
[Federal Register: December 31, 2008 (Volume 73, Number 251)]
[Notices]               
[Page 80457-80464]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31de08-104]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28571; 812-13440]

 
Grail Advisors, LLC and Grail Advisors' Alpha ETF Trust; Notice 
of Application

December 23, 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), 22(d) and 22(e) of the Act and rule 22c-1 under the 
Act, and under sections 6(c) and 17(b) of the Act for an exemption from 
sections 17(a)(1) and (a)(2) of the Act, and under section 12(d)(1)(J) 
for an exemption from sections 12(d)(1)(A) and (B) of the Act.

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Applicants: Grail Advisors, LLC (``Adviser'') and Grail Advisors' Alpha 
ETF Trust (``Trust'').

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 series to pay redemption 
proceeds, under certain circumstances, more than seven days from the 
tender of Shares for redemption; (d) certain affiliated persons of the 
series to deposit securities into, and receive securities from, the 
series in connection with the purchase and redemption of Creation 
Units; and (e) certain registered management investment companies and 
unit investment trusts outside of the same group of investment 
companies as the series to acquire Shares.

Filing Dates: The application was filed on October 17, 2007 and amended 
on August 1, 2008. Applicants have agreed to file an amendment during 
the notice period, the substance of which is reflected in this notice.

Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on January 15, 2009, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state

[[Page 80458]]

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: William M. Thomas, 
Grail Advisors, LLC, One Ferry Building, Suite 255, San Francisco, CA 
94111.

FOR FURTHER INFORMATION CONTACT: Jaea F. Hahn, Senior Counsel, at (202) 
551-6870 or Marilyn Mann, Branch Chief, at (202) 551-6821 (Division of 
Investment Management, Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained 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 organized as a Delaware statutory trust and will be 
registered as an open-end management investment company under the Act. 
The Trust will offer one initial series, Grail U.S. Value Fund 
(``Initial Fund''). The Initial Fund's investment objective will be to 
provide long-term capital growth by investing primarily in U.S. equity 
securities.
    2. Applicants request that the order apply to the Initial Fund and 
any additional series of the Trust and other open-end investment 
management companies or series thereof, that may be created in the 
future (``Future Funds'').\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. Future Funds may invest in U.S. equity or fixed 
income securities, foreign equity or fixed income securities (``Foreign 
Funds''), or a combination of U.S. and foreign equity or fixed income 
securities. The Initial Fund and Future Funds, including the Foreign 
Funds, together are the ``Funds.'' Each Fund will operate as an 
actively managed exchange-traded fund (``ETF'').
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    \1\ All entities that currently intend to rely on the order are 
named as applicants. Any other entity that relies on the order in 
the future will comply with the terms and conditions of the 
application. A Fund of Funds (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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    3. The Adviser, a Delaware limited liability company, is registered 
as an investment adviser under the Investment Advisers Act of 1940 
(``Advisers Act'') and will serve as investment adviser to each Fund. 
The Adviser expects to enter into a sub-advisory agreement with one or 
more investment advisers each of which will serve as an adviser to a 
Fund (each, a ``Sub-Adviser''). Each Sub-Adviser will be registered 
under the Advisers Act. Each Fund will have a distributor 
(``Distributor'') that will be registered as a broker-dealer under the 
Securities Exchange Act of 1934 (``Exchange Act'') and will serve as 
the principal underwriter for the Fund.
    4. Shares of the Funds will be sold at a price of between $20 and 
$100 per Share in Creation Units of 50,000 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 Adviser (the ``Deposit Securities''), together with the deposit 
of a relatively small specified cash payment (``Balancing Amount''). 
The Balancing Amount 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 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 Balancing Amount effective as of 
the previous Business Day, per outstanding Share of each Fund, will 
be made available. The 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 Balancing Amount 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 (``Exchange''). It is expected that one or more 
member firms of a listing Exchange will be designated to act as a 
specialist and maintain a market for Shares on the Exchange (the 
``Specialist''), or if Nasdaq or a similar electronic Exchange is the 
listing Exchange, one or more member firms will act as a market maker 
(``Market Maker'') and maintain a market for Shares.\4\ Prices of 
Shares trading on an 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

[[Page 80459]]

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 (``Redemption Securities'') and (b) a ``Cash Redemption 
Payment,'' consisting of an amount calculated in the same manner as the 
Balancing Amount, although the actual amount of the Cash Redemption 
Payment may differ from the Balancing Amount if the Redemption 
Securities are not identical to the Deposit Securities on that day. An 
investor may receive the cash equivalent of a Redemption Security in 
certain circumstances, such as if the investor is constrained from 
effecting transactions in the security by regulation or policy.\6\ 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.
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    \6\ Applicants state that a cash-in-lieu amount will replace any 
``to-be-announced'' (``TBA'') transaction that is listed as a 
Deposit Security or Redemption Security of any Fund. A TBA 
transaction is a method of trading mortgage-backed securities where 
the buyer and seller agree upon general trade parameters such as 
agency, settlement date, par amount and price. The actual pools 
delivered generally are determined two days prior to the settlement 
date. The amount of substituted cash in the case of TBA transactions 
will be equivalent to the value of the TBA transaction listed as a 
Deposit Security or Redemption Security.
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    9. Applicants state that in accepting Deposit Securities and 
satisfying redemptions with Redemption Securities, the relevant Funds 
will comply with the federal securities laws, including that the 
Deposit Securities and Redemption Securities are sold in transactions 
that would be exempt from registration under the Securities Act.\7\ As 
a general matter, the Deposit Securities and Redemption Securities will 
correspond pro rata to the securities held by each Fund, although 
Redemption Securities received on redemption may not always be 
identical to Deposit Securities deposited in connection with the 
purchase of Creation Units for the same day.
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    \7\ In accepting Deposit Securities and satisfying redemptions 
with Redemption Securities that are restricted securities eligible 
for resale pursuant to rule 144A under the Securities Act, the 
relevant Funds will comply with the conditions of rule 144A, 
including in satisfying redemptions with such rule 144A eligible 
restricted Redemption Securities. The Prospectus will also state 
that an Authorized Participant that is not a ``Qualified 
Institutional Buyer'' as defined in rule 144A under the Securities 
Act will not be able to receive, as part of a redemption, restricted 
securities eligible for resale under rule 144A.
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    10. 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.
    11. 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 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.\8\
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    \8\ Applicants note that under accounting procedures followed by 
the Funds, trades made on the prior Business Day (``T'') will be 
booked and reflected in NAV on the current Business Day (``T + 1''). 
Accordingly, the Funds will be able to disclose at the beginning of 
the Business Day the portfolio that will form the basis for the NAV 
calculation at the end of the Business Day.
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Applicants' Legal Analysis

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

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

    3. Section 5(a)(1) of the Act defines an ``open-end company'' as a 
management investment company that is offering for sale or has 
outstanding any redeemable security of which it is the issuer. Section 
2(a)(32) of the Act defines a redeemable security as any security, 
other than short-term paper, under the terms of which the holder, upon 
its presentation to the issuer, is entitled to receive approximately a 
proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Shares will not be individually redeemable, 
applicants request an order that would permit each Fund, as a series of 
an open-end management investment

[[Page 80460]]

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 22(e)

    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 the Foreign Funds is 
contingent not only on the settlement cycle of the United States 
market, but also on currently practicable delivery cycles in local 
markets for underlying foreign securities held by the Foreign Funds. 
Applicants state that local market delivery cycles for transferring 
Shares to redeeming investors, coupled with local market holiday 
schedules, will, under certain circumstances, require a delivery 
process longer than seven calendar days for Foreign Funds. Applicants 
request relief under section 6(c) of the Act from section 22(e) to 
allow the Foreign Funds to pay redemption proceeds up to 14 calendar 
days after the tender of any Creation Units for redemption. Except as 
disclosed in the relevant Foreign Fund's Prospectus and/or SAI, 
applicants expect that each Foreign Fund will be able to deliver 
redemption proceeds within seven days.\9\ With respect to future 
Foreign Funds, applicants seek the same relief from section 22(e) only 
to the extent that circumstances similar to those described in the 
application exist.
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    \9\ Rule 15c6-1 under the Exchange Act requires that most 
securities be settled within three business days of the trade. 
Applicants acknowledge that no relief obtained from the requirements 
of section 22(e) will affect any obligations applicants may have 
under rule 15c6-1.
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    8. Applicants state that section 22(e) was designed to prevent 
unreasonable and unforeseen delays in the payment of redemption 
proceeds. Applicants assert that the requested relief will not lead to 
the problems that section 22(e) was designed to prevent. Applicants 
state that the SAI will disclose those local holidays (over the period 
of at least one year following the date of the SAI), if any, that are 
expected to prevent the delivery of redemption proceeds in seven 
calendar days, and the maximum number of days needed to deliver the 
proceeds for the relevant Foreign Fund. Applicants are not seeking 
relief from section 22(e) with respect to Foreign Funds that do not 
effect creations and redemptions of Creation Units in-kind.

Section 12(d)(1)

    9. Section 12(d)(1)(A) of the Act prohibits a registered investment 
company from acquiring shares of an investment company if the 
securities represent more than 3% of the total outstanding voting stock 
of the acquired company, more than 5% of the total assets of the 
acquiring company, or, together with the securities of any other 
investment companies, more than 10% of the total assets of the 
acquiring company. Section 12(d)(1)(B) of the Act prohibits a 
registered open-end investment company, its principal underwriter, or 
any other broker or dealer from selling its shares to another 
investment company if the sale will cause the acquiring company to own 
more than 3% of the acquired company's voting stock, or if the sale 
will cause more than 10% of the acquired company's voting stock to be 
owned by investment companies generally.
    10. Applicants request 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 Fund 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 a 
Fund of Funds (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 ``Funds of Funds''). Funds of Funds do not include 
the Funds. Each

[[Page 80461]]

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 (``Fund of Funds Adviser'') that does 
not control, is not controlled by or under common control with the 
Adviser. 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 ``Fund of Funds Sub-Adviser'').
    11. Applicants assert that the proposed transactions will not lead 
to any of the abuses that section 12(d)(1) was designed to prevent. 
Applicants submit that the proposed conditions to the requested relief 
address the concerns underlying the limits in section 12(d)(1), which 
include concerns about undue influence, excessive layering of fees and 
overly complex structures.
    12. Applicants believe that neither the Fund of Funds nor a Fund of 
Funds Affiliate would be able to exert undue influence over the 
Funds.\10\ To limit the control that a Fund of Funds may have over a 
Fund, applicants propose a condition prohibiting the Fund of Funds 
Adviser or Sponsor; any person controlling, controlled by, or under 
common with the Fund of Funds Adviser 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 Fund 
of Funds Adviser or advised or sponsored by the Sponsor, or any person 
controlling, controlled by, or under common control with the Fund of 
Funds Adviser or Sponsor (``Fund of 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 Fund of Funds Sub-Adviser; any person controlling, controlled 
by, or under common control with the Fund of Funds 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 Fund of Funds 
Sub-Adviser or any person controlling, controlled by, or under common 
control with the Fund of Funds Sub-Adviser (``Fund of Funds'' Sub-
Advisory Group'').
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    \10\ A ``Fund of Funds Affiliate'' is a Fund of Funds Adviser, 
Fund of Funds Sub-Adviser, Sponsor, promoter, and principal 
underwriter of a Fund of Funds, and any person controlling, 
controlled by, or under common control with any of those entities. A 
``Fund Affiliate'' is the Adviser, any 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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    13. Applicants propose other conditions to limit the potential for 
undue influence over the Funds, including that no Fund of Funds or Fund 
of Funds 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, Fund of Funds Adviser, Fund of Funds Sub-Adviser, 
employee or Sponsor of a Fund of Funds, or a person of which any such 
officer, director, member of an advisory board, Fund of Funds Adviser, 
Fund of Funds 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).
    14. 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 Fund of Funds Adviser, trustee of an Investing Trust 
(``Trustee'') or Sponsor, as applicable, will waive fees otherwise 
payable to it by the Fund of Funds in an amount at least equal to any 
compensation received from a Fund by the Fund of Funds Adviser, Trustee 
or Sponsor, or an affiliated person of the Fund of Funds Adviser, 
Trustee or Sponsor (other than any advisory fees), in connection with 
the investment by the Fund of Funds in the Funds. Applicants also state 
that any sales charges and/or service fees charged with respect to 
shares of a Fund of Funds will not exceed the limits applicable to a 
fund of funds set forth in Conduct Rule 2830 of the NASD (``Rule 
2830'').
    15. Applicants submit that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that a Fund will be 
prohibited from acquiring securities of any investment company, or 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.
    16. To ensure that a Fund of Funds is aware of the terms and 
conditions of the requested order, the Fund of Funds must enter into an 
agreement with the respective Funds (``FOF Participation Agreement''). 
The FOF Participation Agreement will include an acknowledgement from 
the Fund of Funds 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 Fund of Funds 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 Fund of 
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

    17. 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 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 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

[[Page 80462]]

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.
    18. 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 Fund of Funds of which 
it is an affiliated person or second tier affiliate.\11\
---------------------------------------------------------------------------

    \11\ Although applicants believe that most Fund of Funds will 
purchase and sell Shares in the secondary market, a Fund of Funds 
might seek to transact in Shares directly with a Fund.
---------------------------------------------------------------------------

    19. 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 Redemption 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.
    20. Applicants also submit that the sale of Shares to and 
redemption of Shares from a Fund of Funds 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 a Fund of Funds (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 Fund of Funds. Applicants also state that the 
proposed transactions will be consistent with the policies of each Fund 
of Funds and Fund and with the general purposes of the Act.

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. 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.
    2. Each Fund's 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.
    3. As long as a Fund operates in reliance on the requested order, 
the Shares of the Fund will be listed on an Exchange.
    4. 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 
and advertising materials 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.
    5. The Web site for the Trust, 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).
    6. The Prospectus and annual report for each Fund will also 
include: (a) The information listed in condition A.5(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) the cumulative total 
return and the average annual total return based on NAV and Bid/Ask 
Price calculated on a per Share basis for one-, five- and ten-year 
periods (or for the life of the Fund, if shorter).
    7. No Adviser or Sub-Adviser, directly or indirectly, will 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. On each Business Day, before commencement of trading in Shares 
on the Fund's listing Exchange, the Fund will disclose on its Web site 
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.

B. Section 12(d)(1) Relief

    1. The members of the Fund of 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 the Fund of 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 Fund 
of Funds' Advisory Group or the Fund of Funds' Sub-Advisory 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

[[Page 80463]]

condition does not apply to the Fund of Funds' Sub-Advisory Group with 
respect to a Fund for which the Fund of Funds Sub-Adviser or a person 
controlling, controlled by or under common control with the Fund of 
Funds Sub-Adviser acts as the investment adviser within the meaning of 
section 2(a)(20)(A) of the Act.
    2. No Fund of Funds or Fund of Funds Affiliate will cause any 
existing or potential investment by the Fund of Funds in a Fund to 
influence the terms of any services or transactions between the Fund of 
Funds or a Fund of Funds 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 
Fund of Funds Adviser and any Fund of Funds 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 a Fund of Funds Affiliate from a Fund or a Fund 
Affiliate in connection with any services or transactions.
    4. Once an investment by a Fund of Funds 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 Fund of Funds or a Fund of Funds 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 Fund of Funds Adviser, or Trustee or Sponsor, as applicable, 
will waive fees otherwise payable to it by the Fund of Funds 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 Fund of Funds Adviser, or Trustee or 
Sponsor of the Investing Trust, or an affiliated person of the Fund of 
Funds Adviser, or Trustee or Sponsor of the Investing Trust, other than 
any advisory fees paid to the Fund of Funds Adviser, or Trustee or 
Sponsor of the Investing Trust, or its affiliated person by the Fund, 
in connection with the investment by the Fund of Funds in the Fund. Any 
Fund of Funds Sub-Adviser will waive fees otherwise payable to the Fund 
of Funds 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 Fund of Funds Sub-Adviser, or an affiliated 
person of the Fund of Funds Sub-Adviser, other than any advisory fees 
paid to the Fund of Funds Sub-Adviser 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 Fund of Funds Sub-
Adviser. In the event that the Fund of Funds Sub-Adviser waives fees, 
the benefit of the waiver will be passed through to the Investing 
Management Company.
    6. No Fund of Funds or Fund of Funds 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 a Fund of Funds 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 Fund of Funds 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 a Fund of Funds 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 limit in section 
12(d)(1)(A), a Fund of Funds will execute a FOF Participation Agreement 
with the Fund stating that their respective boards of directors or 
trustees and their investment Advisers, or Trustee and Sponsor, as 
applicable, understand the terms and conditions of the order, and agree 
to fulfill their responsibilities under the order. At the time of its 
investment in Shares of a Fund in excess of the limit in section 
12(d)(1)(A)(i), a Fund of Funds will notify the Fund of the investment. 
At such time, the Fund of Funds will also transmit to the Fund a list 
of the names of each Fund of Funds Affiliate and Underwriting 
Affiliate. The Fund of Funds will notify the Fund of any changes to the 
list as soon as reasonably practicable after a change occurs. The Fund 
and the Fund of Funds 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

[[Page 80464]]

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 a Fund of Funds will not exceed the limits applicable to a 
Fund of Funds as set forth in Rule 2830.
    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.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-31089 Filed 12-30-08; 8:45 am]

BILLING CODE 8011-01-P
