[Federal Register Volume 74, Number 204 (Friday, October 23, 2009)]
[Notices]
[Pages 54866-54872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-25560]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28949; File No. 812-13571]


Pacific Investment Management Company LLC and PIMCO ETF Trust; 
Notice of Application

October 20, 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 (``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 (a)(2) of the Act, and under section 12(d)(1)(J) 
for an exemption from sections 12(d)(1)(A) and (B) of the Act.

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Applicants: Pacific Investment Management Company LLC (the ``Advisor'') 
and PIMCO ETF Trust (the ``Trust'').

Summary of Application: Applicants request an order that permits: (a) 
Series of certain actively managed 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 
from 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 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.

Filing Dates:  The application was filed on September 4, 2008 and 
amended on October 8, 2009. Applicants have agreed to file an amendment 
during the notice period, the substance of which is reflected in this 
notice.

Hearing or Notification of Hearing:  An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on November 9, 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, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-1090. Applicants: 840 Newport Center 
Drive, Newport Beach, CA 92660.

FOR FURTHER INFORMATION CONTACT: Jill Ehrlich, Attorney Adviser, at 
(202) 551-6819 or Mary Kay Frech, 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 for 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 an open-end management company registered under the 
Act and organized as a Delaware statutory trust. The Trust will offer 
five actively-managed investment series: PIMCO Enhanced Short Maturity 
Strategy Fund, PIMCO Government Limited Maturity Strategy Fund, PIMCO 
Intermediate Municipal Bond Strategy Fund, PIMCO Prime Limited Maturity 
Strategy Fund, and PIMCO Short Term Municipal Bond Strategy Fund 
(together, the ``Initial Funds''). The investment objective of PIMCO 
Enhanced Short Maturity Strategy Fund, PIMCO Government Limited 
Maturity Strategy Fund, and PIMCO Prime Limited Maturity Strategy Fund 
will be to seek maximum current income, consistent with preservation of 
capital and daily liquidity. The investment objective of PIMCO 
Intermediate Municipal Bond Strategy Fund and PIMCO Short Term 
Municipal Bond Strategy Fund will be to seek tax-exempt income, 
consistent with preservation of capital.
    2. Applicants request that the order apply to any future series of 
the Trust or of other open-end management companies that may utilize 
active management investment strategies (``Future Funds'').\1\ Any 
Future Fund

[[Page 54867]]

will (a) be advised by the Advisor or an entity controlling, controlled 
by, or under common control with the Advisor, and (b) comply with the 
terms and conditions of the order. The Initial Fund and Future Funds 
together are the ``Funds.'' Each Fund will consist of a portfolio of 
securities (including fixed-income securities and/or equity securities) 
and/or currencies (``Portfolio Instruments'').\2\ Funds holding non-
U.S. investments are ``Global Funds.'' Each Fund will operate as an 
actively managed exchange-traded fund (``ETF'').
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    \1\ All entities that currently intend to rely on the order are 
named as applicants. Any Funds that rely on the order in the future 
will comply with the terms and conditions of the application. An 
Investing Fund (as defined below) may rely on the order only to 
invest in Funds and not in any other registered investment company.
    \2\ To the extent consistent with other investment limitations, 
the Initial Funds may invest in mortgage- or asset-backed 
securities, including TBA Transactions (defined below), and may 
engage in forward commitment transactions. Neither the Initial Funds 
nor any Future Fund will invest in options contracts, futures 
contracts, or swap agreements.
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    3. The Advisor, a Delaware limited liability company, is registered 
as an investment adviser under the Investment Advisers Act of 1940 
(``Advisers Act'') and will be the investment adviser to the Funds. The 
Advisor may enter into sub-advisory agreements with investment advisers 
to act as sub-advisers with respect to the Trust and in connection with 
Future Funds (each a ``Subadvisor''). Any Subadvisor will be registered 
under the Advisers Act. Allianz Global Investors Distributors LLC (the 
``Distributor'') is a broker-dealer that is registered under the 
Securities Exchange Act of 1934 (the ``Exchange Act'') and will act as 
the distributor and principal underwriter of the Funds.
    4. Applicants anticipate that a Creation Unit will consist of at 
least 50,000 Shares and that the price of a Share will range from $20 
to $200. All orders to purchase Creation Units must be placed with the 
Distributor by or through a party that has executed a participant 
agreement with the Distributor and the transfer agent with respect to 
the creation and redemption of Creation Units (``Authorized 
Participant''). An Authorized Participant must be either: (1) A broker 
or dealer registered under the Exchange Act (``Broker'') or other 
participant in the Continuous Net Settlement (``CNS'') System of the 
National Securities Clearing Corporation (``NSCC''), a clearing agency 
registered with the Commission, or (2) a participant in the Depository 
Trust Company (``DTC'' and such participant, a ``DTC Participant''). 
The Initial Funds and certain Future Funds will generally be purchased 
entirely for cash (``All-Cash Payments'') and will generally be 
redeemed in-kind for certain specified Portfolio Instruments 
(``Redemption Instruments''). However, the Trust reserves the right to 
permit purchases of Creation Units by means of an in-kind tender of 
specified instruments (``Deposit Instruments'') and to permit cash 
redemptions.\3\ In-kind purchases and redemptions will be accompanied 
by a small cash balancing amount to ensure that the transactions occur 
at net asset value (``NAV''). The Trust reserves the right to permit, 
under certain circumstances, a purchaser of Creation Units to 
substitute cash in lieu of depositing some or all of the required 
Deposit Instruments.
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    \3\ Applicants state that in determining whether a particular 
Fund will be selling or redeeming Creation Units on a cash or in-
kind basis, the key consideration will be the benefit which would 
accrue to Fund investors. Applicants state that in many cases, 
particularly to the extent the Deposit Instruments (as defined 
below) are less liquid, investors may benefit by the use of all cash 
purchases because the Advisor would execute trades rather than 
Market Makers (as defined below). Applicants believe that the 
Advisor may be able to obtain better execution in bond transactions 
due to its size, experience and potentially stronger relationships 
in the fixed income markets. With respect to redemptions, tax 
considerations may warrant in-kind redemptions, which do not result 
in a taxable event for the Fund.
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    5. An investor purchasing 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 of Creation Units.\4\ The maximum 
Transaction Fees relevant to each Fund will be completely disclosed in 
the prospectus (``Prospectus'' 1A \5\ or other documentation. All 
orders to purchase Creation Units will be placed with the Distributor 
by or through an Authorized Participant, and it will be the 
Distributor's responsibility to transmit all purchase orders to the 
relevant Fund. The Distributor also will be responsible for delivering 
a Prospectus to those persons purchasing Creation Units and for 
maintaining records of both the orders placed with it and the 
confirmations of acceptance furnished by it.
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    \4\ Where a Fund permits an in-kind purchaser to deposit cash in 
lieu of depositing one or more Deposit Instruments, the purchaser 
may be assessed a higher Transaction Fee to offset the transaction 
cost to the Fund of buying those particular Deposit Instruments.
    \5\ All representations and conditions contained in the 
application that require a Fund to disclose particular information 
in the Fund's Prospectus and/or annual report shall be effective 
with respect to the Fund until the time that the Fund complies with 
the disclosure requirements adopted by the Commission in Investment 
Company Act Release No. 28584 (Jan. 13, 2009).
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    6. Purchasers of Shares in Creation Units may hold such Shares or 
may sell such Shares into the secondary market. Shares will be listed 
and traded at negotiated prices on a national securities exchange as 
defined in section 2(a)(26) of the Act (the ``Stock Exchange''). It is 
expected that one or more member firms of the listing Stock Exchange 
will be designated to act as a specialist and maintain a market for 
Shares on the Stock Exchange (``Specialist''), or if Nasdaq is the 
listing Stock Exchange, one or more member firms of Nasdaq will act as 
a market maker (``Market Maker'') and maintain a market for Shares.\6\ 
The price of the Shares trading on the Stock Exchange will be based on 
a current bid-offer market. Shares sold in the secondary market will be 
subject to customary brokerage commissions and charges.
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    \6\ If Shares are listed on Nasdaq, no Specialist will be 
contractually obligated to make a market in Shares. Rather, under 
Nasdaq's listing requirements, two or more Market Makers will be 
registered in Shares and required to make a continuous, two-sided 
market or face regulatory sanctions.
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    7. Applicants expect that purchasers of Creation Units will include 
arbitrageurs. The Specialists or Market Makers, in providing a fair and 
orderly secondary market for Shares, also may purchase Creation Units 
for use in their own market making activities. Applicants expect that 
secondary market purchasers of Shares will include both institutional 
and retail investors.\7\ Applicants expect that the price at which the 
Shares trade will be disciplined by arbitrage opportunities created by 
the ability to continually purchase or redeem Creation Units at their 
NAV, which should ensure that the Shares will not trade at a material 
discount or premium in relation to their NAV.
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    \7\ Shares will be registered in book-entry form only. DTC or 
its nominee will be the record or registered owner of all 
outstanding Shares. Beneficial ownership of Shares will be shown on 
the records of DTC or DTC Participants.
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    8. Shares will not be individually redeemable, and owners of Shares 
may acquire those Shares from a Fund, or tender such Shares for 
redemption to the Fund, in Creation Units only. To redeem, an investor 
must accumulate enough Shares to constitute a Creation Unit. Redemption 
requests must be placed by or through an Authorized Participant. 
Applicants currently contemplate that Creation Units of the Initial 
Funds will be redeemed principally in-kind (together with a balancing 
cash payment).\8\ To the extent

[[Page 54868]]

a Fund utilizes in-kind redemptions, an investor redeeming a Creation 
Unit will receive the Redemption Instruments, which, applicants expect, 
in most cases will be the same as the Deposit Instruments required of 
investors purchasing Creation Units on the same day. The redeeming 
investor also must pay to the Fund a Transaction Fee.
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    \8\ Applicants state that each Fund intends to substitute a 
cash-in-lieu amount to replace any Deposit Instrument or Redemption 
Instrument that is a ``to-be-announced transaction'' or ``TBA 
Transaction.'' A TBA transaction is a method of trading mortgage-
backed securities. In a TBA Transaction, 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 Transaction will be equivalent 
to the value of the TBA Transaction listed as a Deposit Instrument 
or Redemption Instrument.
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    9. Applicants state that in accepting Deposit Instruments and 
satisfying redemptions with Redemption Instruments, the relevant Funds 
will comply with the federal securities laws, including that the 
Deposit Instruments and Redemption Instruments are sold in transactions 
that would be exempt from registration under the Securities Act of 1933 
(``Securities Act'').\9\ To the extent in-kind purchases and 
redemptions are utilized, a Creation Unit will be purchased or redeemed 
from the Funds for a basket of Deposit Instruments or Redemption 
Instruments that corresponds pro rata, to the extent practicable, to 
the Fund portfolio plus a specified cash payment.\10\
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    \9\ In accepting Deposit Instruments and satisfying redemptions 
with Redemption Instruments 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. The 
Prospectus for a Fund 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.
    \10\ In some cases, for example, applicants state that it is 
impossible to break up bonds beyond certain minimum sizes needed for 
transfer and settlement, so there may be minor differences between a 
basket of Deposit Instruments or Redemption Instruments and a true 
pro rata slice of a Fund portfolio.
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    10. Neither the Trust nor any Fund will be marketed or otherwise 
held out as an ``open-end investment company'' or a ``mutual fund.'' 
Instead, each Fund will be marketed as an ``actively-managed exchange-
traded fund.'' Any advertising material where features of obtaining, 
buying or selling Creation Units are described or where there is 
reference to redeemability will prominently disclose that Shares are 
not individually redeemable and that owners of Shares may acquire 
Shares from a Fund and tender those Shares for redemption to a Fund in 
Creation Units only. The same approach will be followed in the 
statement of additional information (``SAI''), shareholder reports and 
any marketing or advertising materials issued or circulated in 
connection with the Shares.
    11. The Funds' Web site, which will be publicly available prior to 
the public offering of Shares, will include the Prospectus and 
information about the Funds that is updated on a daily basis, including 
the mid-point of the bid/ask spread at the time of the calculation of 
NAV (``Bid/Ask Price''). On each Business Day, which is defined to 
include any day that the Trust is open for business as required by 
section 22(e) of the Act, before commencement of trading in Shares on 
the Stock Exchange, the Fund will disclose on its website the 
identities and quantities of the Portfolio Instruments and other assets 
held by the Fund that will form the basis for the Fund's calculation of 
NAV at the end of the Business Day.\11\
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    \11\ Applicants note that under accounting procedures followed 
by the Funds, trades made on the prior Business Day (``T'') will be 
booked and reflected in NAV on the current Business Day (``T+1''). 
Accordingly, the Funds will be able to disclose at the beginning of 
the Business Day the portfolio that will form the basis for the NAV 
calculation at the end of the Business Day.
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Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act 
granting 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 granting an exemption from sections 17(a)(1) and 
17(a)(2) of the Act, and under section 12(d)(1)(J) for an exemption 
from sections 12(d)(1)(A) and (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 provision of section 12(d)(1) if the exemption 
is consistent with the public interest and the protection of investors.

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

    3. Section 5(a)(1) of the Act defines an ``open-end company'' as a 
management investment company that is offering for sale or has 
outstanding any redeemable security of which it is the issuer. Section 
2(a)(32) of the Act defines a redeemable security as any security, 
other than short-term paper, under the terms of which the holder, upon 
its presentation to the issuer, is entitled to receive approximately a 
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 each Fund, as a series of 
an open-end management investment company, to issue Shares that are 
redeemable in Creation Units only. Applicants state that investors may 
purchase Shares in Creation Units from each Fund and redeem Creation 
Units from each Fund. Applicants further state that because the market 
price of Shares will be disciplined by arbitrage opportunities, 
investors should be able to sell Shares in the secondary market at 
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 that is currently being offered to 
the public by or through an 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 the 
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)

[[Page 54869]]

prevent dilution caused by certain riskless-trading schemes by 
principal underwriters and contract dealers, (b) prevent unjust 
discrimination or preferential treatment among buyers resulting from 
sales at different prices, and (c) assure an orderly distribution of 
investment company shares by eliminating price competition from Brokers 
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 the Funds as parties and cannot 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 arbitrage activity will ensure that the 
difference between the market price of Shares and their NAV remains 
narrow.

Section 22(e) of the Act

    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 the settlement of redemptions of Creation Units of the 
Global Funds is contingent not only on the settlement cycle of the U.S. 
securities markets but also on the delivery cycles present in foreign 
markets in which the Global Funds invest. Applicants state that 
delivery cycles for transferring Portfolio Instruments to redeeming 
investors, coupled with local market holiday schedules, will require a 
delivery process longer than seven calendar days for a Global Fund. 
Applicants request relief under section 6(c) of the Act from section 
22(e) to allow a Global Fund to pay redemption proceeds up to 12 
calendar days after the tender of any Creation Units for redemption. 
Except as disclosed in the relevant Global Fund's Prospectus and/or 
SAI, applicants expect that each Global Fund will be able to deliver 
redemption proceeds within seven days.\12\ With respect to Future Funds 
that are Global 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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    \12\ Rule 15c6-1 under the Exchange Act requires that most 
securities transactions be settled within three business days of the 
trade date. Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will affect any obligations that it 
may otherwise have under rule 15c6-1.
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    8. Applicants state that section 22(e) was designed to prevent 
unreasonable and unforeseen delays in the payment of redemption 
proceeds. Applicants assert that the requested relief will not lead to 
the problems that section 22(e) was designed to prevent. Applicants 
state that the SAI will disclose those local holidays (over the period 
of at least one year following the date of the SAI), if any, that are 
expected to prevent the delivery of redemption proceeds in seven 
calendar days, and the maximum number of days needed to deliver the 
proceeds for each affected Global Fund. Applicants are not seeking 
relief from section 22(e) with respect to Global Funds that do not 
effect creations and redemptions of Creation Units in-kind.

Section 12(d)(1) of the Act

    9. 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 total assets of the 
acquiring company. Section 12(d)(1)(B) of the Act prohibits a 
registered open-end investment company, its principal underwriter, or 
any other broker or dealer from selling its 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 relief to permit Investing Funds (as defined 
below) to acquire Shares in excess of the limits in section 12(d)(1)(A) 
of the Act and to permit the Funds, their principal underwriters and 
any Brokers to sell Shares to Investing Funds in excess of the limits 
in section 12(d)(l)(B) of the Act. Applicants request that these 
exemptions apply to: (1) Any Fund that is currently or subsequently 
part of the same ``group of investment companies'' as the Initial Funds 
within the meaning of section 12(d)(1)(G)(ii) of the Act as well as any 
principal underwriter for the Fund and any Brokers selling Shares of a 
Fund to an Investing Fund; and (2) each management investment company 
or unit investment trust registered under the Act that is not part of 
the same ``group of investment companies'' as the Funds within the 
meaning of section 12(d)(1)(G)(ii) of the Act and that enters into a 
FOF Participation Agreement (as defined below) with a Fund (such 
management investment companies are referred to herein as ``Investing 
Management Companies,'' such unit investment trusts are referred to 
herein as ``Investing Trusts,'' and Investing Management Companies and 
Investing Trusts together are referred to herein as ``Investing 
Funds''). Investing Funds do not include the Funds. Each Investing 
Trust will have a sponsor (``Sponsor'') and each Investing Management 
Company will have an investment adviser within the meaning of section 
2(a)(20)(A) of the Act (``Investing Fund Advisor'') that does not 
control, is not controlled by or under common control with the Advisor. 
Each Investing Management Company may also have one or more investment 
advisers within the meaning of section 2(a)(20)(B) of the Act (each, an 
``Investing Fund Sub-Advisor'').
    11. Applicants assert that the proposed transactions will not lead 
to any of the abuses that section 12(d)(1) was designed to prevent. 
Applicants submit that the proposed conditions to the requested relief 
address the concerns underlying the limits in section 12(d)(1), which 
include concerns about undue influence, excessive layering of fees and 
overly complex structures.
    12. Applicants believe that neither an Investing Fund nor an 
Investing Fund Affiliate would be able to exert undue influence over a 
Fund.\13\ To limit the control that an Investing Fund may have over a 
Fund, applicants propose a condition prohibiting an Investing Fund 
Advisor or a Sponsor, any person controlling, controlled by, or under 
common control with the Investing Fund Advisor or Sponsor, and any 
investment company or issuer that would be an investment company but

[[Page 54870]]

for section 3(c)(1) or 3(c)(7) of the Act that is advised or sponsored 
by the Investing Fund Advisor or Sponsor, or any person controlling, 
controlled by, or under common control with the Investing Fund Advisor 
or Sponsor (``Investing Fund's Advisory Group'') from controlling 
(individually or in the aggregate) a Fund within the meaning of section 
2(a)(9) of the Act. The same prohibition would apply to any Investing 
Fund Sub-Advisor, any person controlling, controlled by or under common 
control with the Investing Fund Sub-Advisor, and any investment company 
or issuer that would be an investment company but for 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 Sub-Advisor or any person 
controlling, controlled by or under common control with the Investing 
Fund Sub-Advisor (``Investing Fund's Sub-Advisory Group'').
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    \13\ ``Investing Fund Affiliate'' is the Investing Fund Advisor, 
Investing Fund Sub-Advisor, Sponsor, promoter and principal 
underwriter of an Investing Fund, and any person controlling, 
controlled by or under common control with any of these entities. 
``Fund Affiliate'' is an investment adviser, promoter, or principal 
underwriter of a Fund and any person controlling, controlled by or 
under common control with any of these entities.
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    13. 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 Advisor, Investing Fund Sub-
Advisor, employee or Sponsor of the Investing Fund, or a person of 
which any such officer, director, member of an advisory board, 
Investing Fund Advisor or Investing Fund Sub-Advisor, employee or 
Sponsor is an affiliated person (except that any person whose 
relationship to the Fund is covered by section 10(f) of the Act is not 
an Underwriting Affiliate).
    14. Applicants do not believe that the proposed arrangement will 
involve excessive layering of fees. The board of directors or trustees 
of any Investing Management Company, including a majority of the 
directors or trustees who are not ``interested persons'' within the 
meaning of section 2(a)(19) of the Act (``disinterested directors or 
trustees''), will be required to find that the advisory fees charged 
under the contract are based on services provided that will be in 
addition to, rather than duplicative of, services provided under the 
advisory contract of any Fund in which the Investing Management Company 
may invest. In addition, an Investing Fund Advisor, trustee of a 
Investing Trust (``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-l under the Act) received 
from a Fund by the Investing Fund Advisor, Trustee or Sponsor or an 
affiliated person of the Investing Fund Advisor, Trustee or Sponsor, 
other than any advisory fees paid to the Investing Fund Advisor, 
Trustee or Sponsor or its affiliated person by a Fund, in connection 
with the investment by the Investing Fund in the Fund. Applicants also 
state that any sales charges and/or service fees charged with respect 
to shares of an Investing Fund will not exceed the limits applicable to 
a fund of funds as set forth in Conduct Rule 2830 of the Financial 
Industry Regulatory Authority (``Rule 2830'').
    15. Applicants submit 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) 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.
    16. To ensure that an Investing Fund is aware of the terms and 
conditions of the requested order, the Investing Funds must enter into 
an agreement with the respective Funds (``FOF Participation 
Agreement''). The FOF Participation Agreement will include an 
acknowledgment from the Investing Fund that it may rely on the order 
only to invest in the Funds and not in any other investment company.

Section 17(a) 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 person (``second tier affiliates''), from selling any security to 
or purchasing any security from the company. Section 2(a)(3) of the Act 
defines ``affiliated person'' to include 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 and 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 Advisor or an entity controlling, 
controlled by or under common control with the Advisor 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 Advisor or an entity controlling, 
controlled by or under common control with the Advisor (an ``Affiliated 
Fund'').
    18. Applicants request an exemption under sections 6(c) and 17(b) 
of the Act from section 17(a) of the Act in order to permit in-kind 
purchases and redemptions of Creation Units from the Funds by persons 
that are affiliated persons or second tier affiliates of the Funds 
solely by virtue of one or more of the following: (a) Holding 5% or 
more, or in excess of 25% of the outstanding 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. Applicants also request 
an exemption in order to permit a Fund to sell its Shares to and redeem 
its Shares from, and engage in the in-kind transactions that would 
accompany such sales and redemptions with, any Investing Fund of which 
the Fund is an affiliated person or second-tier affiliate.\14\
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    \14\ Applicants expect that most Investing Funds will purchase 
Shares in the secondary market and will not purchase Creation Units 
directly from a Fund.
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    19. Applicants contend that no useful purpose would be served by 
prohibiting such affiliated persons from making in-kind purchases or 
in-kind redemptions of Shares of a Fund in Creation Units. The deposit 
procedures for in-kind purchases of Creation Units and the redemption 
procedures for in-kind redemptions will be the same for all purchases 
and redemptions. Deposit Instruments and Redemption Instruments will be 
valued in the same manner as those Portfolio Instruments currently held 
by the relevant Funds. Therefore, applicants state that in-kind 
purchases and redemptions will afford no opportunity for the specified 
affiliated persons of a Fund to effect a transaction detrimental to the 
other holders of Shares. Applicants also believe that in-kind purchases 
and redemptions will not result in abusive self-dealing or overreaching 
of the Fund.
    20. Applicants also submit that the sale of Shares to and 
redemption of Shares from an Investing Fund satisfies

[[Page 54871]]

the standards for relief under sections 17(b) and 6(c) of the Act. 
Applicants note that that any consideration paid for the purchase or 
redemption of Shares directly from a Fund will be based on the NAV of 
the Fund in accordance with policies and procedures set forth in the 
Fund's registration statement.\15\ Applicants also state that the 
proposed transactions will be consistent with the policies of each 
Investing Fund and Fund and with the general purposes of the Act.
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    \15\ 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 of a Fund 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.
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Applicants' Conditions

    Applicants agree that any order of the Commission granting the 
requested relief will be subject to the following conditions: \16\
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    \16\ See note 5, supra.
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A. Actively Managed Exchange-Traded Fund Relief

    1. Each Prospectus will clearly disclose that, for purposes of the 
Act, Shares are issued by a registered investment company and that the 
acquisition of Shares by investment companies and companies relying on 
sections 3(c)(1) or 3(c)(7) of the Act is subject to the restrictions 
of section 12(d)(1) of the Act, except as permitted by an exemptive 
order that permits registered investment companies to invest in a Fund 
beyond the limits in section 12(d)(1), subject to certain terms and 
conditions, including that the registered investment company enter into 
a FOF Participation Agreement with the Fund regarding the terms of the 
investment.
    2. As long as the Funds operate in reliance on the requested order, 
the Shares of the Funds will be listed on a Stock 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 the Fund is an actively managed 
exchange-traded fund. Each Prospectus will prominently disclose that 
the Shares are not individually redeemable shares and will disclose 
that the owners of the Shares may acquire those Shares from the Fund 
and tender those Shares for redemption to the Fund in Creation Units 
only. 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.
    4. 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: (a) The prior Business Day's NAV and 
the Bid/Ask Price, and a calculation of the premium or discount of the 
Bid/Ask Price against such NAV; and (b) data in chart format displaying 
the frequency distribution of discounts and premiums of the daily Bid/
Ask Price against the NAV, within appropriate ranges, for each of the 
four previous calendar quarters (or for the life of the Fund, if 
shorter).
    5. The Prospectus and annual report for each Fund will also 
include: (a) The information listed in condition A.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 
(or for the life of the Fund, if shorter), and (b) calculated on a per 
Share basis for one-, five- and ten-year periods (or for the life of 
the Fund, if shorter), the cumulative total return and the average 
annual total return based on NAV and Bid/Ask Price.
    6. On each Business Day, before commencement of trading in Shares 
on the Stock Exchange, the Fund will disclose on its website the 
identities and quantities of the Portfolio Instruments and other assets 
held by the Fund that will form the basis for the Fund's calculation of 
NAV at the end of the Business Day.
    7. The Advisor or any Subadvisor, directly or indirectly, will not 
cause any Authorized Participant (or any investor on whose behalf an 
Authorized Participant may transact with the Fund) to acquire any 
Deposit Instrument for the Fund through a transaction in which the Fund 
could not engage directly.
    8. The requested order will expire on the effective date of any 
Commission rule under the Act that provides relief permitting the 
operation of actively-managed 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 voting securities 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 voting securities 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 Sub-Advisor or a person controlling, controlled by or under common 
control with the Investing Fund Sub-Advisor acts as the investment 
adviser within the meaning of section 2(a)(20)(A) of the Act.
    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 Advisor and any Investing Fund Sub-Advisor are 
conducting the investment program of the Investing Management Company 
without taking into account any consideration received by the Investing 
Management Company or an Investing Fund Affiliate from a Fund or a Fund 
Affiliate in connection with any services or transactions.
    4. Once an investment by an Investing Fund in the securities of a 
Fund exceeds the limit in section 12(d)(1)(A)(i) of the Act, the board 
of trustees (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: (i) Is fair and 
reasonable in relation to the nature and quality of the services and 
benefits received by the Fund; (ii) 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 (iii) 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 advisor(s), 
or any person controlling, controlled by or under common control with 
such investment advisor(s).

[[Page 54872]]

    5. The Investing Fund Advisor, or 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-l under 
the Act) received from a Fund by the Investing Fund Advisor, or Trustee 
or Sponsor, or an affiliated person of the Investing Fund Advisor, or 
Trustee or Sponsor, other than any advisory fees paid to the Investing 
Fund Advisor, 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 Sub-Advisor will waive fees otherwise payable 
to the Investing Fund Sub-Advisor, directly or indirectly, by the 
Investing Management Company in an amount at least equal to any 
compensation received from a Fund by the Investing Fund Sub-Advisor, or 
an affiliated person of the Investing Fund Sub-Advisor, other than any 
advisory fees paid to the Investing Fund Sub-Advisor or its affiliated 
person by the Fund, in connection with the investment by the Investing 
Management Company in the Fund made at the direction of the Investing 
Fund Sub-Advisor. In the event that the Investing Fund Sub-Advisor 
waives fees, the benefit of the waiver will be passed through to the 
Investing Management Company.
    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 a 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 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 Investing Fund in the Fund. The Board will consider, 
among other things: (i) Whether the purchases were consistent with the 
investment objectives and policies of the Fund; (ii) 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 
(iii) whether the amount of securities purchased by the Fund in 
Affiliated Underwritings and the amount purchased directly from an 
Underwriting Affiliate have changed significantly from prior years. The 
Board will take any appropriate actions based on its review, including, 
if appropriate, the institution of procedures designed to assure that 
purchases of securities in Affiliated Underwritings are in the best 
interest of shareholders.
    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 a Fund 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 advisors, 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 shares of a Fund 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 Rule 2830.
    12. No Fund relying on this section 12(d)(1) relief 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, 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, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-25560 Filed 10-22-09; 8:45 am]
BILLING CODE 8011-01-P