
[Federal Register: February 9, 2010 (Volume 75, Number 26)]
[Notices]               
[Page 6417-6421]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09fe10-105]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29128; 812-13658-01]

 
U.S. One, Inc. and U.S. One Trust; Notice of Application

February 2, 2010.
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.

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Applicants: U.S. One, Inc. (the ``Advisor'') and U.S. One Trust (the 
``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; and (c) certain affiliated persons of the 
series to deposit securities into, and receive securities from, the 
series in connection

[[Page 6418]]

with the purchase and redemption of Creation Units.

Filing Dates: The application was filed on May 20, 2009, and amended on 
September 28, 2009, and February 1, 2010.

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, 2010, 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: P.O. Box 17073, 
Reno, NV 89511.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at 
(202) 551-6817 or Julia Kim Gilmer, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file number, or an applicant 
using the Company name box, at http://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicants' Representations

    1. The Trust, a statutory trust established under the laws of 
Delaware, is registered with the Commission as an open-end management 
investment company. The Trust is organized as a series investment 
company with one initial series (the ``Initial Fund''). The investment 
objective of the Initial Fund will be to provide capital appreciation. 
The Initial Fund and all future series of the Trust (``Future Funds,'' 
collectively with the Initial Fund, ``Funds'') will attempt to achieve 
their investment objectives by utilizing an active management strategy. 
Each Fund's investment objective, policies and investment strategies 
will be fully disclosed in the Fund's prospectus (``Prospectus'') \1\ 
and statement of additional information (``SAI''). Each Fund will 
primarily hold shares of underlying exchange-traded funds (``ETFs''), 
as well as shares of certain exchange-traded products that are not 
registered as investment companies under the Act.\2\ Applicants will 
only invest in unaffiliated ETFs that have received certain exemptive 
relief from the Commission to permit such investments in excess of the 
limits of section 12(d)(1)(A) and (B) of the Act. Any Future Fund (a) 
will be advised by the Advisor or an entity controlled by or under 
common control with the Advisor, and (b) will comply with the terms and 
conditions stated in the application.\3\
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    \1\ All representations and conditions contained in the 
application that require a Fund to disclose particular information 
in the Fund's Prospectus and/or annual report shall be effective 
with respect to the Fund until the time that the Fund complies with 
the disclosure requirements adopted by the Commission in Investment 
Company Act Release No. 28584 (Jan. 13, 2009).
    \2\ The Funds may invest in exchange-traded products that invest 
primarily in commodities or currency, but otherwise operate in a 
manner similar to exchange-traded products registered under the Act. 
In addition, the Funds may also invest in equity securities or fixed 
income securities traded in a U.S. or non-U.S. markets. Neither the 
Initial Funds nor any Future Fund will invest in options contracts, 
futures contracts, or swap agreements. The Funds may also invest in 
equity securities or fixed income securities traded in international 
markets or in a combination of equity, fixed income and U.S. money 
market securities and/or non-U.S. money market securities.
    \3\ All existing entities that currently intend to rely on the 
requested order have been named as applicants. Any other existing or 
future entity that subsequently relies on the order will comply with 
the terms and conditions of the application.
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    2. The Advisor, a Nevada corporation, or a subsidiary of such 
company, will serve as the investment adviser to each Fund. The 
Advisor, or its subsidiary, if applicable, will be registered as an 
investment adviser of the Investment Advisers Act of 1940 (``Advisers 
Act'') prior to any Fund beginning operations. Applicants anticipate 
that Funds also may engage subadvisors (``Subadvisors''). Any 
Subadvisor will be registered under the Advisers Act.
    3. Applicants anticipate that shares of the Funds (``Shares'') will 
be sold at a price of between $25 and $200 per Share in Creation Units 
of 50,000 or more Shares. All orders to purchase Creation Units must be 
placed with the principal underwriter and distributor of the Creation 
Units (``Distributor'') by or through a party that has entered into a 
participant agreement with the Distributor (``Authorized 
Participant''). Authorized Participants will include broker-dealers, 
banks, trust companies, and clearing companies that are participants in 
the Depository Trust Company (``DTC,'' and such participants, ``DTC 
Participants''). Purchases of Creation Units of the Funds will be made 
generally by means of an in-kind tender of shares of specified ETFs 
(the ``Deposit Securities''), with any cash portion of the purchase 
price (the ``Cash Amount'') to be kept to a minimum. The Cash Amount is 
an amount equal to the difference between the NAV of a Creation Unit 
and the market value of the Deposit Securities. 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. The Trust may in the future determine 
that Shares of one or more Funds may be purchased in Creation Units on 
a cash-only basis if the Trust and the Advisor believe such method 
would substantially minimize the Trust's transactional costs or enhance 
its operational efficiencies.
    4. Each Fund will charge a fee (``Transaction Fee'') in connection 
with the sale or redemption of Creation Units to protect existing 
shareholders from the dilutive costs associated with the purchase and 
redemption of Creation Units. Each purchaser of a Creation Unit will 
receive a Prospectus that contains complete disclosure about the 
Transaction Fee. All orders to purchase Creation Units must be placed 
with the Distributor no later than the closing time of the regular 
trading session on the NYSE (ordinarily 4 p.m. ET) in order for the 
purchaser to receive the NAV determined on that date. The Distributor 
will transmit all purchase orders to the relevant Fund and will also 
maintain a record of Creation Unit purchases, send out confirmations of 
such purchases, and furnish a Prospectus to purchasers of Creation 
Units.
    5. The Trust intends to list the Shares of each Fund on a national 
securities exchange (``Listing Market'') such as the NYSE. It is 
expected that one or more member firms will be designated to act as a 
specialist or market maker and maintain a market for the Shares trading 
on the Listing Market (``Market Makers''). The price of Shares trading 
on the Listing Market will be based on a current bid/offer market. No 
secondary sales will be made to brokers or dealers at a concession by 
the Distributor or by a Fund. Purchases and sales of Shares in the 
secondary market, which will not involve a Fund, will be subject to 
customary brokerage commissions and charges.
    6. Purchasers of Shares in Creation Units may hold such Shares or 
may sell them into the secondary market. Applicants expect that 
purchasers of Creation Units will include institutional

[[Page 6419]]

investors and arbitrageurs, who will purchase or redeem Creation Units 
of a Fund in pursuit of arbitrage profit and thereby enhance the 
liquidity of the secondary market and keep the market price of shares 
close to their NAV. Applicants expect that secondary market purchasers 
of Shares will include both institutional investors and retail 
investors for whom Shares will provide a useful, retail-priced, 
exchange-traded mechanism for investing in a professionally managed, 
diversified selection of ETFs.\4\
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    \4\ 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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    7. 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. A redeeming investor will receive a basket of securities 
designated to be delivered for Creation Unit redemptions on the date 
that the request for redemption is submitted (``Redemption 
Securities''), which in most cases will be the same as the Deposit 
Securities required to purchase Creation Units on that date, and will 
either receive from or pay to the Fund an amount calculated in the same 
manner as the Cash Amount (``Cash Redemption Payment'').\5\ A Fund may 
make redemptions partly in cash in lieu of transferring one or more 
Redemption Securities to a redeeming investor if the Fund determines 
that such alternative is warranted, such as if the redeeming investor 
is unable, by law or policy, to own a particular Redemption Security. A 
redeeming investor also must pay a Transaction Fee to cover custodial 
costs.
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    \5\ Applicants state the Cash Redemption Payment may differ if 
the Redemption Securities are not identical to the Deposit 
Securities on that day.
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    8. The Trust will not be advertised or marketed or otherwise ``held 
out'' as a traditional open-end investment company or a mutual fund. 
The designation of the Trust and the Funds in all marketing materials 
will be limited to the terms ``exchange-traded fund,'' ``investment 
company,'' ``fund'' and ``trust'' without reference to an ``open-end 
fund'' or a ``mutual fund,'' except to compare and contrast the Trust 
and the Funds with traditional mutual funds. Each Fund's Prospectus 
will also prominently disclose that the Fund is an actively managed 
exchange-traded fund. All marketing materials that describe the method 
of obtaining, buying or selling Creation Units, or Shares traded on the 
Listing Market, or refer to redeemability, will prominently disclose 
that Shares are not individually redeemable and that the owners of 
Shares may acquire 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 Trust will provide copies of its annual and semi-annual 
shareholder reports to DTC Participants for distribution to beneficial 
owners of Shares.
    9. The Trust (or the Listing Market) intends to maintain a Web site 
that will be publicly available at no charge, which will include the 
Prospectus and other information about the Funds that is updated on a 
daily basis. On each Business Day, before the commencement of trading 
in Shares on the Listing Market, each Fund will disclose the identities 
and weightings of the 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.\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.
    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.

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 Creation Units 
will always be redeemable. Applicants further state that because 
Creation Units may always be purchased and redeemed at NAV (less 
certain transactional expenses), the price of Creation Units on the 
secondary market and the price of the individual Shares of a Creation 
Unit, taken together, should not vary substantially from the NAV of 
Creation Units.

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 trading in Shares will take place on and 
away from the Listing Market at all times on the basis of current bid/
offer 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

[[Page 6420]]

while there is little legislative history regarding section 22(d), its 
provisions, as well as those of rule 22c-1, appear to have been 
designed to (a) Prevent dilution caused by certain riskless-trading 
schemes by principal underwriters and contract dealers, (b) prevent 
unjust discrimination or preferential treatment among buyers, and (c) 
assure an orderly distribution of investment company shares by contract 
dealers by eliminating price competition from non-contract dealers who 
could offer investors shares at less than the published sales price and 
who could pay investors a little more than the published redemption 
price.
    6. Applicants believe that none of these purposes will be relevant 
issues for secondary trading by dealers in Shares of a Fund. Applicants 
state that (a) secondary market trading in Shares will not cause 
dilution for owners of such Shares because such transactions do not 
directly involve Fund assets, 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, but do not occur as a result of unjust or discriminatory 
manipulation. Finally, applicants contend that the proposed 
distribution system will be orderly because competitive forces in the 
marketplace should ensure that the difference between the market price 
of Shares and their NAV remains narrow.

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

    7. 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 Advisor 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 an investor could own 5% or 
more of a Fund or the Trust, or in excess of 25% of the outstanding 
Shares of a Fund or the Trust, making that investor an affiliated 
person of the Fund or the Trust under section 2(a)(3)(A) or 2(a)(3)(C) 
of the Act. For so long as such an investor was deemed to be an 
affiliated person, section 17(a)(1) could be read to prohibit that 
investor from depositing the Deposit Securities with a Fund in return 
for a Creation Unit. Similarly, section 17(a)(2) could be read to 
prohibit such an investor from entering into an in-kind redemption with 
a Fund.
    8. 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: (a) holding 5% 
or more, or more than 25%, of the outstanding Shares of the Trust or 
one or more Funds; (b) an affiliation with a person with an ownership 
interest described in (a); or (c) holding 5% or more, or more than 25%, 
of the shares of one or more Affiliated Funds.
    9. Applicants contend that no useful purpose would be served by 
prohibiting the affiliated persons or second tier affiliates of a Fund 
as described above from purchasing or redeeming Creation Units through 
``in-kind'' transactions. The purchase and redemption of Creation Units 
of each Fund is on the same terms for all investors, whether or not 
such investor is an affiliate. In each case, Creation Units are sold 
and redeemed by the Trust or a Fund at their NAV. The Deposit 
Securities and Redemption Securities will be valued in the same manner 
as the securities in the Fund portfolio. Accordingly, applicants 
believe the proposed transactions described above meet the section 
17(b) standards for relief because the terms of such proposed 
transactions are reasonable and fair and do not involve overreaching on 
the part of any person concerned, and the proposed transactions will be 
consistent with the policies of each 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: \7\
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    \7\ See note 1, supra.
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    1. Neither the Trust nor any Fund will be advertised or marketed as 
an open-end investment company or mutual fund. Each Fund's Prospectus 
will prominently disclose that the Fund is an actively managed 
exchange-traded fund. Each Prospectus also will prominently disclose 
that Shares are not individually redeemable shares and will disclose 
that owners of Shares may acquire those Shares from a Fund and tender 
those Shares to a Fund for redemption 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.
    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.
    3. The Web site for the Funds, which 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 reported 
closing price, and a calculation of the premium or discount of the 
closing price against such NAV; and (b) data in chart format displaying 
the frequency distribution of discounts and premiums of the daily 
closing price against the NAV, within appropriate ranges, for each of 
the four previous calendar quarters (or for the life of the Fund, if 
shorter).
    4. The Prospectus and annual report for each Fund will also 
include: (a) The information listed in condition 3(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 closing 
price, calculated on a per Share basis for one-, five- and ten-year 
periods (or life of the Fund, if shorter).
    5. As long as a Fund operates in reliance on the requested order, 
its Shares will be listed on a Listing Market.
    6. On each Business Day, before commencement of trading in Shares 
on a Fund's Listing Market, the Fund will disclose on its Web site the 
identities and weightings of the component securities and other assets 
held by the

[[Page 6421]]

Fund that will form the basis for the Fund's calculation of NAV at the 
end of the Business Day.
    7. The Advisor or any 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.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-2749 Filed 2-8-10; 8:45 am]
BILLING CODE 8011-01-P

