Document ID: SEC-2011-1530-0001
Agency: sec
Document Type: Notice
Title: Applications: Incapital LLC, et al.
Posted Date: 2011-10-07T04:00Z

[Federal Register Volume 76, Number 195 (Friday, October 7, 2011)]
[Notices]
[Pages 62481-62484]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-25927]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29828; File No. 812-13922]

Incapital LLC, et al.; Notice of Application

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

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

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Summary of the Application: Applicants request an order that would 
permit certain series of a registered unit investment trust to acquire 
shares of registered management investment companies and unit 
investment trusts or series thereof (the ``Funds'') both within and 
outside the same group of investment companies.

Applicants: Incapital LLC (the ``Depositor''), and Incapital Unit Trust 
(the ``Trust'').

Filing Dates: The application was filed on July 13, 2011, and amended 
on September 27, 2011 and September 29, 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 25, 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: 200 South Wacker Drive, 
Suite 3700, Chicago, Illinois 60606.

FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Special Counsel, at 
(202) 551-6813, or Dalia Osman Blass, Branch Chief, at (202) 551-6821 
(Office of Investment Company Regulation, Division of Investment 
Management).

[[Page 62482]]

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

Applicants' Representations

    1. The Trust is a UIT registered under the Act.\1\ Each Series will 
be a series of a Trust and will offer units for sale to the public 
(``Units''). Each Series will be created pursuant to a trust agreement 
which will incorporate by reference a master trust agreement between 
the Depositor and a financial institution that satisfies the criteria 
in section 26(a) of the Act (the ``Trustee''). The Depositor is a 
broker dealer registered under the Securities Exchange Act of 1934 and 
member of the Financial Industry Regulatory Authority, Inc. 
(``FINRA'').
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    \1\ Applicants request that the order also extend to future 
registered unit investment trust (``UITs'') sponsored by the 
Depositor or an entity controlling, controlled by or under common 
control with the Depositor and their respective series (the future 
UITs, together with the Trust, are collectively the ``Trusts'' and 
the series of the Trusts are the ``Series''). All existing entities 
that currently intend to rely on the requested order are named as 
applicants. Any other entity that relies on the order in the future 
will comply with the terms and conditions of the application.
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    2. Applicants request relief to permit a Series to invest in 
registered investment companies or series thereof (``Funds'') that are 
(a) part of the same ``group of investment companies'' (as that term is 
defined in section 12(d)(1)(G) of the Act) as the Series (``Affiliated 
Funds''), and (b) not part of the same group of investment companies as 
the Series (``Unaffiliated Funds''). Each of the Funds will be 
registered as a closed-end investment company (``Closed-end Fund''), an 
open-end investment company (``Open-end Fund'') or a UIT. An 
Unaffiliated Fund that is a UIT is referred to as an ``Unaffiliated 
Underlying Trust.'' An Unaffiliated Fund that is a Closed-end Fund or 
Open-end Fund is referred to as an ``Unaffiliated Underlying Fund.'' 
Certain of the Funds may be registered as Open-end Funds or UITs, but 
have received exemptive relief in order that their shares may be traded 
at ``negotiated prices'' on a national securities exchange in the same 
manner as other equity securities (the ``Exchange-traded Funds''). 
Shares of Exchange-traded Funds and Closed-end Funds will be deposited 
in a Series at prices which are based on the market value of the 
securities, as determined by an evaluator. The Depositor does not have 
discretion as to when portfolio securities of a Series will be sold, 
except that the Depositor is authorized to sell securities in extremely 
limited circumstances described in the Series' prospectus.
    3. Applicants state that the requested relief will provide 
investors with a practical, cost-efficient means of investing in a 
professionally selected, diversified portfolio of securities of 
investment companies. Each Series may also make investments in 
securities that are not issued by registered investment companies.

Applicants' Legal Analysis

A. Section 12(d)(1)

    1. Section 12(d)(1)(A) of the Act prohibits a registered investment 
company from acquiring shares of an investment company if the 
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 value 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 broker or dealer (``Broker'') from selling the shares of the 
investment company 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. 
Section 12(d)(1)(C) prohibits an investment company, other investment 
companies having the same investment adviser, and companies controlled 
by such investment companies, from acquiring more than 10% of the 
outstanding voting stock of a registered closed-end management 
investment company.
    2. Section 12(d)(1)(G) provides, in relevant part, that section 
12(d)(1) will not apply to securities of a registered open-end 
investment company or UIT acquired by a registered UIT if the acquired 
company and the acquiring company are part of the same group of 
investment companies, provided that certain other requirements 
contained in section 12(d)(1)(G) are met, including that the only other 
investments held by the acquiring company are government securities and 
short-term paper. Applicants state that they may not rely on section 
12(d)(1)(G) because a Series will invest in Unaffiliated Funds and 
securities other than government securities and short-term paper in 
addition to Affiliated Funds.
    3. 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 provision of section 
12(d)(1) if the exemption is consistent with the public interest and 
the protection of investors. Applicants seek an exemption under section 
12(d)(1)(J) to permit a Series to purchase or otherwise acquire shares 
of the Funds in excess of the percentage limitations of sections 
12(d)(1)(A) and (C), and the Open-end Funds, their principal 
underwriters and any Broker to sell their shares to the Series in 
excess of the percentage limitations of section 12(d)(1)(B).
    4. Applicants state that the proposed arrangement will not give 
rise to the policy concerns underlying sections 12(d)(1)(A), (B), and 
(C), which include concerns about undue influence by a fund of funds 
over underlying funds, excessive layering of fees, and overly complex 
fund structures. Accordingly, Applicants believe that the requested 
exemption is consistent with the public interest and the protection of 
investors.
    5. Applicants state that the concern about undue control does not 
arise with respect to a Series' investment in Affiliated Funds, as 
reflected in section 12(d)(1)(G) of the Act. Applicants also state that 
the proposed arrangement will not result in undue influence by a Series 
or its affiliates over Unaffiliated Funds. Applicants have agreed that 
(a) the Depositor, (b) any person controlling, controlled by or under 
common control with the Depositor, and (c) any investment company and 
any issuer that would be an investment company but for section 3(c)(1) 
or 3(c)(7) of the Act, sponsored or advised by the Depositor (or any 
person controlling, controlled by or under common control with the 
Depositor) (collectively, the ``Group'') will not control (individually 
or in the aggregate) an Unaffiliated Fund within the meaning of section 
2(a)(9) of the Act. Applicants also note that conditions 2, 3, 5 and 6 
set forth below will address the concern about undue influence with 
respect to the Unaffiliated Funds.
    6. As an additional assurance that an Unaffiliated Underlying Fund 
understands the implications of an investment by a Series under the 
requested order, prior to a Series' investment in the Unaffiliated 
Underlying Fund in excess of the limit in Section 12(d)(1)(A)(i), the 
Series and the Unaffiliated Underlying Fund will execute an agreement 
stating, without limitation, that the Depositor and

[[Page 62483]]

Trustee and the board of directors or trustees to the Unaffiliated 
Underlying Fund and the investment adviser(s) to the Unaffiliated 
Underlying Fund, understand the terms and conditions of the order and 
agree to fulfill their responsibilities under the order 
(``Participation Agreement''). Applicants note that an Unaffiliated 
Underlying Fund, including a closed-end Fund or an Exchange-traded 
Fund, may choose to reject an investment from the Series by declining 
to execute the Participation Agreement.
    7. Applicants do not believe that the proposed arrangement will 
involve excessive layering of fees. Applicants state that any sales 
charges and/or service fees (as those terms are defined in Rule 2830 of 
the Conduct Rules of the NASD, Inc. (``NASD Conduct Rules'') \2\ 
charged with respect to Units of a Series will not exceed the limits 
applicable to a fund of funds as set forth in Rule 2830 of the NASD 
Conduct Rules.\3\ In addition, the Trustee or Depositor will waive fees 
otherwise payable to it by the Series in an amount at least equal to 
any compensation (including fees paid pursuant to any plan adopted by 
an Unaffiliated Underlying Fund under rule 12b-1 under the Act) 
received from an Unaffiliated Fund by the Trustee or Depositor, or an 
affiliated person of the Trustee or Depositor, other than any advisory 
fees paid to the Trustee or Depositor or its affiliated person by an 
Unaffiliated Underlying Fund, in connection with the investment by the 
Series in the Unaffiliated Fund.
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    \2\ Any references to NASD Conduct Rule 2830 include any 
successor or replacement rule to Conduct Rule 2830 that may be 
adopted by FINRA.
    \3\ With respect to purchasing closed-end Funds or Exchange-
traded Fund shares, a Series may incur the customary brokerage 
commissions associated with purchasing any equity security on the 
secondary market.
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    8. Applicants state that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that a Fund will be 
prohibited from acquiring 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), except to the extent 
permitted by exemptive relief from the Commission permitting the Fund 
to purchase shares of other investment companies for short-term cash 
management purposes. Applicants also represent that a Series' 
prospectus and sales literature will contain concise, ``plain English'' 
disclosure designed to inform investors of the unique characteristics 
of the trust of funds structure, including, but not limited to, its 
expense structure and the additional expenses of investing in Funds.

B. Section 17(a) of the Act

    1. 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''), acting as principal, from 
selling any security or other property to or acquiring any security or 
other property from the company. Section 2(a)(3) of the Act defines an 
``affiliated person'' of another 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 
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.
    2. Applicants state that a Series and an Affiliated Fund might be 
deemed to be under the common control of the Depositor or an entity 
controlling, controlled by, or under common control with the Depositor. 
Applicants also state that a Series and a Fund might become 
``affiliated persons'' if the Series acquires more than 5% of the 
Fund's outstanding voting securities. The sale or redemption by a Fund 
of its shares to or from a Series therefore could be deemed to be a 
principal transaction prohibited by Section 17(a) of the Act.\4\
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    \4\ To the extent purchases and sales of shares of an Exchange-
traded Fund occur in the secondary market (and not through principal 
transactions directly between a Series and an Exchange-traded Fund), 
relief from section 17(a) would not be necessary. The requested 
relief is intended to cover, however, transactions directly between 
Exchange-traded Funds and a Series. Applicants are not seeking 
relief from section 17(a) for, and the requested relief will not 
apply to, transactions where an Exchange-traded Fund could be deemed 
an affiliated person, or an affiliated person of an affiliated 
person, of a Series because the investment adviser to the Exchange-
traded Fund or an entity controlling, controlled by or under common 
control with the investment adviser is also a depositor to the 
Series. In addition, the request for relief does not cover principal 
transactions with Closed-end Funds.
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    3. Section 17(b) of the Act authorizes the Commission to grant an 
order permitting a transaction otherwise prohibited by section 17(a) if 
it finds that (a) the terms of the proposed transaction are fair and 
reasonable and do not involve overreaching on the part of any person 
concerned; (b) the proposed transaction is consistent with the policies 
of each registered investment company involved; and (c) the proposed 
transaction is consistent with the general purposes of the Act. Section 
6(c) of the Act permits the Commission to exempt any person or 
transactions from any provision of the Act if 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.
    4. Applicants submit that the proposed transactions satisfy the 
standards for relief under sections 17(b) and 6(c) of the Act. 
Applicants state that the terms of the proposed transactions are fair 
and reasonable and do not involve overreaching. Applicants note that 
the consideration paid for the sale and redemption of shares of the 
open-end Funds and Funds that are UITs will be based on the net asset 
values of the Funds. Finally, Applicants state that the proposed 
transactions will be consistent with the policies of each Series and 
Fund, and with the general purposes of the Act.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. The members of the Group will not control (individually or in 
the aggregate) an Unaffiliated Fund within the meaning of section 
2(a)(9) of the Act. If, as a result of a decrease in the outstanding 
voting securities of an Unaffiliated Fund, the Group, in the aggregate, 
becomes a holder of more than 25% of the outstanding voting securities 
of the Unaffiliated Fund, the Group will vote its shares of the 
Unaffiliated Fund in the same proportion as the vote of all other 
holders of the Unaffiliated Fund's shares.
    2. No Series or its Depositor, promoter, principal underwriter, or 
any person controlling, controlled by, or under common control with any 
of those entities (each, a ``Series Affiliate'') will cause any 
existing or potential investment by the Series in an Unaffiliated Fund 
to influence the terms of any services or transactions between the 
Series or Series Affiliate and the Unaffiliated Fund or its investment 
adviser(s), sponsor, promoter, principal underwriter, or any person 
controlling, controlled by, or under common control with any of those 
entities.
    3. Once an investment by a Series in the securities of an 
Unaffiliated Underlying Fund exceeds the limit in section 
12(d)(1)(A)(i) of the Act, the board of directors or trustees of the 
Unaffiliated Underlying Fund, including a majority of the disinterested 
board members, will determine that any

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consideration paid by the Unaffiliated Underlying Fund to the Series or 
Series 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 Unaffiliated Underlying Fund; (b) 
is within the range of consideration that the Unaffiliated Underlying 
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 an Unaffiliated Underlying Fund and its investment adviser(s), 
or any person controlling, controlled by, or under common control with 
such investment adviser(s).
    4. The Trustee or Depositor will waive fees otherwise payable to it 
by the Series, in an amount at least equal to any compensation 
(including fees received pursuant to any plan adopted by an 
Unaffiliated Underlying Fund under rule 12b-1 under the Act) received 
from an Unaffiliated Fund by the Trustee or Depositor, or an affiliated 
person of the Trustee or Depositor, other than any advisory fees paid 
to the Trustee or Depositor or its affiliated person by an Unaffiliated 
Underlying Fund, in connection with the investment by a Series in the 
Unaffiliated Fund.
    5. No Series or Series Affiliate (except to the extent it is acting 
in its capacity as an investment adviser to an Unaffiliated Underlying 
Fund or sponsor to an Unaffiliated Underlying Trust) will cause an 
Unaffiliated Fund to purchase a security in an offering of securities 
during the existence of any underwriting or selling syndicate of which 
a principal underwriter is the Depositor or a person of which the 
Depositor is an affiliated person (each, an ``Underwriting Affiliate,'' 
except any person whose relationship to the Unaffiliated Fund is 
covered by section 10(f) of the Act is not an Underwriting Affiliate). 
An offering of securities during the existence of an underwriting or 
selling syndicate of which a principal underwriter is an Underwriting 
Affiliate is an ``Affiliated Underwriting.''
    6. The board of an Unaffiliated Underlying Fund, including a 
majority of the disinterested board members, will adopt procedures 
reasonably designed to monitor any purchases of securities by the 
Unaffiliated Underlying Fund in an Affiliated Underwriting once an 
investment by a Series in the securities of the Unaffiliated Underlying 
Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act, including 
any purchases made directly from an Underwriting Affiliate. The board 
of the Unaffiliated Underlying Fund will review these purchases 
periodically, but no less frequently than annually, to determine 
whether the purchases were influenced by the investment by the Series 
in the Unaffiliated Underlying Fund. The board of the Unaffiliated 
Underlying Fund will consider, among other things: (a) Whether the 
purchases were consistent with the investment objectives and policies 
of the Unaffiliated Underlying 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 Unaffiliated Underlying Fund in 
Affiliated Underwritings and the amount purchased directly from an 
Underwriting Affiliate have changed significantly from prior years. The 
board of the Unaffiliated Underlying Fund 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.
    7. An Unaffiliated Underlying 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 a Series 
in the securities of the Unaffiliated Underlying 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 determinations of the board of the Unaffiliated 
Underlying Fund were made.
    8. Before investing in an Unaffiliated Underlying Fund in excess of 
the limit in section 12(d)(1)(A)(i), each Series and the Unaffiliated 
Underlying Fund will execute a Participation Agreement stating, without 
limitation, that the Depositor and Trustee, and the board of directors 
or trustees of the Unaffiliated Underlying Fund and the investment 
adviser(s) to the Unaffiliated Underlying Fund, understand the terms 
and conditions of the order and agree to fulfill their responsibilities 
under the order. At the time of its investment in shares of an 
Unaffiliated Underlying Fund in excess of the limit in section 
12(d)(1)(A)(i), a Series will notify the Unaffiliated Underlying Fund 
of the investment. At such time, the Series also will transmit to the 
Unaffiliated Underlying Fund a list of the names of each Series 
Affiliate and Underwriting Affiliate. The Series will notify the 
Unaffiliated Underlying Fund of any changes to the list of names as 
soon as reasonably practicable after a change occurs. The Unaffiliated 
Underlying Fund and the Series 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 not 
less than six years thereafter, the first two years in an easily 
accessible place.
    9. Any sales charges and/or service fees charged with respect to 
Units of a Series will not exceed the limits applicable to a fund of 
funds as set forth in Rule 2830 of the NASD Conduct Rules.
    10. No Fund will acquire securities of any other investment company 
or company relying on section 3(c)(1) or 3(c)(7) of the Act in excess 
of the limits contained in section 12(d)(1)(A) of the Act, except to 
the extent permitted by exemptive relief from the Commission permitting 
the Fund to purchase shares of other investment companies for short-
term cash management purposes.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25927 Filed 10-6-11; 8:45 am]
BILLING CODE 8011-01-P