
[Federal Register Volume 76, Number 2 (Tuesday, January 4, 2011)]
[Notices]
[Pages 397-401]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-33116]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29543; File No. 812-13601]


iShares Trust, et al.; Notice of Application

December 27, 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), 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.

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    Applicants: iShares Trust (``Trust''), iShares, Inc. 
(``Corporation'') (the Trust and Corporation, together, the 
``Companies'' and each a ``Company''), BlackRock Fund Advisors (``BFA'' 
or ``Adviser'') and SEI Investments Distribution Co. (``Distributor'').
SUMMARY:  Summary of Application: Applicants request an order that 
permits: (a) Series o
SUMMARY: f certain actively managed 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; and (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.

DATES: Filing Dates: The application was filed on November 7, 2008 and 
amended on May 4, 2009, June 17, 2010 and November 12, 2010. 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 21, 2011, 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: Andrew Josef, Esq., 
BlackRock Fund Advisors, 400 Howard Street, San Francisco, CA 94105 for 
the Companies and BFA, and SEI Investments Distribution Co., One 
Freedom Valley Drive, Oaks, PA 19456.

FOR FURTHER INFORMATION CONTACT: Jaea F. Hahn, Senior Counsel, at (202) 
551-6870 or Jennifer L. Sawin, 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 is an open-end management investment company 
registered under the Act and organized as a Delaware statutory trust. 
The Corporation is an open-end management investment company registered 
under the Act and organized as a Maryland corporation. The Adviser, an 
investment adviser registered under the Investment Advisers Act of 1940 
(``Advisers Act''), will serve as investment adviser to the initial 
Funds (``Initial Funds'').\1\ The Distributor, a broker-dealer 
registered under the Securities Exchange Act of 1934 (``Exchange 
Act''), will serve as the

[[Page 398]]

principal underwriter of the Funds' shares.
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    \1\ Although BFA does not currently expect to enter into 
subadvisory agreements with respect to the management of the Funds, 
it may do so in the future. If BFA were to enter into a subadvisory 
agreement with a BFA Affiliate (defined below) or other subadviser 
(each a ``Subadviser''), such Subadviser would be registered as an 
investment adviser under the Advisers Act.
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    2. Applicants request that the order apply to the Initial Funds and 
any future series of a Company or of other open-end management 
investment companies advised by BFA or an entity controlling, 
controlled by, or under common control with BFA (a ``BFA Affiliate'') 
that may utilize active management strategies, subject to the terms and 
conditions of the application (``Future Funds'', together with the 
Initial Funds, the ``Funds'').\2\ Each Fund will have a distinct 
investment objective and will attempt to achieve such objective by 
utilizing an ``active'' management strategy.\3\ The Funds may invest in 
equity or fixed income securities traded in the U.S or non-U.S. 
markets, or a combination of equity and fixed income securities, as 
well as shares of other exchange traded funds (``ETFs'') and shares of 
money market mutual funds or other investment companies. Certain of the 
Funds may invest in equity securities or fixed income securities traded 
in international markets (the ``International Funds''). Applicants 
anticipate that certain Funds, including the International Funds, will 
invest a portion of their assets in depositary receipts representing 
foreign securities in they seek to invest (``Depositary Receipts'').\4\ 
The Funds will not invest in options contracts, futures contracts or 
swap agreements.
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    \2\ 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.
    \3\ Each Fund will comply with the disclosure requirements 
adopted by the Commission in Investment Company Act Release No. 
28584 (Jan. 13, 2009), as well as any other applicable disclosure 
requirements.
    \4\ A Fund will not invest in any Depositary Receipts that the 
Adviser deems illiquid or for which pricing information is not 
readily available. No affiliated persons of Applicant will serve as 
the depositary bank for any Depositary Receipts held by a Fund.
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    3. Shares of the Funds will be sold at a price between $25 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 an 
``Authorized Participant,'' which is either: (a) A broker-dealer or 
other participant in the shares clearing process through the continuous 
net settlement system of the National Securities Clearing Corporation, 
or (b) a participant in the Depository Trust Company (``DTC,'' and such 
participant, ``DTC Participant''), which in either case has executed an 
agreement with a Company, the Distributor and the Transfer Agent, with 
respect to creations and redemptions of Creation Units. Each Fund will 
sell Shares in Creation Units, generally in exchange for an in-kind 
deposit by the purchaser of a particular portfolio of securities 
designated by the Adviser (the ``Deposit Securities''), together with 
the deposit or refund of a specified cash payment as the case may be 
(``Cash Component''). The Cash Component is an amount equal to the 
difference between (a) the net asset value (``NAV'') per Creation Unit 
and (b) the market value per Creation Unit of the Deposit 
Securities.\5\ Applicants state that in some circumstances there may be 
operational problems with a Fund operating exclusively on an ``in-
kind'' basis. Each Fund therefore may 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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    \5\ On each day that a Fund is open, including as required by 
section 22(e) of the Act (``Business Day''), the list of names and 
required number of each Deposit Security, the estimated Cash 
Component for the current day and the Cash Component as of the 
previous Business Day will be made available immediately prior to 
the opening of trading on the listing Exchange (as defined below). 
The Exchange will disseminate every 15 seconds throughout the 
trading day, through the facilities of the Consolidated Tape 
Association an amount representing, on a per Share basis, the sum of 
current value of the Deposit Securities and the estimated Cash 
Component.
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    4. 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.\6\ All orders to 
purchase Creation Units will be placed with the Distributor by or 
through an Authorized Participant and it will be the Distributor's 
responsibility to transmit such orders to the Funds. The Distributor 
also will be responsible for maintaining records of both the orders 
placed with it and the confirmations of acceptance furnished by it.
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    \6\ Where a Fund permits an in-kind purchaser to substitute cash 
in lieu of depositing a portion of the Deposit Securities, the 
purchaser may be assessed a higher Transaction Fee to cover the cost 
of purchasing such Deposit Securities, including brokerage costs.
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    5. 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''). One or more member firms of the 
Exchange will act as a specialist and maintain a market for Shares on 
the Exchange (the ``Specialist''), or one or more member firms will act 
as a market maker (``Market Maker'') and maintain a market for 
Shares.\7\ The prices of Shares trading on the Exchange will be based 
on a current bid/offer market. Shares sold in the secondary market will 
be subject to customary brokerage commissions and charges.
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    \7\ If Shares are listed on the NASDAQ, no particular Specialist 
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.\8\ Applicants expect that 
the price at which the Shares trade will be disciplined by so-called 
``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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    \8\ 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. Shares generally will be redeemed in Creation Units in 
exchange for a particular portfolio of securities (``Redemption 
Securities'') plus or minus a ``Cash Redemption Amount,'' equal to the 
difference between the NAV per Creation Unit of the Shares being 
redeemed and the market value of the Redemption Securities. 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.\9\ A redeeming

[[Page 399]]

investor may pay a Transaction Fee, calculated in the same manner as a 
Transaction Fee payable in connection with the purchases of a Creation 
Unit.
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    \9\ 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 a Fund will comply with Federal securities 
laws in accepting Deposit Securities and satisfying redemptions with 
Redemption Securities, including that the Deposit Securities and 
Redemption Securities are sold in transactions that would be exempt 
from registration under the Securities Act.\10\ For each Fund utilizing 
an in-kind process, the Deposit Securities and Redemption Securities 
will consist of a pro rata basket of the Fund's portfolio.\11\
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    \10\ 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.
    \11\ There may be minor differences between a basket of Deposit 
Securities or Redemption Securities and a true pro rata slice of a 
Fund's portfolio solely when (A) it is impossible to break up bonds 
beyond certain minimum sizes needed for transfer and settlement or, 
(B) in the case of equity securities, rounding is necessary to 
eliminate fractional shares or lots that are not tradeable round 
lots. A tradeable round lot for an equity security will be the 
standard unit of trading in that particular type of security in its 
primary market.
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    10. No Company nor any individual Fund will be advertised or 
marketed as an ``open-end investment company'' or a ``mutual fund.'' 
Instead, each Fund will be marketed as an ``actively-managed exchange-
traded fund.'' In all marketing materials where the features or method 
of obtaining, buying or selling Shares traded on the Exchange are 
described, applicants state that there will be a statement or 
statements to the effect that Shares are not individually redeemable. 
Any advertising materials where features of obtaining, buying or 
selling Creation Units are described or where there is a reference to 
redeemability will prominently disclose that Shares are not 
individually redeemable and that owners of Shares may acquire Shares 
from a Fund and tender those Shares for redemption to a Fund in 
Creation Units only.
    11. The Funds' Web site, which will be publicly available prior to 
the public offering of Shares, will include, or will include links to, 
the current summary prospectus, the prospectus, statement of 
information (``SAI''), and most recent annual and semi-annual reports 
to shareholders if required. The Web site will also include additional 
quantitative information updated on a daily basis, including, on a per 
Share basis, for each Fund, daily trading volume, the prior Business 
Day's NAV and the market closing price or mid-point of the bid/ask 
spread at the time of calculation of such NAV (``Bid/Ask Price''). On 
each Business Day, before commencement of trading in Shares on the 
Exchange, each Fund will disclose the identities and quantities 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.\12\
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    \12\ 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.
    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 provides that the Commission may approve the 
sale of securities to an investment company and the purchase of 
securities from an investment company, in both cases by an affiliated 
person of such company, if the Commission finds 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 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 an open-end 
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 that Creation Units are always redeemable in 
accordance with the provisions of the Act. 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

[[Page 400]]

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 should 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 International Funds is 
contingent not only on the securities settlement cycle of the U.S. 
market, but also on currently practicable delivery cycles in local 
markets for underlying foreign securities held by the International 
Funds. Applicants state that local market delivery cycles for 
transferring Redemption Securities to redeeming investors, coupled with 
local market holiday schedules, will, under certain circumstances, 
require a delivery process longer than seven calendar days for 
International Funds. Applicants request relief under section 6(c) of 
the Act from section 22(e) to allow International Funds that deliver 
Redemption Securities in-kind to pay redemption proceeds up to a 
maximum of 14 calendar days following the tender of a Creation Unit of 
such Funds. Except as disclosed in the relevant International Fund's 
SAI, applicants expect that each International Fund will be able to 
deliver redemption proceeds within seven days.\13\ With respect to 
future International 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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    \13\ 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, up to 14 calendar days, 
needed to deliver the proceeds for the relevant International Fund. 
Applicants are not seeking relief from section 22(e) with respect to 
International Funds that do not effect creations and redemptions of 
Creation Units in-kind.

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

    9. 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 BFA or any BFA Affiliate and 
hence are 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 BFA or a BFA 
Affiliate (an ``Affiliated Fund'').
    10. Applicants request an exemption from section 17(a) under 
sections 6(c) and 17(b), to permit in-kind purchases and redemptions of 
Creation Units 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 a Company 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.
    11. Applicants contend that no useful purpose would be served by 
prohibiting such 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. Absent the unusual circumstances described in the 
application, the Fund Deposit and Redemption Securities will be the 
same. Therefore, applicants state that in-kind purchases and 
redemptions will create 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 of the Fund.

Applicants' Conditions

    The applicants agree that any order of the Commission granting the 
requested relief will be subject to the following conditions:
    1. As long as a Fund operates in reliance on the requested order, 
the Shares of the Fund will be listed on an Exchange.
    2. Neither a Company nor any Fund will be advertised or marketed as 
an open-end investment company or a mutual fund. Any advertising 
material that describes the purchase or sale of Creation Units or 
refers to redeemability will prominently disclose that 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.
    3. The Web site for the Funds, which is and will be publicly 
accessible at no charge, will contain, on a per Share basis, for each 
Fund the prior Business Day's NAV and the market closing price or Bid/
Ask Price of the Shares, and a calculation of the premium or discount 
of the market closing price or Bid/Ask Price against such NAV.
    4. On each Business Day, before commencement of trading in Shares 
on the 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.
    5. No Adviser or Subadviser, 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

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Deposit Security for the Fund through a transaction in which the Fund 
could not engage directly.
    6. 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. 2010-33116 Filed 1-3-11; 8:45 am]
BILLING CODE 8011-01-P


