[Federal Register Volume 77, Number 243 (Tuesday, December 18, 2012)]
[Notices]
[Pages 74884-74891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-30380]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30302; 812-13959]
Cambria Investment Management, L.P. and Cambria ETF Trust; Notice
of Application
December 12, 2012.
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, 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.
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Applicants: Cambria Investment Management, L.P. (``Cambria'') and
Cambria ETF Trust (the ``Trust'').
Summary of Application: Applicants request an order that permits: (a)
Actively-managed series of certain open-end management investment
companies to issue shares (``Shares'') redeemable in large aggregations
only (``Creation Units''); (b) secondary market transactions in Shares
to occur at negotiated market prices; (c) certain series to pay
redemption proceeds, under certain circumstances, more than seven days
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.
DATES: Filing Dates: The application was filed on September 12, 2011,
and amended on February 29, 2012, July 9, 2012, November 13, 2012, and
December 12, 2012.\1\
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\1\ A notice for this application was issued on November 30,
2012 (Investment Company Act Rel. No. 30286). The application has
been amended to revise certain representations with respect to the
Funds' investments in derivatives and we are therefore issuing a
revised notice for the application.
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 January 3, 2013, 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
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notification by writing to the Commission's Secretary.
ADDRESSES: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090. Applicants:
2321 Rosecrans Avenue, Suite 3225, El Segundo, CA 92045.
FOR FURTHER INFORMATION CONTACT: Barbara T. Heussler, Senior Counsel,
at (202) 551-6990 or Jennifer L. Sawin, Branch Chief, at (202) 551-6821
(Division of Investment Management, Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or an applicant
using the Company name box, at http://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicants' Representations
1. The Trust is registered as an open-end management investment
company under the Act and is a statutory trust organized under the laws
of Delaware. The Trust will initially offer an actively-managed series,
Cambria Shareholder Yield ETF (the ``Initial Fund''). The investment
objective of the Initial Fund will be to seek to preserve and grow
capital by investing in domestic equity securities and in particular in
companies that will generate investment returns through the payment of
dividends and through the appreciation of their share price.
2. Cambria, a California limited partnership, will be the
investment adviser to the Initial Fund. Cambria is and any other
Adviser (as defined below) is or will be registered as an ``investment
adviser'' under section 203 of the Investment Advisers Act of 1940
(``Advisers Act''). The Adviser may enter into sub-advisory agreements
with investment advisers to act as sub-advisers with respect to the
Funds (each, a ``Subadviser''). Any Subadviser will be registered under
the Advisers Act or not subject to such registration. A registered
broker-dealer under the
[[Page 74885]]
Securities Exchange Act of 1934 (``Exchange Act''), which may be an
affiliate of the Adviser, will act as the distributor and principal
underwriter of the Funds (``Distributor'').
3. Applicants request that the order apply to the Initial Fund and
any future series of the Trust or of other existing or future open-end
management companies that may utilize active management investment
strategies (``Future Funds''). Any Future Fund will (a) be advised by
Cambria or an entity controlling, controlled by, or under common
control with Cambria (each such entity and any successor thereto
included in the term ``Adviser'') \2\, and (b) comply with the terms
and conditions of the application.\3\ The Initial Fund and Future Funds
together are the ``Funds''. Each Fund will operate as an exchange-
traded fund (``ETF''). In addition to the instruments described above,
each Fund reserves the right to invest in other instruments, including
short sales (``Short Positions''). Each Fund will consist of a
portfolio of securities (including fixed income securities and/or
equity securities) and/or currencies traded in the U.S. or in non-U.S.
markets, assets, and other positions (``Portfolio Instruments''). To
the extent consistent with other investment limitations, the Funds may
invest in ETFs as well as shares of certain exchange-traded products
that are not registered investment companies,\4\ cash and cash
equivalents, mortgage- or asset-backed securities, including ``to-be-
announced transactions'' (``TBA Transactions'') \5\, and may engage in
forward commitment transactions,\6\ forward foreign currency contracts,
options contracts, futures contracts or swap agreements.\7\ Funds may
also invest in ``Depositary Receipts''.\8\ A Fund will not invest in
any Depositary Receipts that the Adviser, or Subadviser as applicable,
deems to be illiquid or for which pricing information is not readily
available. The Funds might include one or more ETFs which invest in
other open-end and/or closed-end investment companies and/or ETFs.\9\
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\2\ For purposes of the requested order, a ``successor'' is
limited to an entity that results from a reorganization into another
jurisdiction or a change in the type of business organization.
\3\ All entities that currently intend to rely on the order are
named as applicants. Any entity that relies 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.
\4\ The Funds may invest in exchange-traded products that invest
primarily in commodities or currency but otherwise operate in a
manner similar to ETFs. The Funds may also invest in exchange-traded
notes.
\5\ 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.
\6\ In a forward commitment transaction, the buyer/seller enters
into a contract to purchase/sell, for example, specific securities
for a fixed price at a future date beyond normal settlement time.
\7\ If a Fund invests in derivatives: (a) The Board periodically
will review and approve (i) the Fund's use of derivatives and (ii)
how the Fund's investment adviser assesses and manages risk with
respect to the Fund's use of derivatives; and (b) the Fund's
disclosure of its use of derivatives in its offering documents and
periodic reports will be consistent with relevant Commission and
staff guidance.
\8\ Depositary Receipts are typically issued by a financial
institution, a ``depositary'', and evidence ownership in a security
or pool of securities that have been deposited with the depositary.
No affiliated persons of applicants, any Adviser, Subadviser or the
Funds will serve as the depositary bank for any Depositary Receipts
held by a Fund.
\9\ In no case, however, will such a Fund rely on the exemption
from Section 12(d)(1) being requested in the application.
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4. Applicants also request that any exemptions under section
12(d)(1)(J) of the Act from sections 12(d)(1)(A) and (B) apply to: (1)
Any Fund that is currently or subsequently part of the same ``group of
investment companies'' as the Initial Fund 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, as defined below; 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, 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'').\10\ Investing Funds do not include the Funds.
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\10\ Applicants anticipate that there may be Investing Funds
that are not part of the same group of investment companies as the
Funds, but are subadvised by an Adviser.
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5. Applicants anticipate that a Creation Unit will consist of at
least 25,000 Shares and 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 (``Authorized Participant'') that has
entered into a participant agreement with the Distributor and the
transfer agent of the Trust with respect to the creation and redemption
of Creation Units. An Authorized Participant is either: (a) A broker or
dealer registered under the Exchange Act (``Broker'') or other
participant in the Continuous Net Settlement System of the National
Securities Clearing Corporation (``NSCC''), a clearing agency
registered with the Commission and affiliated with the Depository Trust
Company (``DTC''); or (b) a participant in the DTC (such participant,
``DTC Participant''). Shares of the Funds will be purchased and
redeemed in Creation Units and generally on an ``in-kind'' basis.
Except where the purchase or redemption will include cash under the
limited circumstances specified below, purchasers will be required to
purchase Creation Units by making an in-kind deposit of specified
instruments (``Deposit Instruments''), and shareholders redeeming their
Shares will receive an in-kind transfer of specified instruments
(``Redemption Instruments'').\11\ On any given Business Day\12\, the
names and quantities of the instruments that constitute the Deposit
Instruments and the names and quantities of the instruments that
constitute the Redemption Instruments will be identical, and these
instruments may be referred to, in the case of either a purchase or a
redemption, as the ``In-kind Basket.'' In addition, the In-kind Basket
will correspond pro rata to the positions in the Fund's portfolio
(including cash positions),\13\ except: (a) In the case of bonds, for
minor differences when it is impossible to break up bonds beyond
certain minimum sizes needed for transfer and settlement; (b) for minor
differences when rounding is necessary to eliminate fractional shares
or lots that are not tradeable round lots;\14\ or (c) TBA
[[Page 74886]]
Transactions, Short Positions\15\ or other positions that cannot be
transferred in kind\16\ will be excluded from the In-kind Basket.\17\
If there is a difference between the net asset value attributable to a
Creation Unit and the aggregate market value of the In-kind Basket
exchanged for the Creation Unit, the party conveying instruments with
the lower value will pay to the other an amount in cash equal to that
difference (the ``Balancing Amount'').
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\11\ The Funds must comply with the federal securities laws in
accepting Deposit Instruments and satisfying redemptions with
Redemption Instruments, including that the Deposit Instruments and
Redemption Instruments are sold in transactions that would be exempt
from registration under the Securities Act. 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 Funds will comply with the
conditions of rule 144A.
\12\ ``Business Day'' is defined to include any day that the
Trust is open for business as required by Section 22(e) of the Act.
\13\ The portfolio used for this purpose will be the same
portfolio used to calculate the Fund's NAV for that Business Day.
\14\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
\15\ To the extent required by section 18(f) of the Act,
Portfolio Instruments and/or cash held in a Fund's portfolio will be
segregated to cover Short Positions in such portfolio. See,
Securities Trading Practices of Registered Investment companies,
Investment company Act Rel. No. 10666 (Apr. 18, 1979).
\16\ This includes instruments that can be transferred in kind
only with the consent of the original counterparty to the extent the
Fund does not intend to seek such consents.
\17\ Because these instruments will be excluded from the In-kind
Basket, their value will be reflected in the determination of the
Balancing Amount (defined below).
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6. Purchases and redemptions of Creation Units may be made in whole
or in part on a cash basis, rather than in kind, solely under the
following circumstances: (a) To the extent there is a Balancing Amount,
as described above; (b) if, on a given Business Day, the Fund announces
before the open of trading that all purchases, all redemptions or all
purchases and redemptions on that day will be made entirely in cash;
(c) if, upon receiving a purchase or redemption order from an
Authorized Participant, the Fund determines to require the purchase or
redemption, as applicable, to be made entirely in cash;\18\ (d) if, on
a given Business Day, the Fund requires all Authorized Participants
purchasing or redeeming Shares on that day to deposit or receive (as
applicable) cash in lieu of some or all of the Deposit Instruments or
Redemption Instruments, respectively, solely because: (i) Such
instruments are not eligible for transfer through either the NSCC
Process or DTC Process; or (ii) in the case of Funds holding non-U.S.
investments (``Global Funds''), such instruments are not eligible for
trading due to local trading restrictions, local restrictions on
securities transfers, or other similar circumstances; or (e) if the
Fund permits an Authorized Participant to deposit or receive (as
applicable) cash in lieu of some or all of the Deposit Instruments or
Redemption Instruments, respectively, solely because: (i) Such
instruments are, in the case of the purchase of a Creation Unit, not
available in sufficient quantity; (ii) such instruments are not
eligible for trading by an Authorized Participant or the investor on
whose behalf the Authorized Participant is acting; or (iii) a holder of
Shares of a Global Fund would be subject to unfavorable income tax
treatment if the holder receives redemption proceeds in kind.\19\
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\18\ In determining whether a particular Fund will sell or
redeem Creation Units entirely on a cash or in-kind basis (whether
for a given day or a given order), the key consideration will be the
benefit that would accrue to the Fund and its investors. Purchases
of Creation Units either on an all cash basis or in-kind are
expected to be neutral to the Funds from a tax perspective. In
contrast, cash redemptions typically require selling portfolio
holdings, which may result in adverse tax consequences for the
remaining Fund shareholders that would not occur with an in-kind
redemption. As a result, tax considerations may warrant in-kind
redemptions.
\19\ A ``custom order'' is any purchase or redemption of Shares
made in whole or in part on a cash basis in reliance on clause
(e)(i) or (e)(ii).
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7. Each Business Day, before the open of trading on the national
securities exchange as defined in section 2(a)(26) of the Act (``Stock
Exchange'') upon which its Shares are listed and traded, the Fund will
cause to be published through the NSCC the names and quantities of the
instruments comprising the In-kind Basket, as well as the estimated
Balancing Amount (if any), for that day. The published In-kind Basket
will apply until a new In-kind Basket is announced on the following
Business Day, and there will be no intra-day changes to the In-kind
Basket, except to correct errors in the published In-kind Basket. The
Stock Exchange will disseminate every 15 seconds throughout the trading
day through the facilities of the Consolidated Tape Association an
amount representing, on a per Share basis, the sum of the current value
of the Portfolio Instruments that were publicly disclosed prior to the
commencement of trading in Shares on the Stock Exchange.
8. An investor purchasing or redeeming a Creation Unit from a Fund
may be charged a fee (``Transaction Fee'') to protect existing
shareholders of the Funds from the dilutive costs associated with the
purchase and redemption of Creation Units.\20\ All orders to purchase
Creation Units will be placed with the Distributor by or through an
Authorized Participant and the Distributor will transmit all purchase
orders to the relevant Fund. The Distributor will be responsible for
delivering a prospectus (``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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\20\ Where a Fund, as described in section I.E.1.a, permits an
in-kind purchaser or redeemer to deposit or receive cash in lieu of
one or more Deposit or Redemption Instruments, the purchaser or
redeemer may be assessed a higher Transaction Fee to offset the
transaction cost to the Fund of buying or selling those particular
Deposit or Redemption Instruments.
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9. Shares will be listed and traded at negotiated prices on the
Stock Exchange and traded in the secondary market. Applicants expect
that the Stock Exchange specialists (``Specialists'') or market makers
(``Market Makers'') will be assigned to Shares. The price of Shares
trading on the Stock Exchange will be based on a current bid/offer
market. Transactions involving the purchases and sales of Shares on the
Stock Exchange will be subject to customary brokerage commissions and
charges.
10. Applicants expect that purchasers of Creation Units will
include arbitrageurs. Specialists or Market Makers, acting in their
unique role to provide a fair and orderly secondary market for Shares,
also may purchase Creation Units for use in their own market making
activities.\21\ Applicants expect that secondary market purchasers of
Shares will include both institutional and retail investors.\22\
Applicants expect that arbitrage opportunities created by the ability
to continually purchase or redeem Creation Units at their net asset
value per common Share (``NAV'') should ensure that the Shares will not
trade at a material discount or premium in relation to their NAV.
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\21\ Applicants state that unlike other Stock Exchanges where a
Specialist may oversee trading in Shares, on NASDAQ, numerous Market
Makers buy and sell Shares for their own accounts. 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. No Market Maker or Specialist will be an
affiliated person, or an affiliated person of an affiliated person,
of the Funds, except within Section 2(a)(3)(A) or (C) of the Act due
to ownership of Shares, as described below.
\22\ 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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11. Shares may be redeemed only if tendered in Creation Units.
Redemption requests must be placed by or through an Authorized
Participant. As discussed above, redemptions of Creation Units will
generally be made on an in-kind basis, subject to certain specified
exceptions under which redemptions may be made in whole or in part on a
cash basis, and will be subject to a Transaction Fee.
12. Neither the Trust nor any Fund will be marketed or otherwise
held out as a ``mutual fund.'' Instead, each Fund will be marketed as
an ``actively-managed exchange-traded fund.'' Any
[[Page 74887]]
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.
13. The Funds' Web site, which will be publicly available prior to
the public offering of Shares, will include the Prospectus and
additional quantitative information updated on a daily basis,
including, on a per Share basis for each Fund, the prior Business Day's
NAV and the market closing price or mid-point of the bid/ask spread at
the time of the calculation of such NAV (``Bid/Ask Price''), and a
calculation of the premium or discount of the market closing price or
Bid/Ask Price against such NAV. On each Business Day, before
commencement of trading in Shares on the Stock Exchange, the Fund will
disclose on its Web site the identities and quantities of the Portfolio
Instruments held by the Fund that will form the basis for the Fund's
calculation of NAV at the end of the Business Day.\23\
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\23\ Applicants note that under accounting procedures followed
by the Funds, trades made on the prior Business Day will be booked
and reflected in NAV on the current Business Day. 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 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 (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 provisions 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 the Trust and any Fund to
register as an open-end management investment company and redeem Shares
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
Creation Units will be disciplined by arbitrage opportunities,
investors should be able to sell Shares in the secondary market at
prices that do not vary materially 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 a principal underwriter, except at a current
public offering price described in the prospectus. Rule 22c-1 under the
Act generally requires that a dealer selling, redeeming, or
repurchasing a redeemable security do so only at a price based on its
NAV. Applicants state that secondary market trading in Shares will take
place at negotiated prices, not at a current offering price described
in 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, to permit Shares to
trade at negotiated prices.
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 resulting from sales at different prices, and (c) assure
an orderly distribution system 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 should ensure that
the differences between the market price of Shares and their NAV remain
immaterial.
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
observe that settlement of redemptions of Creation Units of 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 those Funds invest. Applicants have been advised that,
under certain circumstances, the delivery cycles for transferring
Portfolio Instruments to redeeming investors, coupled with local market
holiday schedules, will require a delivery
[[Page 74888]]
process of up to 14 calendar days. Applicants therefore request relief
from section 22(e) in order to provide payment or satisfaction of
redemptions within the maximum number of calendar days required for
such payment or satisfaction in the principal local markets where
transactions in the Portfolio Instruments of each Global Fund
customarily clear and settle, but in all cases no later than 14
calendar days following the tender of a Creation Unit. With respect to
Future Funds that are Global Funds, applicants seek the same relief
from section 22(e) only to the extent that circumstances exist similar
to those described in the application.\24\
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\24\ Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations that they
have under rule 15c6-1 under the Exchange Act. Rule 15c6-1 requires
that most securities transactions be settled within three business
days of the trade date.
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8. Applicants submit that Congress adopted section 22(e) to prevent
unreasonable, undisclosed or unforeseen delays in the actual payment of
redemption proceeds. Applicants state that allowing redemption payments
for Creation Units of a Fund to be made within a maximum of 14 calendar
days will not lead to unreasonable, undisclosed or unforeseen delays in
the redemption process and would not be inconsistent with the spirit
and intent of section 22(e). Applicants state the statement of
additional information (``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, up to
14 calendar days, needed to deliver the proceeds for each affected
Global Fund. Except as disclosed in the SAI for a Fund, deliveries of
redemption proceeds for Global Funds are expected to be made within
seven days. Applicants are not seeking relief from section 22(e) with
respect to Global Funds that do not effect creations or redemptions 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 securities 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)(l)(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 submit that the proposed
conditions to the requested relief are designed to 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.
11. Applicants submit that their proposed conditions address the
concerns regarding the potential for undue influence. To limit the
control that an Investing Fund may have over a Fund, applicants propose
a condition prohibiting the adviser of an Investing Management Company
(``Investing Fund Advisor''), sponsor of an Investing Trust
(``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 for sections
3(c)(l) or 3(c)(7) of the Act that is advised or sponsored by the
Investing Fund Advisor, the 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 sub-adviser
to an Investing Management Company (``Investing Fund Subadviser''), any
person controlling, controlled by, or under common control with the
Investing Fund Subadviser, and any investment company or issuer that
would be an investment company but for sections 3(c)(l) or 3(c)(7) of
the Act (or portion of such investment company or issuer) advised or
sponsored by the Investing Fund Subadviser or any person controlling,
controlled by or under common control with the Investing Fund
Subadviser (``Investing Fund's Subadvisory Group'').
12. Applicants propose a condition to ensure that no Investing Fund
or Investing Fund Affiliate \25\ (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
Subadviser, 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 Subadviser, employee or
Sponsor is an affiliated person. An Underwriting Affiliate does not
include any person whose relationship to the Fund is covered by section
10(f) of the Act.
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\25\ An ``Investing Fund Affiliate'' is defined as the Investing
Fund Advisor, Investing Fund Subadviser, Sponsor, promoter and
principal underwriter of an Investing Fund, and any person
controlling, controlled by or under common control with any of these
entities. A ``Fund Affiliate'' is defined as 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 several conditions to address the concerns
regarding layering of fees and expenses. Applicants note that 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 an 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-1 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
[[Page 74889]]
the investment by the Investing Fund in the Fund. Applicants also
propose a condition to prevent any sales charges or service fees on
shares of an Investing Fund from exceeding the limits applicable to a
fund of funds set forth in NASD Conduct Rule 2830.\26\
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\26\ Any references to NASD Conduct Rule 2830 include any
successor or replacement rule to NASD Conduct Rule 2830 that may be
adopted by FINRA.
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14. 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 sections 3(c)(1) or 3(c)(7) of the Act in excess of
the limits contained in section 12(d)(1)(A) of the Act, except 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.
15. To ensure that the Investing Funds understand and comply with
the terms and conditions of the requested order, any Investing Fund
that intends to invest in a Fund in reliance on the requested order
will be required to enter into a participation agreement (``FOF
Participation Agreement'') with the Fund. 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.
Sections 17(a)(1) and (2) of the Act
16. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such a person (``second tier affiliate''), from selling any security to
or purchasing any security from the company. Section 2(a)(3) of the Act
defines ``affiliated person'' to include 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
defines ``control'' as the power to exercise a controlling influence
over the management or policies of a company and provides that a
control relationship will be presumed where one person owns more than
25% of another person's voting securities. Each Fund may be deemed to
be controlled by an Adviser and hence affiliated persons of each other.
In addition, the Funds may be deemed to be under common control with
any other registered investment company (or series thereof) advised by
an Adviser (an ``Affiliated Fund'').
17. Applicants request an exemption under sections 6(c) and 17(b)
of the Act from sections 17(a)(1) and 17(a)(2) of the Act to permit in-
kind purchases and redemptions of Creation Units 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.\27\ Applicants also request an
exemption in order to permit a Fund to sell its Shares to, and purchase
its Shares from, an Investing Fund and to engage in any accompanying
in-kind transactions with certain Investing Funds of which the Funds
are affiliated persons or a second-tier affiliates.\28\
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\27\ Applicants are not seeking relief from section 17(a) for,
and the requested relief will not apply to, transactions where a
Fund could be deemed an affiliated person, or an affiliated person
of an affiliated person, of an Investing Fund because an investment
adviser to the Funds is also an investment adviser to an Investing
Fund.
\28\ Applicants expect most Investing Funds will purchase Shares
in the secondary market and will not purchase Creation Units
directly from a Fund. To the extent that purchases and sales of
Shares occur in the secondary market and not through principal
transactions directly between an Investing Fund and a Fund, relief
from section 17(a) would not be necessary. However, the requested
relief would apply to direct sales of Shares in Creation Units by a
Fund to an Investing Fund and redemptions of those Shares. The
requested relief is also intended to cover any in-kind transactions
that may accompany such sales and redemptions.
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18. Applicants assert 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. Both the
deposit procedures for in-kind purchases of Creation Units and the
redemption procedures for in-kind redemptions will be effected in
exactly the same manner for all purchases and redemptions, regardless
of size or number. Absent the circumstances discussed in section
I.E.1.a of the application, on each Business Day the Deposit
Instruments and Redemption Instruments available for a Fund will be the
same for all purchasers and redeemers, respectively, and will
correspond pro rata to the Fund's Portfolio Instruments. Applicants
state that the method of valuing Portfolio Instruments held by a Fund
is the same as that used for calculating the value of in-kind purchases
or redemptions and therefore, creates no opportunity for affiliated
persons or the Applicants to effect a transaction detrimental to other
holders of Shares of that Fund. Applicants note that any consideration
paid for the purchase or redemption of Shares directly from a Fund
(including for any affiliated person and including any Investing Fund)
will be based on the NAV of the Fund in accordance with policies and
procedures set forth in the Fund's registration statement.\29\
Applicants do not believe that in-kind purchases and redemptions will
result in abusive self-dealing or overreaching of the Fund.
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\29\ 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 the 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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19. Applicants also submit that the sale of Shares to and
redemption of Shares from an Investing Fund meets the standards for
relief under sections 17(b) and 6(c) of the Act. Applicants also state
that the proposed transactions are consistent with the general purposes
of the Act and appropriate in the public interest.
Applicants' Conditions
Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
A. Actively-Managed Exchange-Traded Fund Relief
1. As long as a Fund operates in reliance on the requested order,
the Shares of the Fund will be listed on a Stock Exchange.
2. Neither the Trust nor any Fund will be advertised or marketed as
an open-end investment company or a mutual fund. Any advertising
material that describes the purchase or sale of Creation Units or
refers to redeemability will prominently disclose that the Shares are
not individually redeemable and that owners of the Shares may acquire
those Shares from the Fund and tender those Shares for redemption to
the Fund in Creation Units only.
3. The Web site for the Funds, which is and will be publicly
accessible at no charge, will contain, on a per Share basis, for each
Fund the prior Business Day's NAV and the market closing price or Bid/
Ask Price, and a calculation of the premium or discount of the market
closing price or Bid/Ask Price against such NAV.
4. On each Business Day, before commencement of trading in Shares
on
[[Page 74890]]
the Stock Exchange, the Fund will disclose on its Web site the
identities and quantities of the Portfolio Instruments held by the Fund
that will form the basis for the Fund's calculation of NAV at the end
of the Business Day.
5. The Adviser or any Subadviser, 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.
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 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 Subadviser or a person controlling, controlled by or under common
control with the Investing Fund Subadviser acts as the investment
adviser within the meaning of section 2(a)(20)(A) of the Act.
2. No Investing Fund or Investing Fund Affiliate will cause any
existing or potential investment by the Investing Fund in a Fund to
influence the terms of any services or transactions between the
Investing Fund or an Investing Fund Affiliate and the Fund or a Fund
Affiliate.
3. The board of directors or trustees of an Investing Management
Company, including a majority of the disinterested directors or
trustees, will adopt procedures reasonably designed to assure that the
Investing Fund Advisor and any Investing Fund Subadviser are conducting
the investment program of the Investing Management Company without
taking into account any consideration received by the Investing
Management Company or an Investing Fund Affiliate from a Fund or a Fund
Affiliate in connection with any services or transactions.
4. Once an investment by an Investing Fund in Shares of a Fund
exceeds the limit in section 12(d)(1)(A)(i) of the Act, the board of
the Fund (``Board''), 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 adviser(s), or any person controlling, controlled by or
under common control with such investment adviser(s).
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-1 under
the Act) received from a Fund by the Investing Fund Advisor, or Trustee
or Sponsor, or an affiliated person of the Investing Fund Advisor, 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 Subadviser will waive fees otherwise payable
to the Investing Fund Subadviser, directly or indirectly, by the
Investing Management Company in an amount at least equal to any
compensation received from a Fund by the Investing Fund Subadviser, or
an affiliated person of the Investing Fund Subadviser, other than any
advisory fees paid to the Investing Fund Subadviser or its affiliated
person by the Fund, in connection with the investment by the Investing
Management Company in the Fund made at the direction of the Investing
Fund Subadviser. In the event that the Investing Fund Subadviser waives
fees, the benefit of the waiver 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
[[Page 74891]]
execute a FOF Participation Agreement with the Fund stating that their
respective boards of directors or trustees and their investment
advisers, or Trustee and Sponsor, as applicable, understand the terms
and conditions of the order, and agree to fulfill their
responsibilities under the order. At the time of its investment in
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 NASD Conduct 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.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30380 Filed 12-17-12; 8:45 am]
BILLING CODE 8011-01-P