[Federal Register Volume 80, Number 61 (Tuesday, March 31, 2015)]
[Notices]
[Pages 17129-17132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-07252]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 31511; File No. 812-14346]


ETFS Trust and ETF Securities Advisors, LLC; Notice of 
Application

March 25, 2015.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under section 6(c) of the Investment 
Company Act of 1940 (``Act'') for an exemption from section 15(a) of 
the Act and rule 18f-2 under the Act, as well as from certain 
disclosure requirements.

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Summary of Application:  Applicants request an order that would permit 
them to enter into and materially amend subadvisory agreements with 
Wholly-Owned Sub-Advisers (as defined below) and non-affiliated sub-
advisers without shareholder approval and would grant relief from 
certain disclosure requirements.

Applicants: ETFS Trust (the ``Trust'') and ETF Securities Advisors LLC 
(the ``Adviser'').

DATES: Filing Dates: The application was filed on August 13, 2014 and 
amended on December 2, 2014 and February 12, 2015.

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 April 17, 2015, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Pursuant to rule 0-5 under the Act, hearing 
requests should state the nature of the writer's interest, any facts 
bearing upon the desirability of a hearing on the matter, the reason 
for the request, and the issues contested. Persons who wish to be 
notified of a hearing may request notification by writing to the 
Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street NE., Washington, DC 20549-1090. Applicants, ETFS Trust, 48 Wall 
Street, New York, New York 10005.

FOR FURTHER INFORMATION CONTACT: Barbara T. Heussler, Senior Counsel, 
at (202) 551-6990, or Mary Kay Frech, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Chief Counsel's 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 for an 
applicant using the Company name box, at http://www.sec.gov/search/search.htm or by calling (202) 551-8090.

Applicants' Representations

    1. The Trust is organized as a Delaware statutory trust and is 
registered with the Commission as an open-end management investment 
company under the Act. The Trust currently offers four series of shares 
and may offer additional series of shares in the future (each, a 
``Fund'' and collectively the ``Funds''),\1\ each with its own distinct 
investment objective, policy and restrictions. Each Fund will operate 
as an exchange-traded fund.\2\ ETF Securities is a Delaware limited 
liability company and is registered with the Commission as an 
investment adviser under the Investment Advisers Act of 1940 (the 
``Advisers Act'').
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    \1\ Currently the Trust consists of the following Funds: ETFS 
Zacks Earnings Large-Cap U.S. Index Fund, ETFS Zacks Earnings Small-
Cap U.S. Index Fund, ETFS Diversified-Factor Large Cap U.S. Index 
Fund, and the ETFS Diversified-Factor Developed Europe Index Fund 
(the ``Initial Fund(s)'').
    \2\ Future Funds may be operated as a master-feeder structure 
pursuant to section 12(d)(1)(E) of the Act. In such a structure, 
certain Funds (each, a ``Feeder Fund'') may invest substantially all 
of their assets in a Fund (a ``Master Fund'') pursuant to section 
12(d)(1)(E) of the Act. No Feeder Fund will engage any sub-advisers 
other than through approving the engagement of one or more of the 
Master Fund's sub-advisers.
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    2. Applicants request an order to permit the Adviser,\3\ subject to 
the

[[Page 17130]]

approval of the board of trustees of the Trust (the ``Board''), 
including a majority of the trustees who are not ``interested persons'' 
of the Trust, the Funds or the Adviser as defined in section 2(a)(19) 
of the Act (the ``Independent Trustees''), to, without obtaining 
shareholder approval: (a) Select Sub-Advisers \4\ to manage all or a 
portion of the assets of a Fund and enter into investment sub-advisory 
agreements with the Sub-Advisers (each, a ``Sub-Advisory Agreement''); 
and (b) materially amend Sub-Advisory Agreements with the Sub-
Advisers.\5\ Applicants request that the relief apply to the named 
applicants, as well as to any future Fund and any other existing or 
future registered open-end management investment company or series 
thereof that is advised by the Adviser, uses the multi-manager 
structure described in the application, and complies with the terms and 
conditions set forth in the application (each, a ``Subadvised 
Fund'').\6\ The requested relief will not extend to any sub-adviser, 
other than a Wholly-Owned Sub-Adviser, who is an affiliated person, as 
defined in section 2(a)(3) of the Act, of the Subadvised Fund, of any 
Feeder Fund, or of the Adviser, other than by reason of serving as a 
sub-adviser to one or more of the Subadvised Funds (``Affiliated Sub-
Adviser'').
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    \3\ The term ``Adviser'' includes (1) ETF Securities, and (2) 
any entity controlling, controlled by or under common control with, 
ETF Securities or its successors that serves as investment adviser 
to the Funds. For purposes of the requested order, ``successor'' is 
limited to an entity that results from a reorganization into another 
jurisdiction or a change in the type of business organization.
    \4\ A ``Sub-Adviser'' for a Fund is (1) an indirect or direct 
``wholly owned subsidiary'' (as such term is defined in the Act) of 
the Adviser for that Fund, or (2) a sister company of the Adviser 
for that Fund that is an indirect or direct ``wholly-owned 
subsidiary'' of the same company that, indirectly or directly, 
wholly owns the Adviser (each of (1) and (2) a ``Wholly-Owned Sub-
Adviser'' and collectively, the ``Wholly-Owned Sub-Advisers''), or 
(3) not an ``affiliated person'' (as such term is defined in section 
2(a)(3) of the Act) of the Fund, any Feeder Fund invested in a 
Master Fund, the Trust, or the Adviser, except to the extent that an 
affiliation arises solely because the Sub-Adviser serves as a sub-
adviser to a Fund (each, a ``Non-Affiliated Sub-Adviser'').
    \5\ Shareholder approval will continue to be required for any 
other sub-adviser changes (not otherwise permitted by rule) and 
material amendments to an existing Sub-Advisory Agreement with any 
sub-adviser other than a Non-Affiliated Sub-Adviser or Wholly-Owned 
Sub-Adviser (all such changes referred to as ``Ineligible Sub-
Adviser Changes'').
    \6\ All registered open-end investment companies that currently 
intend to rely on the requested order are named as applicants. All 
Funds that currently are, or that currently intend to be, Subadvised 
Funds are identified in the application. Any entity that relies on 
the requested order will do so only in accordance with the terms and 
conditions contained in the application. If the name of any 
Subadvised Fund contains the name of a Sub-Adviser, the name of the 
Adviser that serves as the primary adviser to the Subadvised Fund, 
or a trademark or trade name that is owned by or publicly used to 
identify that Adviser, will precede the name of the Sub-Adviser.
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    3. ETF Securities is the investment adviser to each Fund pursuant 
to an investment advisory agreement with the Trust (the ``Investment 
Management Agreement''). Any other Adviser will be registered with the 
Commission as an investment adviser under the Advisers Act. The 
Investment Management Agreement was approved by the Board, including a 
majority the Independent Trustees, and by the shareholders of each Fund 
in the manner required by sections 15(a) and 15(c) of the Act and rule 
18f-2 thereunder. The terms of the Investment Management Agreement will 
comply with section 15(a) of the Act. Each other investment management 
agreement with respect to a Fund (included in the term ``Investment 
Management Agreement'') will comply with section 15(a) of the Act and 
will be similarly approved.
    4. Pursuant to the terms of the Investment Management Agreement, 
the Adviser, subject to the supervision of the Board, provides 
continuous investment management of the assets of each Fund. Consistent 
with the terms of the Investment Management Agreement, the Adviser may, 
subject to the approval of the Board, including a majority of the 
Independent Trustees, and the shareholders of the applicable Subadvised 
Fund (if required), delegate portfolio management responsibilities of 
all or a portion of the assets of a Subadvised Fund to one or more Sub-
Advisers. The Adviser would continue to have overall responsibility for 
the management and investment of the assets of each Subadvised Fund, 
and the Adviser's responsibilities would include, for example, 
recommending the removal or replacement of Sub-Advisers and determining 
the portion of that Subadvised Fund's assets to be managed by any given 
Sub-Adviser and reallocating those assets as necessary from time to 
time. The Adviser evaluates, allocates assets to, and oversees, the 
Sub-Advisers, and makes recommendations about their hiring, termination 
and replacement to the Board, at all times subject to the authority of 
the Board. For its services to a Fund under an Investment Management 
Agreement, the Adviser would receive an investment management fee from 
that Fund based on the average net assets of that Fund.
    5. Currently the Adviser has entered into a sub-advisory agreement 
with Index Management Solutions, LLC (``IMS'') with respect to the 
Initial Funds. The sub-advisory agreement with IMS was approved by the 
Board, including a majority of the Independent Trustees, and by the 
sole shareholders of each Initial Fund in the manner required by 
sections 15(a) and 15(c) of the Act and rule 18f-2 thereunder. The 
terms of the sub-advisory agreement with IMS comply with section 15(a) 
of the Act. IMS is, and any future Sub-Adviser will be, an ``investment 
adviser'' as defined in section 2(a)(20) of the Act and will be 
registered as an investment adviser under the Advisers Act or exempt 
from such registration. Any Sub-Advisory Agreements will be approved by 
the Board, including a majority of the Independent Trustees, and the 
terms of each Sub-Advisory Agreement will comply fully with the 
requirements of section 15(a) of the Act. The Sub-Advisers, subject to 
the supervision of the Adviser and oversight of the Board, determine 
the securities and other instruments to be purchased, sold or entered 
into by a Subadvised Fund's portfolio or a portion thereof, and place 
orders with brokers or dealers that they select. The Adviser will 
compensate each Sub-Adviser out of the fee paid to the Adviser under 
the Investment Management Agreement.
    6. Subadvised Funds will inform shareholders of the hiring of a new 
Sub-Adviser pursuant to the following procedures (``Modified Notice and 
Access Procedures''): (a) Within 90 days after a new Sub-Adviser is 
hired for any Subadvised Fund, that Subadvised Fund will send its 
shareholders \7\ either a Multi-manager Notice or a Multi-manager 
Notice and Multi-manager Information Statement; \8\ and (b) the 
Subadvised Fund will make the Multi-manager Information Statement 
available on the Web site identified in the Multi-manager Notice no 
later than when the Multi-manager Notice (or Multi-manager Notice and 
Multi-manager Information Statement) is first

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sent to shareholders, and will maintain it on that Web site for at 
least 90 days. Applicants state that, in the circumstances described in 
the application, a proxy solicitation to approve the appointment of new 
Sub-Advisers provides no more meaningful information to shareholders 
than the proposed Multi-manager Information Statement. Applicants also 
state that the Board would comply with the requirements of sections 
15(a) and 15(c) of the Act before entering into or amending Sub-
Advisory Agreements.
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    \7\ If the Subadvised Fund is a Master Fund, for purposes of the 
Modified Notice and Access Procedures, ``shareholders'' include both 
the shareholders of the applicable Master Fund and the shareholders 
of its Feeder Funds.
    \8\ A ``Multi-manager Notice'' will be modeled on a Notice of 
Internet Availability as defined in rule 14a-16 under the Securities 
Exchange Act of 1934 (``Exchange Act''), and specifically will, 
among other things: (a) Summarize the relevant information regarding 
the new Sub-Adviser; (b) inform shareholders that the Multi-manager 
Information Statement is available on a Web site; (c) provide the 
Web site address; (d) state the time period during which the Multi-
manager Information Statement will remain available on that Web 
site; (e) provide instructions for accessing and printing the Multi-
manager Information Statement; and (f) instruct the shareholder that 
a paper or email copy of the Multi-manager Information Statement may 
be obtained, without charge, by contacting the Subadvised Fund.
    A ``Multi-manager Information Statement'' will meet the 
requirements of Regulation 14C, Schedule 14C and Item 22 of Schedule 
14A under the Exchange Act for an information statement. Multi-
manager Information Statements will be filed with the Commission via 
the EDGAR system.
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    7. Applicants also request an order under section 6(c) of the Act 
exempting the Subadvised Funds from certain disclosure obligations that 
may require each Subadvised Fund to disclose fees paid by the Adviser 
to each Sub-Adviser. Applicants seek relief to permit each Subadvised 
Fund to disclose (as a dollar amount and a percentage of the Subadvised 
Fund's net assets): (a) The aggregate fees paid to the Adviser and any 
Wholly-Owned Sub-Advisers; (b) the aggregate fees paid to Non-
Affiliated Sub-Advisers; and (c) the fee paid to each Affiliated Sub-
Adviser (collectively, the ``Aggregate Fee Disclosure''). An exemption 
is requested to permit the Funds to include only the Aggregate Fee 
Disclosure. All other items required by sections 6-07(2)(a), (b) and 
(c) of Regulation S-X will be disclosed.

Applicants' Legal Analysis

    1. Section 15(a) of the Act states, in part, that it is unlawful 
for any person to act as an investment adviser to a registered 
investment company ``except pursuant to a written contract, which 
contract, whether with such registered company or with an investment 
adviser of such registered company, has been approved by the vote of a 
majority of the outstanding voting securities of such registered 
company.'' Rule 18f-2 under the Act provides that each series or class 
of stock in a series investment company affected by a matter must 
approve that matter if the Act requires shareholder approval.
    2. Form N-1A is the registration statement used by open-end 
investment companies. Item 19(a)(3) of Form N-1A requires a registered 
investment company to disclose in its statement of additional 
information the method of computing the ``advisory fee payable'' by the 
investment company, including the total dollar amounts that the 
investment company ``paid to the adviser (aggregated with amounts paid 
to affiliated advisers, if any), and any advisers who are not 
affiliated persons of the adviser, under the investment advisory 
contract for the last three fiscal years.''
    3. Rule 20a-1 under the Act requires proxies solicited with respect 
to a registered investment company to comply with Schedule 14A under 
the Exchange Act. Items 22(c)(1)(ii), 22(c)(1)(iii), 22(c)(8) and 
22(c)(9) of Schedule 14A, taken together, require a proxy statement for 
a shareholder meeting at which the advisory contract will be voted upon 
to include the ``rate of compensation of the investment adviser,'' the 
``aggregate amount of the investment adviser's fee,'' a description of 
the ``terms of the contract to be acted upon,'' and, if a change in the 
advisory fee is proposed, the existing and proposed fees and the 
difference between the two fees.
    4. Regulation S-X sets forth the requirements for financial 
statements required to be included as part of investment company 
registration statements and shareholder reports filed with the 
Commission. Sections 6-07(2)(a), (b) and (c) of Regulation S-X require 
registered investment companies to include in their financial 
statements information about investment advisory fees.
    5. Section 6(c) of the Act provides that the Commission by order 
upon application may conditionally or unconditionally exempt any 
person, security, or transaction or any class or classes of persons, 
securities, or transactions from any provisions of the Act, or from any 
rule thereunder, if such exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act. 
Applicants state that their requested relief meets this standard for 
the reasons discussed below.
    6. Applicants assert that the shareholders expect the Adviser, 
subject to the review and approval of the Board, to select the Sub-
Advisers who are in the best position to achieve the Subadvised Funds' 
investment objectives. Applicants assert that, from the perspective of 
the shareholder, the role of the Sub-Advisers is substantially 
equivalent to the role of the individual portfolio managers employed by 
an investment adviser to a traditional investment company. Applicants 
believe that permitting the Adviser to perform the duties for which the 
shareholders of the Subadvised Fund are paying the Adviser--the 
selection, supervision and evaluation of the Sub-Advisers--without 
incurring unnecessary delays or expenses is appropriate in the interest 
of the Subadvised Fund's shareholders and will allow such Subadvised 
Fund to operate more efficiently. Applicants state that the Investment 
Management Agreement will continue to be fully subject to section 15(a) 
of the Act and rule 18f-2 under the Act and approved by the Board, 
including a majority of the Independent Trustees, in the manner 
required by sections 15(a) and 15(c) of the Act. Applicants are not 
seeking an exemption with respect to the Investment Management 
Agreement.
    7. Applicants assert that disclosure of the individual fees that 
the Adviser would pay to the Sub-Advisers of Subadvised Funds that 
operate in the multi-manager structure described in the application 
does not serve any meaningful purpose. Applicants contend that the 
primary reasons for requiring disclosure of individual fees paid to 
Sub-Advisers are to inform shareholders of expenses to be charged by a 
particular Subadvised Fund and to enable shareholders to compare the 
fees to those of other comparable investment companies. Applicants 
believe that the requested relief satisfies these objectives because 
the advisory fee paid to the Adviser will be fully disclosed and, 
therefore, shareholders will know what the Subadvised Fund's fees and 
expenses are and will be able to compare the advisory fees a Subadvised 
Fund is charged to those of other investment companies. Applicants 
assert that the requested disclosure relief would benefit shareholders 
of the Subadvised Fund because it would improve the Adviser's ability 
to negotiate the fees paid to Sub-Advisers. Applicants state that if 
the Adviser is not required to disclose the Sub-Advisers' fees to the 
public, the Adviser may be able to negotiate rates that are below a 
Sub-Adviser's ``posted'' amounts. Applicants assert that the relief 
will also encourage Sub-Advisers to negotiate lower sub-advisory fees 
with the Adviser if the lower fees are not required to be made public.
    8. Applicants submit that the requested relief meets the standards 
for relief under section 6(c) of the Act. Applicants state that each 
Subadvised Fund will be required to obtain shareholder approval to 
operate as a ``multiple manager'' fund as described in the application 
before relying on the requested order. Applicants assert that 
conditions 6, 10, and 11 are designed to provide the Board with 
sufficient independence and the resources and information it needs to 
monitor and address any conflicts of interest. Applicants state that, 
accordingly, they believe the requested relief is necessary or 
appropriate in the public interest and consistent with the protection 
of

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investors and the purposes fairly intended by the policy and provisions 
of the Act.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions: \9\
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    \9\ Applicants will only comply with conditions 7, 8, 9, and 12 
if they rely on the relief that would allow them to provide 
Aggregate Fee Disclosure.
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    1. Before a Subadvised Fund may rely on the order requested in the 
application, the operation of the Subadvised Fund in the manner 
described in the application, including the hiring of Wholly-Owned Sub-
Advisers, will be approved by a majority of the Subadvised Fund's 
outstanding voting securities as defined in the Act, which in the case 
of a Master Fund will include voting instructions provided by 
shareholders of the Feeder Funds investing in such Master Fund or other 
voting arrangements that comply with section 12(d)(1)(E)(iii)(aa) of 
the Act or, in the case of a new Subadvised Fund whose public 
shareholders purchase shares on the basis of a prospectus containing 
the disclosure contemplated by condition 2 below, by the initial 
shareholder(s) before offering the Subadvised Fund's shares to the 
public.
    2. The prospectus for each Subadvised Fund, and in the case of a 
Master Fund relying on the requested relief, the prospectus for each 
Feeder Fund investing in such Master Fund, will disclose the existence, 
substance and effect of any order granted pursuant to the application. 
Each Subadvised Fund (and any such Feeder Fund) will hold itself out to 
the public as employing the multi-manager structure described in the 
application. Each prospectus will prominently disclose that the Adviser 
has the ultimate responsibility, subject to oversight by the Board, to 
oversee the Sub-Advisers and recommend their hiring, termination, and 
replacement.
    3. The Adviser will provide general management services to a 
Subadvised Fund, including overall supervisory responsibility for the 
general management and investment of the Subadvised Fund's assets. 
Subject to review and approval of the Board, the Adviser will (a) set a 
Subadvised Fund's overall investment strategies, (b) evaluate, select, 
and recommend Sub-Advisers to manage all or a portion of a Subadvised 
Fund's assets, and (c) implement procedures reasonably designed to 
ensure that Sub-Advisers comply with a Subadvised Fund's investment 
objective, policies and restrictions. Subject to review by the Board, 
the Adviser will (a) when appropriate, allocate and reallocate a 
Subadvised Fund's assets among Sub-Advisers; and (b) monitor and 
evaluate the performance of Sub-Advisers.
    4. A Subadvised Fund will not make any Ineligible Sub-Adviser 
Changes without such agreement, including the compensation to be paid 
thereunder, being approved by the shareholders of the applicable 
Subadvised Fund, which in the case of a Master Fund will include voting 
instructions provided by shareholders of the Feeder Fund investing in 
such Master Fund or other voting arrangements that comply with section 
12(d)(1)(E)(iii)(aa) of the Act.
    5. Subadvised Funds will inform shareholders, and if the Subadvised 
Fund is a Master Fund, shareholders of any Feeder Funds, of the hiring 
of a new Sub-Adviser within 90 days after the hiring of the new Sub-
Adviser pursuant to the Modified Notice and Access Procedures.
    6. At all times, at least a majority of the Board will be 
Independent Trustees, and the selection and nomination of new or 
additional Independent Trustees will be placed within the discretion of 
the then-existing Independent Trustees.
    7. Independent Legal Counsel, as defined in rule 0-1(a)(16) under 
the Act, will be engaged to represent the Independent Trustees. The 
selection of such counsel will be within the discretion of the then-
existing Independent Trustees.
    8. The Adviser will provide the Board, no less frequently than 
quarterly, with information about the profitability of the Adviser on a 
per Subadvised Fund basis. The information will reflect the impact on 
profitability of the hiring or termination of any sub-adviser during 
the applicable quarter.
    9. Whenever a sub-adviser is hired or terminated, the Adviser will 
provide the Board with information showing the expected impact on the 
profitability of the Adviser.
    10. Whenever a sub-adviser change is proposed for a Subadvised Fund 
with an Affiliated Sub-Adviser or a Wholly-Owned Sub-Adviser, the 
Board, including a majority of the Independent Trustees, will make a 
separate finding, reflected in the Board minutes, that such change is 
in the best interests of the Subadvised Fund and its shareholders, and 
if the Subadvised Fund is a Master Fund, the best interests of any 
applicable Feeder Funds and their respective shareholders, and does not 
involve a conflict of interest from which the Adviser or the Affiliated 
Sub-Adviser or Wholly-Owned Sub-Adviser derives an inappropriate 
advantage.
    11. No Trustee or officer of the Trust, a Fund or a Feeder Fund, or 
partner, director, manager or officer of the Adviser, will own directly 
or indirectly (other than through a pooled investment vehicle that is 
not controlled by such person) any interest in a Sub-Adviser except for 
(a) ownership of interests in the Adviser or any entity, except a 
Wholly-Owned Sub-Adviser, that controls, is controlled by, or is under 
common control with the Adviser, or (b) ownership of less than 1% of 
the outstanding securities of any class of equity or debt of any 
publicly traded company that is either a Sub-Adviser or an entity that 
controls, is controlled by, or under common control with a Sub-Adviser.
    12. Each Subadvised Fund and any Feeder Fund that invests in a 
Subadvised Fund that is a Master Fund will disclose the Aggregate Fee 
Disclosure in its registration statement.
    13. Any new Sub-Advisory Agreement or any amendment to a Subadvised 
Fund's existing Investment Management Agreement or Sub-Advisory 
Agreement that directly or indirectly results in an increase in the 
aggregate advisory fee rate payable by the Subadvised Fund will be 
submitted to the Subadvised Fund's shareholders for approval.
    14. In the event the Commission adopts a rule under the Act 
providing substantially similar relief to that requested in the 
application, the requested order will expire on the effective date of 
that rule.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Brent J. Fields,
Secretary.
[FR Doc. 2015-07252 Filed 3-30-15; 8:45 am]
BILLING CODE 8011-01-P