62480]]

from an Investing Fund.\15\ 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.\16\ Applicants believe that any proposed 
transactions directly between the Funds and Investing Funds will be 
consistent with the policies of each Investing Fund. The purchase of 
Creation Units by an Investing Fund directly from a Fund will be 
accomplished in accordance with the investment restrictions of any such 
Investing Fund and will be consistent with the investment policies set 
forth in the Investing Fund's registration statement. The FOF 
Participation Agreement will require any Investing Fund that purchases 
Creation Units directly from a Fund to represent that the purchase of 
Creation Units from a Fund by an Investing Fund will be accomplished in 
compliance with the investment restrictions of the Investing Fund and 
will be consistent with the investment policies set forth in the 
Investing Fund's registration statement.
---------------------------------------------------------------------------

    \15\ Applicants believe that an Investing Fund generally will 
purchase Shares of the Funds in the secondary market and will not 
purchase or redeem Creation Units directly from a Fund. However, the 
requested relief would apply to direct sales of Shares in Creation 
Units by a Fund to an Investing Fund and redemptions of those 
Shares. The requested relief is intended to cover the transactions 
that would accompany such sales and redemptions. Applicants are not 
seeking relief from section 17(a) for, and the requested relief will 
not apply to, transactions where a Fund could be deemed an 
affiliated person, or an affiliated person of an affiliated person 
of an Investing Fund because the Adviser or an entity controlling, 
controlled by or under common control with the Adviser is also an 
investment adviser to the Investing Fund.
    \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 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.
---------------------------------------------------------------------------

Applicants' Conditions

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

A. Exchange Traded Fund Relief

    1. As long as the Funds operate in reliance on the requested order, 
the Shares of the Funds will be listed on an Exchange.
    2. Neither the Trust nor any Fund will be advertised or marketed as 
an open-end investment company or a mutual fund. Any advertising 
material that describes the purchase or sale of Creation Units or 
refers to redeemability will prominently disclose that 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.
    3. The Web site for the Funds, which is and will be publicly 
accessible at no charge, will contain the following information, on a 
per Share basis, for each Fund: the prior Business Day's NAV and the 
market closing price or the midpoint of the bid/ask spread at the time 
of calculation of such NAV (the ``Bid/Ask Price''), and a calculation 
of the premium or discount of the market closing price or Bid/Ask Price 
against such NAV.
    4. The requested relief to permit ETF operations will expire on the 
effective date of any Commission rule under the Act that provides 
relief permitting the operation of index-based exchange-traded funds.

B. Section 12(d)(1) Relief

    1. The members of 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 disinterested 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 12(d)(1)(A)(i) of the Act, the Board of a Fund, 
including a majority of the disinterested 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(s).
    5. The Investing Fund Adviser, Trustee or Sponsor, as applicable, 
will waive fees otherwise payable to it by the Investing Fund in an 
amount at least equal to any compensation (including fees received 
pursuant to any plan adopted by a Fund under rule 12b-1 under the Act) 
received from a Fund by the Investing Fund Adviser, 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

[[Page 62481]]

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.
    7. The Board of the Fund, including a majority of the disinterested 
Board members, will adopt procedures reasonably designed to monitor any 
purchases of securities by the Fund in an Affiliated Underwriting, once 
an investment by an Investing Fund in Fund Shares exceeds the limit of 
section 12(d)(1)(A)(i) of the Act, including any purchases made 
directly from an Underwriting Affiliate. The Board will review these 
purchases periodically, but no less frequently than annually, to 
determine whether the purchases were influenced by the investment by 
the Investing Fund in the Fund. The Board will consider, among other 
things: (a) Whether the purchases were consistent with the investment 
objectives and policies of the Fund; (b) how the performance of 
securities purchased in an Affiliated Underwriting compares to the 
performance of comparable securities purchased during a comparable 
period of time in underwritings other than Affiliated Underwritings or 
to a benchmark such as a comparable market index; and (c) whether the 
amount of securities purchased by the Fund in Affiliated Underwritings 
and the amount purchased directly from an Underwriting Affiliate have 
changed significantly from prior years. The Board will take any 
appropriate actions based on its review, including, if appropriate, the 
institution of procedures designed to ensure 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 disinterested 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 NASD Conduct Rule 2830.
    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, 
under delegated authority.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25928 Filed 10-6-11; 8:45 am]
BILLING CODE 8011-01-P