[Federal Register Volume 74, Number 168 (Tuesday, September 1, 2009)]
[Notices]
[Pages 45261-45267]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-20983]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28852; 812-13405]


Arrow Investment Advisers, LLC, and Arrow Funds Trust; Notice of 
Application

August 25, 2009.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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SUMMARY: Summary of Application: Applicants request an order that would 
permit (a) certain open-end management investment companies and their 
series to issue shares (``Shares'') redeemable in large aggregations 
(``Creation Unit Aggregations'') only; (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 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 Shares.
    Applicants: Arrow Investment Advisers, LLC (``Adviser'') and Arrow 
Funds Trust (``Trust'').

DATES: Filing Dates: The application was filed on July 9, 2007 and 
amended on November 3, 2008, May 28, 2009, and August 21, 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 September 21, 2009, and should be accompanied by proof of 
service on applicants, in the form of an affidavit, or for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090; Applicants, c/o Joe Barrato, Chief 
Executive Officer, Arrow Investment Advisers, LLC, 2943 Olney-Sandy 
Spring Road, Suite A, Olney, MD 20832.

FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Sr., Senior Counsel 
at (202) 551-6868, or Julia K. 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 under the Act as an open-end management 
investment company and is organized as a Delaware statutory trust. The 
Trust will initially offer three series (``Initial Funds''), each of 
which will track a global index of equity and fixed income securities. 
Applicants request that the order (``Order'') apply to the Initial 
Funds and any existing or future registered open-end management 
investment company and its series registered under the Act 
(collectively, with future series of the Trust, the ``Future Funds,'' 
and together with the Initial Funds, the ``Funds'').\1\ Each Future 
Fund will be (a) advised by the Adviser or an entity controlling, 
controlled by, or under common control with the Adviser, and (b) comply 
with the terms and conditions stated in the application.
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    \1\ All entities that currently intend to rely on the Order are 
named as applicants. An Acquiring Fund (as defined below) may rely 
on the Order only to invest in Funds and not in any other registered 
investment company.
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    2. The Adviser is registered as an investment adviser under the 
Investment Advisers Act of 1940, as amended (the ``Advisers Act'') and 
will be the investment adviser to the Initial Funds. The Adviser may 
enter into sub-advisory agreements with other investment advisers to 
act as subadvisers to the Funds (``Subadvisers''). Each Subadviser will 
be registered under the Advisers Act. A broker-dealer registered under 
the Securities Exchange Act of 1934 (the ``Exchange Act''), will serve 
as the principal underwriter and distributor for the Creation Unit 
Aggregations of Shares (``Distributor'').
    3. Each Fund will consist of a portfolio of securities (``Portfolio 
Securities'') selected to correspond generally to the price and yield 
performance, before fees and expenses, of a specified securities index

[[Page 45262]]

(``Underlying Index'').\2\ Any entity that creates, compiles, sponsors 
or maintains an Underlying Index (``Index Provider'') is not or 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, a Fund, 
the Adviser, any Subadviser, or promoter of a Fund, or a Distributor.
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    \2\ The Underlying Indexes for the Initial Funds are the Dow 
Jones Global Relative Risk Moderate Portfolio Index, Dow Jones 
Relative Risk Moderately Aggressive Portfolio Index and the Dow 
Jones Global Risk Aggressive Portfolio Index.
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    4. The investment objective of each Fund will be to provide 
investment results, before fees and expenses, that correspond generally 
to the price and yield performance, of its Underlying Index.\3\ The 
values of the Underlying Indices will be disseminated every 15 seconds 
each ``Business Day,'' which is defined as any day that a Fund is 
required to be opened under section 22(e) of the Act. A Fund will 
utilize either a ``replication'' or ``representative sampling'' 
strategy which will be disclosed with regard to each Fund in its 
prospectus (``Prospectus'').\4\ A Fund using a replication strategy 
will invest in substantially all of the Component Securities in its 
Underlying Index in approximately the same proportions as in the 
Underlying Index.\5\ A Fund may use a representative sampling strategy 
pursuant to which it will invest in a significant number but not all of 
the Component Securities of its Underlying Index. This may be the case 
when there are practical difficulties or substantial costs involved in 
compiling an entire Underlying Index or when a Component Security is 
illiquid. 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 a Fund employing 
the replication strategy. Applicants expect that each Fund will have a 
tracking error relative to the performance of its Underlying Index of 
less than 5 percent.
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    \3\ Applicants represent that each Fund will invest at least 90% 
or 80% of its total assets in the component securities that comprise 
its Underlying Index (``Component Securities'') and the depositary 
receipts representing such securities. ``Depositary Receipts'' will 
typically be American Depositary Receipts, but may include Global 
Depositary Receipts and Euro Depositary Receipts. Each Fund also may 
invest up to 10% or 20%, as the case may be, of its total assets in 
futures contracts, options on future contracts, options and swaps, 
as well as cash and cash equivalents and other investment companies.
    \4\ 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 
disclosure requirements adopted by the Commission in Investment 
Company Act Release No. 28584 (Jan. 13, 2009).
    \5\ Under the representative sampling strategy, the Adviser will 
seek to construct a Fund's portfolio so that its fundamental 
investment characteristics and liquidity measures perform like those 
of the Underlying Index.
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    5. Shares will be sold at a price between $25 and $250 in Creation 
Unit Aggregations which will have an initial price range of $1,000,000 
to $10,000,000. 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) a participant in the Depository Trust 
Company (``DCrdquo;, and such participant, ``DCParticipant''). Shares 
generally will be sold in Creation Unit Aggregations in exchange for an 
in-kind deposit by the purchaser of a portfolio of specified securities 
(the ``Deposit Securities''), together with the deposit of a specified 
cash payment (``Cash Amount'' and collectively with the Deposit 
Securities, ``Creation Deposit''). The Cash Amount is generally 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.\6\ Each Fund reserves the right to permit, under certain 
circumstances, a purchaser of Creation Unit Aggregations to substitute 
cash in lieu of depositing some or all of the requisite Deposit 
Securities.
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    \6\ The Trust will sell Creation Unit Aggregations of each Fund 
only on a Business Day. Each Business Day, prior to the opening of 
trading on the Primary Listing Exchange, the list of names and 
amount of each security constituting the current Deposit Securities 
and the Cash Amount, effective as of the previous Business Day, will 
be made available. Any national securities exchange (as defined in 
section 2(a)(26) of the Act) (``Exchange'') on which Shares are 
listed (``Primary Listing Exchange'') will disseminate, every 15 
seconds during its regular trading hours, through the facilities of 
the Consolidated Tape Association, an estimated intra-day NAV of 
Shares (which will include the previous day's Cash Amount).
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    6. An investor acquiring 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.\7\ The exact amounts of Transaction Fees relevant to each 
Fund (including the maximum Transaction Fees) will be fully disclosed 
in the Prospectus of such Fund. The method for calculating the 
Transaction Fees will be disclosed in each Fund's statement of 
additional information (``SAI''). The Distributor will furnish a Fund's 
Prospectus and a confirmation to those placing purchase orders and 
maintain a record of the purchase orders, confirmations of purchase 
orders and the instructions given to the Fund to implement the delivery 
of Shares.
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    \7\ Where a Fund permits a purchaser to substitute cash in lieu 
of depositing one or more Deposit Securities, the purchaser may be 
assessed a higher Transaction Fee to cover the cost to the Fund of 
Acquiring such Deposit Securities.
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    7. Purchasers of Shares in Creation Unit Aggregations may hold such 
Shares or sell such Shares into the secondary market. Shares will be 
listed and traded on an Exchange. It is expected that one or more 
member firms of a Primary Listing Exchange will be designated to act as 
a specialist or market maker and maintain a market for Shares trading 
on such Exchange. Prices of Shares trading on an Exchange will be based 
on the current bid/offer market. 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. A specialist or 
market maker also may purchase Creation Unit Aggregations of Shares for 
use in its 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 ability to continually purchase Creation Unit Aggregations at NAV, 
which should ensure that Shares do not trade at a material discount or 
premium to NAV.
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    \8\ Shares will be registered in book-entry form only. DCor its 
nominee will be the registered owner of all outstanding Shares. DCor 
DCParticipants will maintain records reflecting beneficial owners of 
Shares.
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    9. Shares will not be individually redeemable, and owners of Shares 
may acquire those Shares from the Fund, or tender such Shares for 
redemption to the Fund, in Creation Unit Aggregations only. To redeem, 
an investor will have to accumulate enough Shares to constitute a 
Creation Unit Aggregation. Redemption orders must be placed by or 
through an Authorized Participant. An investor redeeming a Creation 
Unit

[[Page 45263]]

Aggregation generally will receive (a) Portfolio Securities designated 
to be delivered for Creation Unit Aggregation redemptions (``Redemption 
Securities'') on the date that the request for redemption is submitted 
and (b) the Cash Amount.\9\ An investor may receive the cash equivalent 
of a Fund Security in certain circumstances.
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    \9\ As a general matter, the Deposit Securities and Redemption 
Securities will correspond pro rata to the Portfolio Securities held 
by each Fund although in limited circumstances Deposit Securities 
and Redemption Securities may not be the same on the same day. In 
accepting Deposit Securities and satisfying redemptions with 
Redemption Securities that are restricted securities eligible for 
resale pursuant to rule 144A under the Securities Act of 1933 
(``Securities Act''), the Funds will comply with the conditions of 
rule 144A. The Prospectus will also state that an Authorized 
Participant that is not a ``Qualified Institutional Buyer'' as 
defined in rule 144A under the Securities Act will not be able to 
receive, as part of a redemption, restricted securities eligible for 
resale under rule 144A.
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    10. Neither the Trust nor any individual Fund will be marketed or 
otherwise held out an ``open-end investment company'' or a ``mutual 
fund.'' Instead, each Fund will be marketed as an ``exchange traded 
fund,'' an ``investment company,'' a ``fund,'' or a ``trust.'' All 
marketing materials that describe the features or method of obtaining, 
buying or selling Creation Unit Aggregations 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 Unit 
Aggregations only. The same approach will be followed in the SAI, 
shareholder reports and investor educational materials issued or 
circulated in connection with the Shares. The Trust or each Fund, as 
applicable, will provide copies of their annual and semi-annual 
shareholder reports to DCParticipants 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 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) of the Act for an exemption from sections 
12(d)(1)(A) and (B) of the Act.
    2. Section 6(c) of the Act provides that the Commission may exempt 
any person, security or transaction, or any class of persons, 
securities or transactions, from any provision of the Act, if and to 
the extent that such exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act. 
Section 17(b) of the Act authorizes the Commission to exempt a proposed 
transaction from section 17(a) of the Act if evidence establishes that 
the terms of the transaction, including the consideration to be paid or 
received, are reasonable and fair and do not involve overreaching on 
the part of any person concerned, and the proposed transaction is 
consistent with the policies of the registered investment company and 
the general provisions of the Act. Section 12(d)(1)(J) of the Act 
provides that the Commission may exempt any person, security, or 
transaction, or any class or classes of persons, securities or 
transactions, from any provisions of section 12(d)(1) if the exemption 
is consistent with the public interest and the protection of investors.

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

    3. Section 5(a)(1) of the Act defines an ``open-end company'' as a 
management investment company that is offering for sale or has 
outstanding any redeemable security of which it is the issuer. Section 
2(a)(32) of the Act defines a ``redeemable security'' as any security, 
other than short-term paper, under the terms of which the owner, upon 
its presentation to the issuer, is entitled to receive approximately 
his proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Shares will not be individually redeemable, 
applicants request an order that would permit the Trust or a Fund to 
register as an open-end management investment company and issue Shares 
that are redeemable in Creation Unit Aggregations only. Applicants 
state that investors may purchase Shares in Creation Unit Aggregations 
from each Fund. Applicants further state that because the market price 
of Shares will be disciplined by arbitrage opportunities, the market 
price of an individual Fund Share will not vary much from its 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 reacquiring 
a redeemable security do so only at a price based on its NAV. 
Applicants state that secondary market trading in Shares will take 
place at negotiated prices, not at a current offering price described 
in a Fund's Prospectus, and not at a price based on NAV. Thus, 
purchases and sales of Shares in the secondary market will not comply 
with section 22(d) of the Act and rule 22c-1 under the Act. Applicants 
request an exemption under section 6(c) from these provisions.
    5. Applicants assert that the concerns sought to be addressed by 
section 22(d) of the Act and rule 22c-1 under the Act with respect to 
pricing are equally satisfied by the proposed method of pricing Shares. 
Applicants maintain that while there is little legislative history 
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to (a) prevent dilution caused by 
certain riskless-trading schemes by principal underwriters and contract 
dealers, (b) prevent unjust discrimination or preferential treatment 
among buyers, and (c) ensure an orderly distribution of investment 
company shares by eliminating price competition from dealers offering 
shares at less than the published sales price and who could pay 
investors a little 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 directly involve Fund assets 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 
state that settlement of redemptions for Funds that are based on global 
equity indices, global fixed income indices or global indices of equity 
and fixed income securities (collectively, ``Global Funds'') and Funds 
that are based on international equity indices,

[[Page 45264]]

international fixed income indices or a blend of international, equity 
and fixed income indices (collectively, ``International Funds'') is 
contingent not only on the settlement cycle of the United States 
securities markets, but also on the delivery cycles present in foreign 
markets in which Global Funds and International Funds invest. 
Applicants state that delivery cycles for transferring Portfolio 
Securities to redeeming investors coupled with local market holiday 
schedules will, under certain circumstances, require a delivery process 
longer than seven calendar days. Applicants request relief under 
section 6(c) of the Act from section 22(e) to permit the Global Funds 
and International Funds to pay redemption proceeds up to 12 calendar 
days after the tender of any Creation Unit Aggregations for redemption. 
Except as disclosed in the relevant Fund's Prospectus and/or SAI, 
applicants expect that each Global Fund and International Fund will be 
able to deliver redemption proceeds within seven days.\10\ With respect 
to future Global Funds and International Funds, applicants seek the 
same relief from section 22(e) only to the extent that circumstances 
similar to those described in the application exist.
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    \10\ 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 Prospectus and/or SAI will disclose those 
instances in a given year where, due to local holidays, more than seven 
days will be needed to deliver redemption proceeds. Applicants are not 
seeking relief from section 22(e) with respect to Global Funds and 
International Funds that do not effect creations and 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 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 (``Acquiring Management Companies'') and unit investment 
trusts (``Acquiring Trusts'') registered under the Act that are not 
advised or sponsored 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, 
``Acquiring Funds'') to acquire Shares of a Fund beyond the limits of 
section 12(d)(1)(A). No Acquiring Fund will be in the same group of 
investment companies as the Funds. In addition, applicants seek relief 
to permit a Fund or a broker-dealer registered under the Exchange Act 
to sell Shares to an Acquiring Fund in excess of the limits of section 
12(d)(1)(B).
    11. All Acquiring Management Companies will be advised by an 
investment adviser within the meaning of section 2(a)(20)(A) of the Act 
(the ``Acquiring 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 ``Acquiring Fund Subadviser''). Any investment adviser to 
an Acquiring Fund will be registered under the Advisers Act. Each 
Acquiring 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 section 
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 Acquiring Funds nor an 
Acquiring Fund Affiliate would be able to exert undue influence over 
the Funds.\11\ To limit the control that an Acquiring Fund may have 
over a Fund, applicants propose a condition prohibiting an Acquiring 
Fund Adviser or a Sponsor, any person controlling, controlled by, or 
under common control with an Acquiring Fund Adviser or Sponsor, and any 
investment company and any issuer that would be an investment company 
but for sections 3(c)(1) or 3(c)(7) of the Act that is advised or 
sponsored by an Acquiring Fund Adviser or Sponsor, or any person 
controlling, controlled by, or under common control with an Acquiring 
Fund Adviser or Sponsor (``Acquiring Fund 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 Acquiring Fund Subadviser, any person controlling, controlled by 
or under common control with the Acquiring Fund Subadviser, and any 
investment company or issuer that would be an investment company but 
for sections 3(c)(1) or 3(c)(7) of the Act (or portion of such 
investment company or issuer) advised or sponsored by the Acquiring 
Fund Subadviser or any person controlling, controlled by or under 
common control with the Acquiring Fund Subadviser (``Acquiring Fund's 
Subadvisory Group''). Applicants propose other conditions to limit the 
potential for undue influence over the Funds, including that no 
Acquiring Fund or Acquiring 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, Acquiring Fund Adviser, Acquiring Fund 
Subadviser, employee or Sponsor of an Acquiring Fund, or a person of 
which any such officer, director, member of an advisory board, 
Acquiring Fund Adviser, Acquiring Fund Subadviser, employee, or Sponsor 
is an affiliated person

[[Page 45265]]

(except that any person whose relationship to the Fund is covered by 
section 10(f) of the Act is not an Underwriting Affiliate.
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    \11\ An ``Acquiring Fund Affiliate'' is an Acquiring Fund 
Adviser, Acquiring Fund Subadviser, Sponsor, promoter, and principal 
underwriter of an Acquiring 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.
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    14. Applicants assert that the proposed conditions address any 
concerns regarding excessive layering of fees. The board of directors 
or trustees of any Acquiring 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 Acquiring 
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 Acquiring Management 
Company may invest. In addition, except as provided in condition 15, an 
Acquiring Fund Adviser or a trustee (``Trustee'') or Sponsor of an 
Acquiring Trust will, as applicable, waive fees otherwise payable to it 
by the Acquiring 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 Acquiring Fund Adviser or 
Trustee or Sponsor or an affiliated person of the Acquiring Fund 
Adviser, Trustee or Sponsor, from the Funds in connection with the 
investment by the Acquiring Fund in the Fund. Applicants state that any 
sales charges or service fees charged with respect to Shares of an 
Acquiring 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'').\12\
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    \12\ Any references to Conduct Rule 2830 of the NASD include any 
successor or replacement rule to Conduct Rule 2830 that may be 
adopted by the Financial Industry Regulatory Authority.
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    15. Applicants submit that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that no Fund 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 Acquiring Funds 
comply with the terms and conditions of the requested relief from 
section 12(d)(1), any Acquiring Fund that intends to invest in a Fund 
in reliance on the requested order will enter into an Acquiring Fund 
Agreement between the Fund and the Acquiring Fund requiring the 
Acquiring Fund to adhere to the terms and conditions of the requested 
order. The Acquiring Fund Agreement also will include an 
acknowledgement from the Acquiring Fund that it may rely on the Order 
only to invest in the Funds and not in any other investment company.
    16. Applicants also note that a Fund may choose to reject a direct 
purchase of Shares in Creation Unit Aggregations by an Acquiring Fund. 
To the extent that an Acquiring 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 Acquiring Fund Agreement prior to any 
investment by an Acquiring Fund in excess of the limits of section 
12(d)(1)(A).

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

    17. Section 17(a) of the Act generally prohibits an affiliated 
person of a registered investment company, or an affiliated person of 
such a person (``Second-Tier Affiliate''), from selling any security to 
or 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.
    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 other registered investment companies (or series 
thereof) advised by the Adviser.
    19. Applicants assert that no useful purpose would be served by 
prohibiting these types of affiliated persons from acquiring or 
redeeming Creation Unit Aggregations through ``in-kind'' transactions. 
The deposit 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 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 Acquiring Fund to sell its Shares to 
and redeem its Shares from an Acquiring Fund through in-kind Creation 
Unit Aggregation transactions with the Acquiring Fund.\13\ 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 Acquiring Fund for the purchase or redemption of Shares directly 
from a Fund will be based on the NAV of the Fund.\14\ Applicants 
believe that any proposed transactions directly between the Funds and 
Acquiring Funds will be consistent with the policies of each Acquiring 
Fund. The purchase of Creation Unit Aggregations by an Acquiring Fund 
directly from a Fund will be accomplished in accordance with the 
investment restrictions of any such Acquiring Fund and will be 
consistent with the investment policies set forth in the Acquiring 
Fund's registration statement. The Acquiring Fund Agreement will 
require any Acquiring Fund that purchases Creation Unit Aggregations 
directly from a Fund to represent that the purchase of Creation Unit 
Aggregations from a Fund by an Acquiring Fund will be accomplished in 
compliance with the investment restrictions of the Acquiring Fund and 
will be consistent with the investment policies set forth in the 
Acquiring Fund's registration statement.
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    \13\ Applicants acknowledge that receipt of compensation by (a) 
an affiliated person of an Acquiring Fund, or an affiliated person 
of such person, for the purchase by the Acquiring 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 Acquiring Fund 
may be prohibited by section 17(e)(1) of the Act. The Acquiring Fund 
Agreement also will include this acknowledgment.
    \14\ Applicants believe that an Acquiring Fund will purchase 
Shares in the secondary market and will not purchase or redeem 
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 Acquiring Fund and redemptions of those 
Shares.

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[[Page 45266]]

Applicants' Conditions

    Applicants agree that any order of granting the requested relief 
will be subject to the following conditions:\15\
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    \15\ See note 4, supra.
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ETF Relief

    1. Each Fund's Prospectus will clearly disclose that, for purposes 
of the Act, Shares are issued by the Funds, and that the acquisition of 
Shares by investment companies is subject to the restrictions of 
section 12(d)(1) of the Act, except as permitted by an exemptive order 
that permits registered investment companies to invest in a Fund beyond 
the limits in section 12(d)(1), subject to certain terms and 
conditions, including that the registered investment company enter into 
an Acquiring Fund Agreement with the Fund regarding the terms of the 
investment.
    2. As long as the Trust or a Fund operates in reliance on the 
requested order, the 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 Shares are not individually redeemable 
shares and will disclose that the owners of Shares may acquire those 
Shares from a Fund and tender those Shares for redemption to a Fund 
only in Creation Unit Aggregations. Any advertising material that 
describes the purchase or sale of Creation Unit Aggregations or refers 
to redeemability will prominently disclose that Shares are not 
individually redeemable and that owners of Shares may acquire those 
Shares from a Fund and tender those Shares for redemption to a Fund in 
Creation Unit Aggregations only.
    4. The Web site for each Fund, which will be publicly accessible at 
no charge, will contain the following information, on a per Share 
basis, for each Fund: (a) The prior Business Day's NAV and the reported 
closing price, and a calculation of the premium or discount of such 
closing price against such NAV; and (b) data in chart format displaying 
the frequency distribution of discounts and premiums of the daily 
closing price against the NAV, within appropriate ranges, for each of 
the four previous calendar quarters (or the life of the Fund, if 
shorter).
    5. The Prospectus and annual report for each Fund also will 
include: (a) The 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 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 closing price, and (ii) the cumulative total return of the 
relevant Underlying Index.
    6. The requested relief to permit ETF operations will expire on the 
effective date of any Commission rule under the Act that provides 
relief permitting the operation of index-based exchange-traded funds.

Section 12(d)(1) Relief

    7. The members of the Acquiring 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 an Acquiring 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 voting securities of a Fund, the 
Acquiring Fund's Advisory Group or the Acquiring Fund's Subadvisory 
Group, each in the aggregate, becomes a holder of more than 25 percent 
of the outstanding voting securities of a Fund, it will vote its Shares 
in the same proportion as the vote of all other holders of the Shares. 
This condition does not apply to the Acquiring Fund Subadvisory Group 
with respect to a Fund for which the Acquiring Fund Subadviser or a 
person controlling, controlled by, or under common control with the 
Acquiring Fund Subadviser acts as the investment adviser within the 
meaning of section 2(a)(20)(A) of the Act.
    8. No Acquiring Fund or Acquiring Fund Affiliate will cause any 
existing or potential investment by the Acquiring Fund in a Fund to 
influence the terms of any services or transactions between the 
Acquiring Fund or Acquiring Fund Affiliate and the Fund or a Fund 
Affiliate.
    9. The board of directors or trustees of an Acquiring Management 
Company, including the independent directors or trustees, will adopt 
procedures reasonably designed to ensure that the Acquiring Fund 
Adviser and Acquiring Fund Subadviser are conducting the investment 
program of the Acquiring Management Company without taking into account 
any consideration received by the Acquiring Management Company or an 
Acquiring Fund Affiliate from a Fund or a Fund Affiliate in connection 
with any services or transactions.
    10. Once an investment by an Acquiring Fund in Shares exceeds the 
limits 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 independent 
directors or trustees will determine that any consideration paid by the 
Fund to an Acquiring Fund or an Acquiring 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).
    11. No Acquiring Fund or Acquiring 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 Affiliated 
Underwriting.
    12. The Board, including a majority of the independent directors or 
trustees, will adopt procedures reasonably designed to monitor any 
purchases of securities by the Fund in an Affiliated Underwriting, once 
an investment by an Acquiring Fund in the securities of the 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 will 
review these purchases periodically, but no less frequently than 
annually, to determine whether the purchases were influenced by the 
investment by the Acquiring 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

[[Page 45267]]

procedures designed to assure that purchases of securities in 
Affiliated Underwritings are in the best interest of shareholders of 
the Fund.
    13. 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 Acquiring 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 
determinations of the Board were made.
    14. Before investing in Shares in excess of the limits in section 
12(d)(1)(A), each Acquiring Fund and the Fund will execute an Acquiring 
Fund Agreement stating, without limitation, that their boards of 
directors or trustees and their investment adviser(s) or their Sponsors 
or Trustees, 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 Shares in excess of the limit in section 
12(d)(1)(A)(i), an Acquiring Fund will notify the Fund of the 
investment. At such time, the Acquiring Fund will also transmit to the 
Fund a list of the names of each Acquiring Fund Affiliate and 
Underwriting Affiliate. The Acquiring 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 Acquiring Fund will maintain and 
preserve a copy of the Order, the Acquiring Fund 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.
    15. The Acquiring Fund Adviser, Trustee or Sponsor, as applicable, 
will waive fees otherwise payable to it by the Acquiring Fund in an 
amount at least equal to any compensation (including fees received 
pursuant to any plan adopted under rule 12b-1 under the Act) received 
from the Fund by the Acquiring Fund Adviser, Trustee or Sponsor, or an 
affiliated person of the Acquiring Fund Adviser, Trustee or Sponsor, 
other than any advisory fees paid to the Acquiring Fund Adviser, 
Trustee or Sponsor, or its affiliated person by a Fund, in connection 
with the investment by the Acquiring Fund in the Fund. Any Acquiring 
Fund Subadviser will waive fees otherwise payable to the Acquiring Fund 
Subadviser, directly or indirectly, by the Acquiring Management Company 
in an amount at least equal to any compensation received from a Fund by 
the Acquiring Fund Subadviser, or an affiliated person of the Acquiring 
Fund Subadviser, other than any advisory fees paid to the Acquiring 
Fund Subadviser or its affiliated person by the Fund, in connection 
with any investment by the Acquiring Management Company in the Fund 
made at the direction of the Acquiring Fund Subadviser. In the event 
that the Acquiring Fund Subadviser waives fees, the benefit of the 
waiver will be passed through to the Acquiring Management Company.
    16. Any sales charges and/or service fees charged with respect to 
shares of an Acquiring Fund will not exceed the limits applicable to a 
fund of funds as set forth in Conduct Rule 2830 of the NASD.
    17. 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.
    18. Before approving any advisory contract under section 15 of the 
Act, the board of directors or trustees of each Acquiring Management 
Company, including a majority of the disinterested 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 Acquiring Management Company may 
invest. These findings and their basis will be recorded fully in the 
minute books of the appropriate Acquiring Fund.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-20983 Filed 8-31-09; 8:45 am]
BILLING CODE 8010-01-P