

[Federal Register: February 7, 2008 (Volume 73, Number 26)]
[Notices]               
[Page 7328-7334]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07fe08-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28140; 812-13386]

 
PowerShares Capital Management LLC, et al.; Notice of Application

February 1, 2008.
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) and 22(d) of the Act and rule 22c-1 under the Act, 
and under sections 6(c) and 17(b) of the Act for an exemption from 
sections 17(a)(1) and (a)(2) of the Act, and under section 12(d)(1)(J) 
for an exemption from sections 12(d)(1)(A) and (B) of the Act.

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    Applicants: PowerShares Capital Management LLC (the ``Advisor''), 
AER Advisors, Inc. (``AER''), AIM Distributors, Inc. (the 
``Distributor''), and PowerShares Actively Managed Exchange-Traded Fund 
Trust (the ``Trust'').

[[Page 7329]]

    Summary of Application: Applicants request an order that permits: 
(a) 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 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 (d) 
certain registered management investment companies and unit investment 
trusts outside of the same group of investment companies as the series 
to acquire Shares.
    Filing Dates: The application was filed on May 18, 2007, and 
amended on November 9, 2007, November 16, 2007, November 30, 2007, 
December 20, 2007 and January 7, 2008.
    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 February 26, 2008, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-1090. Applicants: Advisor and Trust, 
301 West Roosevelt Road, Wheaton, IL 60187; Distributor, 11 Greenway 
Plaza, Houston, TX 77046-1173; AER, 30 Laurence Lane, Rye Beach, NH 
03871.

FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Branch Chief, or Michael 
W. Mundt, Assistant Director, 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 for a fee at the 
Commission's Public Reference Desk, 100 F Street, NE., Washington, DC 
20549-0102 (tel. 202-551-5850).

Applicants' Representations

    1. The Trust is an open-end management investment company 
registered under the Act and organized as a Delaware business trust. 
The Trust will offer two initial series subadvised by AER: The 
PowerShares Active AlphaQ Portfolio and the PowerShares Active Alpha 
Multi-Cap Portfolio (the ``Initial AER Funds''). The Trust will also 
offer two initial series subadvised by Invesco Institutional (N.A.), 
Inc. (``Invesco''): The PowerShares Active Mega-Cap Portfolio (``Mega-
Cap Fund'') and PowerShares Active Low Duration Portfolio (``Low 
Duration Fund,'' and together with the Mega-Cap Fund, the ``Initial 
Invesco Funds''). The Initial AER Funds and Initial Invesco Funds are 
collectively referred to as the ``Initial Funds.'' Each Initial AER 
Fund's investment objective will be to provide long-term capital 
appreciation by investing in stocks selected according to a 
quantitative screening methodology developed by AER. The Mega-Cap 
Fund's investment objective will be to provide long-term growth of 
capital by investing primarily in the equity securities of mega-
capitalization companies according to a quantitative approach developed 
by Invesco. The Low Duration Fund's investment objective is to provide 
total return by investing primarily in U.S. government and corporate 
debt securities.
    2. The Advisor plans to introduce future series of the Trust or of 
other open-end management investment companies that will invest in 
equity or fixed income securities traded in the U.S. markets (``Future 
Funds''). Applicants request that the order apply to any such Future 
Funds. Any Future Fund will be (a) advised by the Advisor or an entity 
controlling, controlled by, or under common control with the Advisor, 
and (b) comply with the terms and conditions of the order. The Initial 
Funds and Future Funds together are the ``Funds.'' Funds that invest in 
equity securities are ``Equity Funds'' and Funds that invest in fixed 
income securities are ``Fixed Income Funds.'' Each Fund will operate as 
an actively-managed exchange-traded fund (``ETF'').
    3. The Advisor, a Delaware limited liability company, is registered 
as an investment adviser under the Investment Advisers Act of 1940 
(``Advisers Act'') and serves as investment adviser to each Fund. The 
Advisor has retained AER as subadvisor to the Initial AER Funds and 
Invesco as subadviser to the Initial Invesco Funds, and may in the 
future retain other subadvisers (together with AER and Invesco, the 
``Fund Subadvisors'') to manage the portfolios of other Funds. AER, a 
New Hampshire corporation, and Invesco, a Delaware corporation, are 
registered under the Advisers Act, and any other Fund Subadvisor will 
be registered under the Advisers Act. The Distributor, a Delaware 
corporation, is registered as a broker-dealer under the Securities 
Exchange Act of 1934 (``Exchange Act'') and serves as the principal 
underwriter and distributor for the Funds. Each of the Advisor, Invesco 
and the Distributor is an indirect wholly-owned subsidiary of Invesco 
PLC, a public limited company organized in the United Kingdom.\1\
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    \1\ All entities that currently intend to rely on the order are 
named as applicants. Any other 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.
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    4. Shares of the Funds will be sold at a price of between $50 and 
$60 per Share in Creation Units of between 50,000 and 100,000 Shares. 
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 Trust and the Distributor (``Authorized Participant''). An 
Authorized Participant must be either: (a) A broker-dealer or other 
participant in the continuous net settlement system of the National 
Securities Clearing Corporation (``NSCC''), a clearing agency 
registered with the Commission, or (b) a participant in the Depository 
Trust Company (``DTC,'' and such participant, ``DTC Participant''). 
Shares of each Fund generally will be sold in Creation Units in 
exchange for an in-kind deposit by the purchaser of a portfolio of 
securities designated by the Advisor (the ``Deposit Securities''), 
together with the deposit of a relatively small specified cash payment 
(``Cash Component''). The Cash Component is an amount equal to the 
difference between (a) the net asset value (``NAV'') per Creation Unit 
of the Fund and (b) the total aggregate market value per Creation Unit 
of the Deposit Securities.\2\ Applicants state that in some 
circumstances it may not be practicable or convenient for a Fund to 
operate exclusively on an ``in-kind'' basis. The Trust reserves the 
right to permit, under certain circumstances, a purchaser of

[[Page 7330]]

Creation Units to substitute cash in lieu of depositing some or all of 
the requisite Deposit Securities.
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    \2\ In addition to the list of names and amount of each security 
constituting the current Deposit Securities, it is intended that, on 
each day that a Fund is open, including as required by section 22(e) 
of the Act (``Business Day''), the Cash Component effective as of 
the previous Business Day, per outstanding Share of each Fund, will 
be made available. The Stock Exchange intends to disseminate, every 
15 seconds, during regular trading hours, through the facilities of 
the Consolidated Tape Association, an approximate amount per Share 
representing the sum of the estimated Cash Component effective 
through and including the previous Business Day, plus the current 
value of the Deposit Securities, on a per Share basis.
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    5. An investor purchasing a Creation Unit from a Fund will be 
charged a fee (``Transaction Fee'') to prevent the dilution of the 
interests of the remaining shareholders resulting from costs in 
connection with the purchase of Creation Units.\3\ The maximum 
Transaction Fees relevant to each Fund will be fully disclosed in the 
prospectus (``Prospectus'') or statement of additional information 
(``SAI'') of such Fund. 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 Trust. The Distributor also will be responsible for delivering the 
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. In addition, the 
Distributor will maintain a record of the instructions given to the 
Trust to implement the delivery of Shares.
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    \3\ Where a Fund permits a purchaser to substitute cash in lieu 
of depositing a portion of the requisite Deposit Securities, the 
purchaser may be assessed a higher Transaction Fee to cover the cost 
of purchasing such Deposit Securities, including brokerage costs, 
and part or all of the spread between the expected bid and the offer 
side of the market relating to such Deposit Securities.
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    6. Purchasers of Shares in Creation Units may hold such Shares or 
may sell such Shares into the secondary market. Shares will be listed 
and traded on a national securities exchange as defined in section 
2(a)(26) of the Act (``Stock Exchange''). It is expected that one or 
more member firms of a listing Stock Exchange will be designated to act 
as a specialist and maintain a market for Shares on the Stock Exchange 
(the ``Specialist''), or if Nasdaq is the listing Stock Exchange, one 
or more member firms of Nasdaq will act as a market maker (``Market 
Maker'') and maintain a market for Shares.\4\ Prices of Shares trading 
on a Stock Exchange will be based on the current bid/offer market. 
Shares sold in the secondary market will be subject to customary 
brokerage commissions and charges.
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    \4\ If Shares are listed on the Nasdaq, no particular Market 
Maker will be contractually obligated to make a market in Shares, 
although Nasdaq's listing requirements stipulate that at least two 
Market Makers must be registered as Market Makers in Shares to 
maintain the listing. Registered Market Makers are required to make 
a continuous, two-sided market at all times or be subject to 
regulatory sanctions.
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    7. Applicants expect that purchasers of Creation Units will include 
institutional investors and arbitrageurs (which could include 
institutional investors). The Specialist, or Market Maker, in providing 
a fair and orderly secondary market for the Shares, also may purchase 
Creation Units for use in its market-making activities. Applicants 
expect that secondary market purchasers of Shares will include both 
institutional investors and retail investors.\5\ Applicants expect that 
the price at which the Shares trade will be disciplined by arbitrage 
opportunities created by the ability to continually purchase or redeem 
Creation Units at their NAV, which should ensure that the Shares will 
not trade at a material discount or premium in relation to their NAV.
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    \5\ Shares will be registered in book-entry form only. DTC or 
its nominee will be the registered owner of all outstanding Shares. 
DTC or DTC Participants will maintain records reflecting beneficial 
owners of Shares.
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    8. Shares will not be individually redeemable, and owners of Shares 
may acquire those Shares from a Fund, or tender such Shares for 
redemption to the Fund, in Creation Units only. To redeem, an investor 
will have to accumulate enough Shares to constitute a Creation Unit. 
Redemption orders must be placed by or through an Authorized 
Participant. An investor redeeming a Creation Unit generally will 
receive (a) a portfolio of securities designated to be delivered for 
Creation Unit redemptions on the date that the request for redemption 
is submitted (``Fund Securities''), which may not be identical to the 
Deposit Securities required to purchase Creation Units on that date, 
and (b) a ``Cash Redemption Payment,'' consisting of an amount 
calculated in the same manner as the Cash Component, although the 
actual amount of the Cash Redemption Payment may differ from the Cash 
Component if the Fund Securities are not identical to the Deposit 
Securities on that day. An investor may receive the cash equivalent of 
a Fund Security in certain circumstances, such as if the investor is 
constrained from effecting transactions in the security by regulation 
or policy. A redeeming investor may pay a Transaction Fee, calculated 
in the same manner as a Transaction Fee payable in connection with 
purchases of Creation Units.
    9. Neither the Trust nor any individual Fund will be marketed or 
otherwise held out as an ``open-end investment company'' or a ``mutual 
fund.'' Instead, each Fund will be marketed as an ``actively-managed 
exchange-traded fund.'' All marketing materials that describe the 
method of obtaining, buying or selling Shares, or refer to 
redeemability, will prominently disclose that Shares are not 
individually redeemable and that the owners of Shares may purchase or 
redeem Shares from a Fund in Creation Units only. The same approach 
will be followed in the SAI, shareholder reports and investor 
educational materials issued or circulated in connection with the 
Shares. The Funds will provide copies of their annual and semi-annual 
shareholder reports to DTC Participants for distribution to beneficial 
owners of Shares.
    10. The Funds' Web site, which will be publicly available prior to 
the public offering of Shares, will include the Prospectus and other 
information about the Funds that is updated on a daily basis, including 
the mid-point of the bid-ask spread at the time of the calculation of 
NAV (``Bid/Ask Price''). On each Business Day, before the commencement 
of trading in Shares on the Stock Exchange, each Fund will disclose the 
identities and quantities of the securities (``Portfolio Securities'') 
and other assets held in the Fund portfolio that will form the basis 
for the Fund's calculation of NAV at the end of the Business Day.\6\
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    \6\ Applicants note that under accounting procedures followed by 
the Funds, trades made on the prior Business Day (``T'') will be 
booked and reflected in NAV on the current Business Day (``T + 1''). 
Accordingly, the Funds will be able to disclose at the beginning of 
the Business Day the portfolio that will form the basis for the NAV 
calculation at the end of the Business Day.
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Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act 
granting an exemption from sections 2(a)(32), 5(a)(1) and 22(d) 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 (a)(2) of the 
Act, and under section 12(d)(1)(J) for an exemption from sections 
12(d)(1)(A) and (B) of the Act.
    2. Section 6(c) of the Act provides that the Commission may exempt 
any person, security or transaction, or any class of persons, 
securities or transactions, from any provision of the Act, if and to 
the extent that such exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act. 
Section 17(b) of the Act authorizes the Commission to exempt a proposed 
transaction from section 17(a) of the Act if evidence establishes that 
the terms of the transaction, including the consideration to be paid or 
received, are reasonable and fair and do not involve overreaching on 
the part of any person concerned, and the proposed

[[Page 7331]]

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 
his proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Shares will not be individually redeemable, 
applicants request an order that would permit each Fund, as a series of 
an open-end management investment company, to issue Shares that are 
redeemable in Creation Units only. Applicants state that investors may 
purchase Shares in Creation Units from each Fund and redeem Creation 
Units from each Fund. Applicants further state that because the market 
price of Shares will be disciplined by arbitrage opportunities, 
investors should be able to sell Shares in the secondary market at 
prices that do not vary substantially from their NAV.

Section 22(d) of the Act and Rule 22c-1 under the Act

    4. Section 22(d) of the Act, among other things, prohibits a dealer 
from selling a redeemable security, which is currently being offered to 
the public by or through a principal underwriter, except at a current 
public offering price described in the prospectus. Rule 22c-1 under the 
Act generally requires that a dealer selling, redeeming, or 
repurchasing a redeemable security do so only at a price based on its 
NAV. Applicants state that secondary market trading in Shares will take 
place at negotiated prices, not at a current offering price described 
in the prospectus, and not at a price based on NAV. Thus, purchases and 
sales of Shares in the secondary market will not comply with section 
22(d) of the Act and rule 22c-1 under the Act. Applicants request an 
exemption under section 6(c) from these provisions.
    5. Applicants assert that the concerns sought to be addressed by 
section 22(d) of the Act and rule 22c-1 under the Act with respect to 
pricing are equally satisfied by the proposed method of pricing Shares. 
Applicants maintain that while there is little legislative history 
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to (a) prevent dilution caused by 
certain riskless-trading schemes by principal underwriters and contract 
dealers, (b) prevent unjust discrimination or preferential treatment 
among buyers resulting from sales at different prices, and (c) assure 
an orderly distribution of investment company shares by eliminating 
price competition from dealers offering shares at less than the 
published sales price and repurchasing shares at more than the 
published redemption price.
    6. Applicants believe that none of these purposes will be thwarted 
by permitting Shares to trade in the secondary market at negotiated 
prices. Applicants state that (a) secondary market trading in Shares 
does not involve the Funds as parties and cannot result in dilution of 
an investment in Shares, and (b) to the extent different prices exist 
during a given trading day, or from day to day, such variances occur as 
a result of third-party market forces, such as supply and demand. 
Therefore, applicants assert that secondary market transactions in 
Shares will not lead to discrimination or preferential treatment among 
purchasers. Finally, applicants contend that the proposed distribution 
system will be orderly because arbitrage activity will ensure that the 
difference between the market price of Shares and their NAV remains 
narrow.

Section 12(d)(1)

    7. Section 12(d)(1)(A) of the Act prohibits a registered investment 
company from acquiring shares of an investment company if the 
securities represent more than 3% of the total outstanding voting stock 
of the acquired company, more than 5% of the total assets of the 
acquiring company, or, together with the securities of any other 
investment companies, more than 10% of the total assets of the 
acquiring company. Section 12(d)(1)(B) of the Act prohibits a 
registered open-end investment company, its principal underwriter, or 
any other broker or dealer from selling its shares to another 
investment company if the sale will cause the acquiring company to own 
more than 3% of the acquired company's voting stock, or if the sale 
will cause more than 10% of the acquired company's voting stock to be 
owned by investment companies generally.
    8. Applicants request that the order permit certain investment 
companies registered under the Act to acquire Shares beyond the 
limitations in section 12(d)(1)(A) and permit the Funds, any principal 
underwriter for the Funds, and any broker or dealer registered under 
the Exchange Act (``Brokers''), to sell Shares beyond the limitations 
in section 12(d)(1)(B). Applicants request that these exemptions apply 
to: (1) Any Fund that is currently or subsequently part of the same 
``group of investment companies'' as the Initial Funds within the 
meaning of section 12(d)(1)(G)(ii) of the Act as well as any principal 
underwriter for the Funds 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 within the meaning of section 12(d)(1)(G)(ii) of the Act and that 
enters into a FOF Participation Agreement (as defined below) with a 
Fund (such management investment companies are referred to herein as 
``Investing Management Companies,'' such unit investment trusts are 
referred to herein as ``Investing Trusts,'' and Investing Management 
Companies and Investing Trusts are ``Investing Funds''). Investing 
Funds do not include the Funds. Each Investing Trust will have a 
sponsor (``Sponsor'') and each Investing Management Company will have 
an investment adviser within the meaning of section 2(a)(20)(A) of the 
Act (``Investing Fund Advisor'') that does not control, is not 
controlled by or under common control with the Advisor. Each Investing 
Management Company may also have one or more investment advisers within 
the meaning of section 2(a)(20)(B) of the Act (each, a ``Subadvisor'').
    9. Applicants assert that the proposed transactions will not lead 
to any of the abuses that section 12(d)(1) was designed to prevent. 
Applicants submit that the proposed conditions to the requested relief 
address the concerns underlying the limits in section 12(d)(1), which 
include concerns about undue influence, excessive layering of fees and 
overly complex structures.
    10. Applicants believe that neither the Investing Funds nor an 
Investing Fund Affiliate would be able to exert undue influence over 
the Funds.\7\ To limit the

[[Page 7332]]

control that an Investing Fund may have over a Fund, applicants propose 
a condition prohibiting the Investing Fund Advisor or Sponsor; any 
person controlling, controlled by, or under common with the Investing 
Fund Advisor or Sponsor; and any investment company or issuer that 
would be an investment company but for sections 3(c)(1) or 3(c)(7) of 
the Act that is advised or sponsored by the Investing Fund Advisor or 
advised or sponsored by 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 Subadvisor; 
any person controlling, controlled by, or under common control with the 
Subadvisor; 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 Subadvisor or any person controlling, controlled by, or under 
common control with the Subadvisor (``Investing Fund's Subadvisory 
Group'').
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    \7\ An ``Investing Fund Affiliate'' is an Investing Fund 
Advisor, Subadvisor, Sponsor, promoter, and principal underwriter of 
an Investing Fund, and any person controlling, controlled by, or 
under common control with any of those entities.
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    11. 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 any offering of securities during the existence 
of any underwriting or selling syndicate of which a principal 
underwriter is an Underwriting Affiliate (``Affiliated Underwriting''). 
An ``Underwriting Affiliate'' is a principal underwriter in any 
underwriting or selling syndicate that is an officer, director, member 
of an advisory board, Investing Fund Advisor, Subadvisor, employee or 
Sponsor of an Investing Fund, or a person of which any such officer, 
director, member of an advisory board, Investing Fund Advisor, 
Subadvisor, 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).
    12. Applicants do not believe that the proposed arrangement will 
involve excessive layering of fees. The board of directors or trustees 
of each Investing Management Company, including a majority of the 
disinterested directors or trustees, before approving any advisory 
contract under section 15 of the Act, will be required to determine 
that the advisory fees charged to the Investing Management Company 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. In 
addition, the 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 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), in 
connection with the investment by the Investing Fund in the Funds. 
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 set forth in Conduct Rule 2830 of 
the NASD (``Rule 2830'').
    13. 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 of 
any 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.
    14. To ensure that Investing Funds are aware of the terms and 
conditions of the requested order, the Investing Funds must enter into 
an agreement with the respective Funds (``FOF Participation 
Agreement''). The FOF Participation Agreement will include an 
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. 
The FOF Participation Agreement will further require any Investing Fund 
that exceeds the 5% or 10% limitations in section 12(d)(1)(A)(ii) and 
(iii) to disclose in its Prospectus that it may invest in ETFs and 
disclose, in ``plain English,'' in its Prospectus the unique 
characteristics of the Investing Funds investing in investment 
companies, including but not limited to the expense structure and any 
additional expenses of investing in investment companies.

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

    15. Section 17(a)(1) and (2) of the Act generally prohibit 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 provides that a control relationship will be presumed where one 
person owns more than 25% of another person's voting securities. The 
Funds may be deemed to be controlled by the Advisor or an entity 
controlling, controlled by or under common control with the 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 Advisor or an entity 
controlling, controlled by or under common control with the Advisor (an 
``Affiliated Fund''). Applicants state that because the definition of 
``affiliated person'' includes any person owning 5% or more of an 
issuer's outstanding voting securities, every purchaser of a Creation 
Unit will be affiliated with the Fund so long as fewer than twenty 
Creation Units are in existence, and any purchaser that owns more than 
25% of a Fund's outstanding Shares will be affiliated with a Fund.
    16. Applicants request an exemption from section 17(a) under 
sections 6(c) and 17(b), to permit in-kind purchases and redemptions by 
persons that are affiliated persons or second tier affiliates of the 
Funds solely by virtue of one or more of the following: (1) Holding 5% 
or more, or more than 25%, of the outstanding Shares of the Trust or 
one or more Funds; (2) an affiliation with a person with an ownership 
interest described in (1); or (3) 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 
it is an affiliated person or second tier affiliate because of one or 
more of the following: (1) The Investing Fund holds 5% or more of the 
Shares of the Trust or one or more Funds; (2) an Investing Fund 
described in (1) is an affiliated person of the Investing Fund; or (3) 
the Investing Fund holds 5% or more of the shares of one or more 
Affiliated Funds.\8\
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    \8\ Although applicants believe that most Investing Funds will 
purchase and sell Shares in the secondary market, an Investing Fund 
might seek to transact in Shares directly with a Fund. With respect 
to these in-kind transactions, applicants are requesting relief for 
Funds that are affiliated persons or second tier affiliates of an 
Investing Fund solely by virtue of one or more of the reasons 
described above.

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    17. Applicants contend that no useful purpose would be served by 
prohibiting affiliated persons or second tier affiliates of a Fund from 
purchasing or redeeming Creation Units through ``in-kind'' 
transactions. The deposit procedure for in-kind purchases and the 
redemption procedure for in-kind redemptions will be the same for all 
purchases and redemptions. Deposit Securities and Fund Securities will 
be valued under the same objective standards applied to valuing 
Portfolio Securities. Therefore, applicants state that in-kind 
purchases and redemptions will afford no opportunity for the affiliated 
persons and second tier affiliates described above 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 by these persons of the Fund.
    18. 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 
the consideration paid for the purchase or received for the redemption 
of Shares directly from a Fund by an Investing Fund (or any other 
investor) will be based on the NAV of the Shares. In addition, the 
securities received or transferred by the Fund in connection with the 
purchase or redemption of Shares will be valued in the same manner as 
the Fund's Portfolio Securities and thus the transactions will not be 
detrimental to the Investing Fund. Applicants also state that the 
proposed transactions will be consistent with the policies of each 
Investing Fund and Fund and with the general purposes of the Act. 
Applicants state that the FOF Participation Agreement will require an 
Investing Fund to represent that its ownership of Shares issued by a 
Fund is consistent with the investment policies set forth in the 
Investing Fund's registration statement.

Applicants' Conditions

    The 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. Each Prospectus will clearly disclose that, for purposes of the 
Act, Shares are issued by a registered investment company and that the 
acquisition of Shares by investment companies and companies relying on 
sections 3(c)(1) or 3(c)(7) of the Act is subject to the restrictions 
of section 12(d)(1) of the Act, except as permitted by an exemptive 
order that permits registered investment companies to invest in a Fund 
beyond the limits in section 12(d)(1), subject to certain terms and 
conditions, including that the registered investment company enter into 
a FOF Participation Agreement with the Fund regarding the terms of the 
investment.
    2. As long as the Funds operate in reliance on the requested order, 
the Shares of the Funds will be listed on a Stock Exchange.
    3. Neither the Trust nor any Fund will be advertised or marketed as 
an open-end investment company or a mutual fund. Each Fund's Prospectus 
will prominently disclose that the Fund is an actively managed 
exchange-traded fund. Each Prospectus will prominently disclose that 
the Shares are not individually redeemable shares and will disclose 
that the owners of the Shares may acquire those Shares from the Fund 
and tender those Shares for redemption to the Fund in Creation Units 
only. Any advertising material that describes the purchase or sale of 
Creation Units or refers to redeemability will prominently disclose 
that the Shares are not individually redeemable and that owners of the 
Shares may acquire those Shares from the Fund and tender those Shares 
for redemption to the Fund in Creation Units only.
    4. The website for the Funds, which is and will be publicly 
accessible at no charge, will contain the following information, on a 
per Share basis, for each Fund: (a) the prior Business Day's NAV and 
the Bid/Ask Price, and a calculation of the premium or discount of the 
Bid/Ask Price against such NAV; and (b) data in chart format displaying 
the frequency distribution of discounts and premiums of the daily Bid/
Ask Price against the NAV, within appropriate ranges, for each of the 
four previous calendar quarters (or for the life of the Fund, if 
shorter).
    5. The Prospectus and annual report for each Fund will also 
include: (a) the information listed in condition A.4(b), (i) in the 
case of the Prospectus, for the most recently completed year (and the 
most recently completed quarter or quarters, as applicable) and (ii) in 
the case of the annual report, for the immediately preceding five years 
(or for the life of the Fund, if shorter), and (b) calculated on a per 
Share basis for one-, five- and ten-year periods (or for the life of 
the Fund, if shorter), the cumulative total return and the average 
annual total return based on NAV and Bid/Ask Price.
    6. On each Business Day, before commencement of trading in Shares 
on the Stock Exchange, the Fund will disclose on its website the 
identities and quantities of the Portfolio Securities and other assets 
held by the Fund that will form the basis for the Fund's calculation of 
NAV at the end of the Business Day.
    7. The Advisor or Fund Subadvisor, directly or indirectly, will not 
cause any Authorized Participant (or any investor on whose behalf an 
Authorized Participant may transact with the Fund) to acquire any 
Deposit Security for the Fund through a transaction in which the Fund 
could not engage directly.
    8. The requested order will expire on the effective date of any 
Commission rule under the Act that provides relief permitting the 
operation of actively managed exchange-traded funds.

B. Section 12(d)(1) Relief

    1. The members of the Investing Fund's Advisory Group will not 
control (individually or in the aggregate) a Fund within the meaning of 
section 2(a)(9) of the 1940 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 1940 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 
Subadvisor or a person controlling, controlled by or under common 
control with the Subadvisor 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 Subadvisor are conducting the investment 
program of the Investing Management Company without taking

[[Page 7334]]

into account any consideration received by the Investing Management 
Company or an Investing Fund Affiliate from a Fund or a Fund Affiliate 
in connection with any services or transactions.
    4. Once an investment by an Investing Fund in the securities of a 
Fund exceeds the limit in section l2(d)(1)(A)(i) of the Act, the board 
of trustees (``Board'') of a Fund, including a majority of the 
disinterested Board members, will determine that any consideration paid 
by the Fund to the Investing Fund or an Investing Fund Affiliate in 
connection with any services or transactions: (i) Is fair and 
reasonable in relation to the nature and quality of the services and 
benefits received by the Fund; (ii) is within the range of 
consideration that the Fund would be required to pay to another 
unaffiliated entity in connection with the same services or 
transactions; and (iii) does not involve overreaching on the part of 
any person concerned. This condition does not apply with respect to any 
services or transactions between a Fund and its investment 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-l under 
the Act) received from a Fund by the Investing Fund Advisor, or Trustee 
or Sponsor, or an affiliated person of the Investing Fund Advisor, or 
Trustee or Sponsor, other than any advisory fees paid to the Investing 
Fund Advisor, or Trustee or Sponsor, or its affiliated person by the 
Fund, in connection with the investment by the Investing Fund in the 
Fund. Any Subadvisor will waive fees otherwise payable to the 
Subadvisor, directly or indirectly, by the Investing Management Company 
in an amount at least equal to any compensation received from a Fund by 
the Subadvisor, or an affiliated person of the Subadvisor, other than 
any advisory fees paid to the Subadvisor 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 Subadvisor. In the 
event that the Subadvisor 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 the 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 1940 
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 limit in section 
12(d)(1)(A), an Investing Fund will execute a FOF Participation 
Agreement with the Fund stating that their respective boards of 
directors or trustees and their investment advisors, or Trustee and 
Sponsor, as applicable, understand the terms and conditions of the 
order, and agree to fulfill their responsibilities under the order. At 
the time of its investment in shares of a Fund in excess of the limit 
in section 12(d)(1)(A)(i), an Investing Fund will notify the Fund of 
the investment. At such time, the Investing Fund will also transmit to 
the Fund a list of the names of each Investing Fund Affiliate and 
Underwriting Affiliate. The Investing Fund will notify the Fund of any 
changes to the list as soon as reasonably practicable after a change 
occurs. The Fund and the Investing Fund will maintain and preserve a 
copy of the order, the FOF Participation Agreement, and the list with 
any updated information for the duration of the investment and for a 
period of not less than six years thereafter, the first two years in an 
easily accessible place.
    10. Before approving any advisory contract under section 15 of the 
Act, the board of directors or trustees of each Investing Management 
Company, including a majority of the disinterested directors or 
trustees, will find that the advisory fees charged under such contract 
are based on services provided that will be in addition to, rather than 
duplicative of, the services provided under the advisory contract(s) of 
any Fund in which the Investing Management Company may invest. These 
findings and their basis will be recorded fully in the minute books of 
the appropriate Investing Management Company.
    11. Any sales charges and/or service fees charged with respect to 
shares of an Investing Fund will not exceed the limits applicable to a 
fund of funds as set forth in Rule 2830.
    12. No Fund 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.

    By the Commission.
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-2269 Filed 2-6-08; 8:45 am]

BILLING CODE 8011-01-P
