[Federal Register Volume 78, Number 99 (Wednesday, May 22, 2013)]
[Notices]
[Pages 30351-30357]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-12146]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 30523; File No. 812-14085]


LocalShares Investment Trust, et al.; Notice of Application

May 15, 2013.
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 (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: LocalShares Investment Trust (the ``Trust''), 
LocalShares, Inc. (the ``Adviser''), and SEI Investments Distribution 
Co. (``SEI'').
SUMMARY: Summary of Application: Applicants request an order that 
permits: (a) Certain open-end management investment companies or series 
thereof 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 October 17, 2012, and 
amended on April 3, 2013.

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. June 10, 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 
notification by writing to the Commission's Secretary.

ADDRESSES: Elizabeth M. Murphy, Secretary, Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549; the Trust and the 
Adviser, 618 Church Street, Suite 220, Nashville, TN 37219; SEI, One 
Freedom Valley Drive, Oaks PA 19456.

FOR FURTHER INFORMATION CONTACT: Barry Pershkow, Senior Special Counsel 
at (202) 551-6877, or Janet M. Grossnickle, Assistant Director, at 
(202) 551-6821 (Division of Investment Management, Exemptive 
Applications Office).

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 organized as a Delaware statutory trust. 
Applicants request that the order apply to the series of the Trust 
described in Appendix B to the application (``Initial Fund'') and any 
future series of the Trust and any other open-end management companies 
or series thereof created in the future (``Future Funds'') that tracks 
a specified securities index (an ``Underlying Index'').\1\ Any Future 
Fund will be (a) advised by the Adviser or an entity controlling, 
controlled by, or under common control with the Adviser, and (b) comply 
with the terms and conditions of the application. Each Underlying Index 
will be comprised solely of equity and/or fixed income securities. The 
Funds will be based on Underlying Indexes comprised of equity and/or 
fixed income securities that trade in U.S. markets (``Domestic Funds'') 
or securities that trade in non-U.S. markets (``Foreign Funds'') or 
Underlying Indexes comprised of a combination of domestic and foreign 
securities (``Global Funds''). The Initial Fund and all Future Funds, 
together, are the ``Funds.''
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    \1\ All entities that currently intend to rely on the requested 
order are named as applicants. Any other existing or future entity 
that relies on the order 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 the Funds and not in any other 
registered investment company.
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    2. The Adviser will be registered as an investment adviser under 
the Investment Advisers Act of 1940 (``Advisers Act'') and will serve 
as investment adviser to the Funds. The Adviser may enter into sub-
advisory agreements with one or more investment advisers to act as sub-
advisers to a particular Fund (each, a ``Sub-Adviser''). Each Sub-
Adviser will be registered, or not subject to registration under the 
Advisers Act. The Trust will enter into a distribution agreement with 
one or more distributors that will be registered as a broker-dealer 
(``Broker'') under the Securities Exchange Act of 1934 (``Exchange 
Act'') and will serve as the principal underwriter and distributor 
(``Distributor'') for one or more Funds. The Distributor for the 
Initial Fund is SEI. A Distributor may be an affiliated person of, or 
an affiliated person of such affiliated person of, the Adviser and/or 
Sub-Advisers within the meaning of section 2(a)(3) of the Act.
    3. Each Fund will consist of a portfolio of securities, other 
assets and/or positions (``Portfolio Positions'') selected to 
correspond to the performance of its Underlying Index. No entity that 
creates, compiles, sponsors or maintains an Underlying Index (``Index 
Provider'') is or will be an affiliated person, as defined in section 
2(a)(3) of the Act, (``Affiliated Person'') or an affiliated person of 
an affiliated person (``Second-Tier Affiliate'') of the Trust, any 
Fund, the Adviser, any Sub-Adviser, or promoter of a Fund, or of any 
Distributor.
    4. The Initial Fund's investment objective will be to seek to 
replicate as closely as possible, before fees and expenses, the price 
and yield performance of an index comprised of publicly traded U.S. 
companies that have corporate headquarters in the Nashville, Tennessee 
region and that meet certain requirements regarding capitalization, 
trading volume, and price levels (the ``Nashville Index''). The 
investment objective of each Fund will be to provide investment returns 
that correspond, before fees and expenses, to

[[Page 30352]]

the performance of its Underlying Index.\2\ Each Fund will sell and 
redeem Creation Units on a ``Business Day,'' which is defined as any 
day that the NYSE, the relevant Listing Exchange (as defined below), 
the Trust and the custodian of the Funds are open for business and 
includes any day that a Fund is required to be open under section 22(e) 
of the Act. A Fund will utilize either a replication or representative 
sampling strategy to track its Underlying Index. A Fund using a 
replication strategy will invest in the Component Securities in its 
Underlying Index in the same approximate proportions as in such 
Underlying Index. A Fund using a representative sampling strategy will 
hold some, but not necessarily all, of the Component Securities of its 
Underlying Index. Applicants state that in using the representative 
sampling strategy, a Fund is not expected to track the performance of 
its Underlying Index with the same degree of accuracy as would an 
investment vehicle that invests in every Component Security of the 
Underlying Index with the same weighting as the Underlying Index. 
Applicants expect that each Fund will have an annual tracking error 
relative to the performance of its Underlying Index of less than 5 
percent.
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    \2\ Applicants represent that at least 80% of each Fund's total 
assets (excluding securities lending collateral) (``80% Basket'') 
will be invested in component securities that comprise its 
Underlying Index (``Component Securities'') or TBA Transactions (as 
defined below), or in the case of Foreign Funds and Global Funds, 
the 80% Basket requirement may also include Depositary Receipts 
(defined below) representing Component Securities. Each Fund may 
also invest up to 20% of its total assets in a broad variety of 
other instruments, including securities not included in its 
Underlying Index, which the Adviser and/or Sub-Adviser believes will 
help the Fund in tracking the performance of its Underlying Index.
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    5. Creation Units will consist of specified large aggregations of 
Shares, e.g., 25,000 or 100,000 Shares, and it is expected that the 
initial price of a Creation Unit will range from $1 million to $2.5 
million. All orders to purchase Creation Units must be placed with the 
Distributor by or through a party that has entered into an agreement 
with the Distributor (``Authorized Participant''). The Distributor will 
be responsible for transmitting the orders to the Funds. An Authorized 
Participant must be either: (a) A Broker or other participant in the 
continuous net settlement system of the National Securities Clearing 
Corporation (``NSCC''), a clearing agency registered with the 
Commission, or (b) a participant in the Depository Trust Company 
(``DTC,'' and such participant, ``DTC Participant'').
    6. The Shares 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'').\3\ On any given 
Business Day 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, unless the Fund is Rebalancing (as defined below). In 
addition, the Deposit Instruments and the Redemption Instruments will 
each correspond pro rata to the positions in a Fund's portfolio 
(including cash positions),\4\ 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; \5\ (c) ``to be announced'' 
transactions (``TBA Transactions''),\6\ derivatives and other positions 
that cannot be transferred in kind \7\ will be excluded from the 
Deposit Instruments and the Redemption Instruments; \8\ (d) to the 
extent the Fund determines, on a given Business Day, to use a 
representative sampling of the Fund's portfolio; \9\ or (e) for 
temporary periods, to effect changes in the Fund's portfolio as a 
result of the rebalancing of its Underlying Index (any such change, a 
``Rebalancing''). If there is a difference between the net asset value 
(``NAV'') attributable to a Creation Unit and the aggregate market 
value of the Deposit Instruments or Redemption Instruments exchanged 
for the Creation Unit, the party conveying instruments with the lower 
value will also pay to the other an amount in cash equal to that 
difference (the ``Balancing Amount'').
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    \3\ 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 of 1933 (``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.
    \4\ The portfolio used for this purpose will be the same 
portfolio used to calculate the Fund's NAV for that Business Day.
    \5\ A tradeable round lot for a security will be the standard 
unit of trading in that particular type of security in its primary 
market.
    \6\ A TBA Transaction is a method of trading mortgage-backed 
securities. In a TBA Transaction, the buyer and seller agree on 
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.
    \7\ 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.
    \8\ Because these instruments will be excluded from the Deposit 
Instruments and the Redemption Instruments, their value will be 
reflected in the determination of the Cash Amount (defined below).
    \9\ A Fund may only use sampling for this purpose if the sample: 
(i) Is designed to generate performance that is highly correlated to 
the performance of the Fund's portfolio; (ii) consists entirely of 
instruments that are already included in the Fund's portfolio; and 
(iii) is the same for all Authorized Participants on a given 
Business Day.
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    7. 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, a 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, a Fund determines to require the purchase or 
redemption, as applicable, to be made entirely in cash; \10\ (d) if, on 
a given Business Day, a 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 or 
DTC; or (ii) in the case of Foreign Funds and 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 a 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

[[Page 30353]]

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 Foreign Fund or Global Fund would be subject to unfavorable 
income tax treatment if the holder receives redemption proceeds in 
kind.\11\
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    \10\ 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.
    \11\ 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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    8. Each Business Day, before the open of trading on a national 
securities exchange, as defined in section 2(a)(26) of the Act 
(``Exchange'') on which Shares are listed (``Listing Exchange''), each 
Fund will cause to be published through the NSCC the names and 
quantities of the instruments comprising the Deposit Instruments and 
the Redemption Instruments, as well as the estimated Balancing Amount 
(if any), for that day. The list of Deposit Instruments and the list of 
Redemption Instruments will apply until new lists are announced on the 
following Business Day, and there will be no intra-day changes to the 
lists except to correct errors in the published lists. Each Listing 
Exchange will disseminate, every 15 seconds during regular Exchange 
trading hours, through the facilities of the Consolidated Tape 
Association, an amount for each Fund stated on a per individual Share 
basis representing the sum of (i) the estimated Balancing Amount and 
(ii) the current value of the Deposit Instruments.
    9. An investor purchasing or redeeming a Creation Unit from a Fund 
will be charged a fee (``Transaction Fee'') to prevent the dilution of 
the interests of shareholders resulting from costs in connection with 
the purchase or redemption of Creation Units.\12\ 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 such orders to the Funds. The Distributor 
also will be responsible for delivering the Fund's prospectus to those 
persons purchasing Shares in Creation Units and for maintaining records 
of both the orders placed with it and the acknowledgements of 
acceptance furnished by it. In addition, the Distributor will maintain 
a record of the instructions given to the applicable Fund to implement 
the delivery of its Shares.
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    \12\ Where a Fund permits an in-kind purchaser to substitute 
cash-in-lieu of depositing one or more of the requisite Deposit 
Instruments, the purchaser may be assessed a higher Transaction Fee 
to cover the cost of purchasing such Deposit Instruments.
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    10. Shares of the Initial Funds will be listed on the NYSE Arca, 
Inc. Exchange (``NYSE Arca''). Shares of each Future Fund will be 
listed and traded individually on an Exchange. It is expected that one 
or more Exchange liquidity providers or market makers (``Market 
Makers'') will be assigned to Shares and maintain a market for Shares 
trading on the Listing Exchange. The price of Shares trading on an 
Exchange will be based on a current bid-offer market. Transactions 
involving the sale of Shares on an Exchange may be subject to customary 
brokerage commissions and charges.
    11. Applicants expect that purchasers of Creation Units will 
include institutional investors and arbitrageurs. Market Makers also 
may purchase or redeem Creation Units in connection with their market 
making activities. Applicants expect that secondary market purchasers 
of Shares will include both institutional and retail investors.\13\ The 
price at which Shares trade will be disciplined by arbitrage 
opportunities created by the option continually to purchase or redeem 
Shares in Creation Units, which should help to ensure that Shares will 
not trade at a material discount or premium in relation to their NAV 
per Share.
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    \13\ 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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    12. 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.
    13. Neither the Trust nor any Fund will be advertised or marketed 
or otherwise held out as a traditional open-end investment company or 
``mutual fund.'' Instead, each Fund will be marketed as an ``exchange-
traded fund'' or an ``ETF.'' All advertising materials that describe 
the features or method of obtaining, buying or selling Creation Units, 
or Shares traded on an Exchange, or refer to redeemability, will 
prominently disclose that Shares are not individually redeemable and 
that the owners of Shares may acquire or tender such Shares for 
redemption to the Fund in Creation Units only. The Funds will provide 
copies of their annual and semi-annual shareholder reports to DTC 
Participants for distribution to beneficial owners of Shares.

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 (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 the Trust and each Fund 
to redeem Shares in Creation Units only. Applicants state that 
investors may purchase Shares in Creation Units from each Fund and 
redeem Creation Units according to the provisions of the Act.

[[Page 30354]]

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 
materially from their NAV per Share.

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 a 
Fund's prospectus and not at a price based on NAV. Thus, purchases and 
sales of Shares in the secondary market will not comply with section 
22(d) of the Act and rule 22c-1 under the Act. Applicants request an 
exemption under section 6(c) from these provisions.
    5. Applicants assert that the concerns sought to be addressed by 
section 22(d) of the Act and rule 22c-1 under the Act with respect to 
pricing are equally satisfied by the proposed method of pricing Shares. 
Applicants maintain that, while there is little legislative history 
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to (a) prevent dilution caused by 
certain riskless-trading schemes by principal underwriters and contract 
dealers, (b) prevent unjust discrimination or preferential treatment 
among buyers, and (c) ensure an orderly distribution system of 
investment company shares by eliminating price competition from non-
contract dealers offering shares at less than the published sales price 
and repurchasing shares at more than the published redemption price.
    6. 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 
Shares do not trade at a material discount or premium in relation to 
their NAV.

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 settlement of redemptions for Foreign Funds and Global Funds 
will be contingent not only on the settlement cycle of the U.S. 
securities markets but also on the delivery cycles in local markets for 
the foreign Portfolio Positions held by the Foreign Funds and Global 
Funds. Applicants state that current delivery cycles for transferring 
Redemption Instruments to redeeming investors, coupled with local 
market holiday schedules, in certain circumstances will require a 
delivery process for the Foreign Funds and Global Funds of up to 14 
calendar days. Applicants request relief under section 6(c) of the Act 
from section 22(e) to allow Foreign Funds and Global Funds to pay 
redemption proceeds up to 14 calendar days after the tender of the 
Creation Units for redemption. Except as disclosed in the relevant 
Foreign Fund's or Global Fund's SAI, applicants expect that each 
Foreign Fund and Global Fund will be able to deliver redemption 
proceeds within seven days.\14\
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    \14\ 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 relief obtained from the 
requirements of section 22(e) will not affect any obligations that 
they have under rule 15c6-1.
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    8. Applicants state that Congress adopted section 22(e) to prevent 
unreasonable, undisclosed and unforeseen delays in the actual payment 
of redemption proceeds. Applicants state that allowing redemption 
payments for Creation Units of a Foreign Fund or Global Fund to be made 
within the number of days indicated above would not be inconsistent 
with the spirit and intent of section 22(e). 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 in kind redemption proceeds in seven calendar 
days, and the maximum number of days (up to fourteen calendar days) 
needed to deliver the proceeds for each affected Foreign Fund and 
Global Fund.
    9. Applicants are not seeking relief from section 22(e) with 
respect to Foreign Funds or Global Funds that do not effect creations 
and redemptions of Creation Units in-kind.

Section 12(d)(1) of the Act

    10. 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 the investment company's shares 
to another investment company if the sale would cause the acquiring 
company to own more than 3% of the acquired company's voting stock, or 
if the sale would cause more than 10% of the acquired company's voting 
stock to be owned by investment companies generally.
    11. Applicants request an exemption to permit management investment 
companies (``Investing Management Companies'') and unit investment 
trusts (``Investing Trusts'') registered under the Act that are not 
sponsored or advised by the Adviser or an entity controlling, 
controlled by, or under common control with the Adviser and are not 
part of the same ``group of investment companies,'' as defined in 
section 12(d)(1)(G)(ii) of the Act, as the Funds (collectively, 
``Investing Funds'') to acquire Shares beyond the limits of section 
12(d)(1)(A). In addition, applicants seek relief to permit a Fund, any 
Distributor, and/or any Broker to sell Shares to Investing Funds in 
excess of the limits of section 12(d)(1)(B).
    12. Each Investing Management Company's investment adviser within 
the meaning of section 2(a)(20)(A) of the Act is the ``Investing Fund 
Adviser'' and each Investing Management Company's investment adviser 
within the meaning of section 2(a)(20)(B) of the Act is the ``Investing 
Fund Sub-Adviser.'' Any investment adviser to an Investing Fund will be 
registered under the Advisers Act. Each Investing Trust's sponsor is 
the ``Sponsor.''
    13. Applicants submit that the proposed conditions to the requested 
relief adequately address the concerns underlying the limits in section 
12(d)(1)(A) and (B), which include concerns about undue influence by a 
fund of funds over underlying funds, excessive layering of fees and 
overly complex fund structures. Applicants believe that the requested 
exemption is

[[Page 30355]]

consistent with the public interest and the protection of investors.
    14. Applicants believe that neither an Investing Fund nor an 
Investing Fund Affiliate would be able to exert undue influence over a 
Fund.\15\ To limit the control that an Investing Fund may have over a 
Fund, applicants propose a condition prohibiting the Investing Fund 
Adviser, Sponsor, any person controlling, controlled by, or under 
common control with the Investing Fund Adviser or Sponsor, and any 
investment company and any issuer that would be an investment company 
but for sections 3(c)(1) or 3(c)(7) of the Act that is advised or 
sponsored by the Investing Fund Adviser, the Sponsor, or any person 
controlling, controlled by, or under common control with the Investing 
Fund Adviser or Sponsor (``Investing Funds' 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-Adviser, any person controlling, controlled 
by or under common control with the Investing Fund Sub-Adviser, 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-Adviser or any person controlling, controlled by or under 
common control with the Investing Fund Sub-Adviser (``Investing Funds' 
Sub-Advisory Group''). Applicants propose other conditions to limit the 
potential for undue influence over the Funds, including that no 
Investing Fund or Investing Fund Affiliate (except to the extent it is 
acting in its capacity as an investment adviser to a Fund) will cause a 
Fund to purchase a security in an offering of securities during the 
existence of an underwriting or selling syndicate of which a principal 
underwriter is an Underwriting Affiliate (``Affiliated Underwriting''). 
An ``Underwriting Affiliate'' is a principal underwriter in any 
underwriting or selling syndicate that is an officer, director, member 
of an advisory board, Investing Fund Adviser, Investing Fund Sub-
Adviser, employee or Sponsor of the Investing Fund, or a person of 
which any such officer, director, member of an advisory board, 
Investing Fund Adviser, Investing Fund Sub-Adviser, employee or Sponsor 
is an affiliated person (except any person whose relationship to the 
Fund is covered by section 10(f) of the Act is not an Underwriting 
Affiliate).
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    \15\ An ``Investing Fund Affiliate'' is any Investing Fund 
Adviser, Investing Fund Sub-Adviser, Sponsor, promoter or principal 
underwriter of an Investing Fund, and any person controlling, 
controlled by or under common control with any of those entities. 
``Fund Affiliate'' is the Adviser, Sub-Adviser, promoter, or 
principal underwriter of a Fund or any person controlling, 
controlled by or under common control with any of these entities.
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    15. 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 directors or trustees 
within the meaning of section 2(a)(19) of the Act (``disinterested 
directors or trustees''), will 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, under condition B.5, an Investing Fund 
Adviser, or Investing Trust's trustee (``Trustee'') or Sponsor, will 
waive fees otherwise payable to it by the Investing Fund in an amount 
at least equal to any compensation (including fees received pursuant to 
any plan adopted by a Fund under rule 12b-1 under the Act) received 
from a Fund by the Investing Fund Adviser, Trustee or Sponsor or an 
affiliated person of the Investing Fund Adviser, Trustee or Sponsor, 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 NASD.\16\
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    \16\ All references to Conduct Rule 2830 of the NASD include any 
successor or replacement rule that may be adopted by the Financial 
Industry Regulatory Authority.
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    16. 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 for short-term cash management purposes. 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 (``Investing Fund Participation Agreement''). 
The Investing Fund Participation Agreement will include an 
acknowledgement from the Investing Fund that it may rely on the order 
only to invest in the Funds and not in any other investment company.
    17. Applicants also note that a Fund may choose to reject a direct 
purchase of Shares in Creation Units by an Investing Fund. To the 
extent that an Investing Fund purchases Shares in the secondary market, 
a Fund would still retain its ability to reject initial purchases of 
Shares made in reliance on the requested order by declining to enter 
into the Investing Fund Participation Agreement prior to any investment 
by an Investing Fund in excess of the limits of section 12(d)(1)(A).

Section 17 of the Act

    18. Section 17(a) of the Act generally prohibits an Affiliated 
Person or a Second-Tier Affiliate, from selling any security to or 
purchasing any security from a registered investment company. Section 
2(a)(3) of the Act defines ``affiliated person'' of another 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 a company's voting securities. 
The Funds may be deemed to be controlled by the Adviser or an entity 
controlling, controlled by or under common control with the Adviser and 
hence Affiliated Persons of each other. In addition, the Funds may be 
deemed to be under common control with any other registered investment 
company (or series thereof) advised by the Adviser or an entity 
controlling, controlled by or under common control with the Adviser (an 
``Affiliated Fund''). Applicants also state that any investor, 
including Market Makers, owning 5% or holding in excess of 25% of the 
Trust or such Funds may be deemed affiliated persons of the Trust or 
such Funds. In addition, an investor could own 5% or more, or in excess 
of 25% of the outstanding shares of one or more Affiliated Funds making 
that investor a Second-Tier Affiliate of the Funds.
    19. 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 in order to 
permit in-kind purchases and redemptions of Creation Units from the 
Funds by persons that are Affiliated

[[Page 30356]]

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 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 each 
Fund to sell Shares to and redeem 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.\17\
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    \17\ To the extent that purchases and sales of Shares of a Fund 
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. The requested relief is 
intended to cover, however, transactions directly between Funds and 
Investing Funds. 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 Second-Tier 
Affiliate of an Investing Fund because an investment adviser to the 
Fund or an entity controlling, controlled by or under common control 
with the investment adviser is also an investment adviser to the 
Investing Fund.
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    20. 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. Deposit 
Instruments and Redemption Instruments for each Fund will be valued in 
the same manner as the Portfolio Securities currently held by such 
Fund, and will be valued in this same manner, regardless of the 
identity of the purchaser or redeemer. Portfolio Positions, Deposit 
Instruments, Redemption Instruments, and applicable Balancing Amounts 
(except where a fund permits an in-kind purchaser or redeemer to 
substitute cash as specified above) will be the same regardless of the 
identity of the purchaser or redeemer. 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. Applicants also submit that the 
sale of Shares to and redemption of Shares from an Investing Fund 
satisfies the standards for relief under sections 17(b) and 6(c) of the 
Act. Applicants note 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.\18\ Applicants also state that the 
proposed transactions are consistent with the general purposes of the 
Act and appropriate in the public interest.
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    \18\ Applicants acknowledge that the receipt of compensation by 
(a) an Affiliated Person of an Investing Fund, or a Second-Tier 
Affiliate, for the purchase by the Investing Funds of Shares of a 
Fund or (b) an Affiliated Person of a Fund, or a Second-Tier 
Affiliate, for the sale by the Fund of Shares to an Investing Fund, 
may be prohibited by section 17(e)(1) of the Act. The Investing Fund 
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:

A. ETF Relief

    1. As long as a Fund operates in reliance on the requested order, 
the Shares of such Fund will be listed on an Exchange.
    2. Neither the Trust nor any Fund will be advertised or marketed as 
an open-end investment company or a mutual fund. Any advertising 
material that describes the purchase or sale of Creation Units or 
refers to redeemability will prominently disclose that Shares are not 
individually redeemable and that owners of Shares may acquire those 
Shares from a Fund and tender those Shares for redemption to a Fund in 
Creation Units only.
    3. The Web site maintained for each Fund, 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 the midpoint 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.
    4. The requested relief to permit ETF operations will expire on the 
effective date of any Commission rule under the Act that provides 
relief permitting the operation of index-based exchange-traded funds.

B. Section 12(d)(1) Relief

    1. The members of an Investing Funds' Advisory Group will not 
control (individually or in the aggregate) a Fund within the meaning of 
section 2(a)(9) of the Act. The members of an Investing Funds' Sub-
Advisory 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 Funds' Advisory Group or the Investing Funds' Sub-Advisory 
Group, each in the aggregate, becomes a holder of more than 25% 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 Funds' 
Sub-Advisory Group with respect to a Fund for which the Investing Fund 
Sub-Adviser or a person controlling, controlled by, or under common 
control with the Investing Fund Sub-Adviser 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 ensure that the 
Investing Fund Adviser and any Investing Fund Sub-Adviser 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 securities of a Fund 
exceeds the limit in section 12(d)(1)(A)(i) of the Act, the board of 
trustees of the Trust (``Board''), including a majority of the 
disinterested trustees, will determine that any consideration paid by 
the Fund to the Investing Fund or an Investing Funds Affiliate in 
connection with any services or transactions: (a) Is fair and 
reasonable in relation to the nature and quality of the services and 
benefits received by the Fund; (b) is within the range of consideration 
that the Fund would be required to pay to another unaffiliated entity 
in connection with the same services or transactions; and (c) does not 
involve overreaching on the part of any person concerned. This 
condition does not apply with respect to any services or transactions 
between a Fund and its investment adviser(s), or any person 
controlling, controlled by, or under common control with such 
investment adviser(s).
    5. The Investing Fund Adviser, Trustee or Sponsor, as applicable, 
will waive fees otherwise payable to it by the

[[Page 30357]]

Investing Fund in an amount at least equal to any compensation 
(including fees received pursuant to any plan adopted by a Fund under 
rule 12b-1 under the Act) received from a Fund by the Investing Fund 
Adviser, Trustee or Sponsor, or an affiliated person of the Investing 
Fund Adviser, Trustee or Sponsor, other than any advisory fees paid to 
the Investing Fund Adviser, 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-Adviser will waive fees 
otherwise payable to the Investing Fund Sub-Adviser, 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-Adviser, or an affiliated person of the Investing Fund Sub-Adviser, 
other than any advisory fees paid to the Investing Fund Sub-Adviser or 
its affiliated person by the Fund, in connection with any investment by 
the Investing Management Company in the Fund made at the direction of 
the Investing Fund Sub-Adviser. In the event that the Investing Fund 
Sub-Adviser 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, including a majority of the disinterested trustees, 
will adopt procedures reasonably designed to monitor any purchases of 
securities by a 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: (a) whether the purchases were consistent with the investment 
objectives and policies of the Fund; (b) how the performance of 
securities purchased in an Affiliated Underwriting compares to the 
performance of comparable securities purchased during a comparable 
period of time in underwritings other than Affiliated Underwritings or 
to a benchmark such as a comparable market index; and (c) whether the 
amount of securities purchased by the Fund in Affiliated Underwritings 
and the amount purchased directly from an Underwriting Affiliate have 
changed significantly from prior years. The Board will take any 
appropriate actions based on its review, including, if appropriate, the 
institution of procedures designed to ensure that purchases of 
securities in Affiliated Underwritings are in the best interest of 
shareholders of the Fund.
    8. Each Fund will maintain and preserve permanently in an easily 
accessible place a written copy of the procedures described in the 
preceding condition, and any modifications to such procedures, and will 
maintain and preserve for a period of not less than six years from the 
end of the fiscal year in which any purchase in an Affiliated 
Underwriting occurred, the first two years in an easily accessible 
place, a written record of each purchase of securities in Affiliated 
Underwritings once an investment by an Investing Fund in the securities 
of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act, 
setting forth from whom the securities were acquired, the identity of 
the underwriting syndicate's members, the terms of the purchase, and 
the information or materials upon which the Board's determinations were 
made.
    9. Before investing in a Fund in excess of the limits in section 
12(d)(1)(A), each Investing Fund and the Fund will execute an Investing 
Fund Participation Agreement stating, without limitation, 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 of names 
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 
Investing Fund 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 an 
Investing Fund as set forth in Conduct Rule 2830 of the NASD.
    12. No Fund will acquire securities of an 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. 2013-12146 Filed 5-21-13; 8:45 am]
BILLING CODE 8011-01-P