
[Federal Register Volume 76, Number 247 (Friday, December 23, 2011)]
[Notices]
[Pages 80424-80430]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32935]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29890; 812-13478]


Highland Capital Management, L.P., et al.; Notice of Application

December 19, 2011.
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, 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 12(d)(1)(B) of the Act.

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Applicants: Highland Capital Management, L.P. (``Adviser''), Highland 
Funds I (``Trust'') and Nexbank Securities, Inc. (``Nexbank'').
SUMMARY: Summary of Application: Applicants request an order that 
permits: (a) Certain open-end management investment companies or series 
thereof to issue shares (``Shares'') redeemable in large aggregations 
only (``Creation Unit Aggregations''); (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 Unit Aggregations; 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.

DATES: Filing Dates: The application was filed on January 17, 2008, and 
amended on November 21, 2008, July 1, 2011, May 12, 2011, and November 
15, 2011.
    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 13, 2012, 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, 13455 Noel Road, 
Suite 800, Dallas, TX 75240.

FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Senior Counsel, at 
(202) 551-6868 or Janet M. Grossnickle, Assistant Director, at (202) 
551-6821 (Division of Investment Management, Office of Investment 
Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained 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 registered as an open-end management investment 
company under the Act and organized as a Delaware statutory trust. The 
Trust will initially offer one series, the Highland Senior Loan 
Portfolio, (``Initial Fund'') whose performance will correspond 
generally to the price and yield performance of a specified securities 
index (``Underlying Index'').\1\
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    \1\ The Underlying Index for the Initial Fund is the Highland/
Markit Liquid Loan Index.\TM\
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    2. Applicants request that the order apply to the Initial Fund and 
any future series of the Trust and any future open-end management 
investment companies or series thereof that may track specified 
domestic and/or foreign securities indexes (``Future Funds'').\2\ Any 
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 be 
based on Underlying Indexes comprised only of domestic equity 
securities, fixed income securities or a blend of equity and fixed 
income securities or international equity securities, fixed income 
securities or a blend of international equity and fixed income 
securities (``International Funds'') or Underlying Indexes comprised 
only of a combination of domestic and international foreign securities 
(``Global Funds''). The Initial Fund and all Future Funds, together, 
are the ``Funds.'' \3\
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    \2\ All existing entities that currently intend to rely on the 
order are named as applicants. Any other existing or future entity 
that relies on the order will comply with the terms and conditions 
of the application. An Acquiring Fund (as defined below) may rely on 
the order only to invest in the Funds and not in any other 
registered investment company.
    \3\ Each Fund will comply with the disclosure requirements 
adopted by the Commission in Investment Company Act Release No. 
28584 (Jan. 13, 2009) before offering Shares.
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    3. The Adviser will be registered as an investment adviser under 
the Investment Advisers Act of 1940 (``Advisers Act'') and will serve 
as investment adviser to the Funds. The Adviser may enter into sub-
advisory agreements with one or more investment advisers as sub-
advisers to act as subadvisers to a Fund (each, a ``Sub-Adviser''). 
Each Sub-Adviser will be registered under the Advisers Act. Nexbank is 
a broker-dealer registered under the Securities Exchange Act of 1934 
(``Exchange Act''). Nexbank will serve as the distributor and principal 
underwriter of the Shares of Funds (``Distributor''). In the future 
another broker-dealer registered under the Exchange Act may act as 
Distributor. No Distributor may be an affiliated person with any 
Exchange or any Index Provider.
    4. Each Fund will consist of a portfolio of securities (``Portfolio 
Securities'') selected to correspond generally to the price and yield 
performance of an Underlying Index. No entity that creates, compiles, 
sponsors or maintains an Underlying Index (``Index Provider'') is or 
will be an affiliated person, as defined in section 2(a)(3) of the Act, 
or an affiliated person of an affiliated person of the Trust, any Fund, 
the Adviser, any Sub-Adviser, or promoter, or of a Distributor.
    5. The investment objective of each Fund will be to provide 
investment returns that closely correspond to the price and performance 
of its Underlying Index.\4\ A Fund will utilize either a

[[Page 80425]]

replication or representative sampling strategy to track its Underlying 
Index. A Fund using a replication strategy will invest in substantially 
all the Component Securities in its Underlying Index in the same 
approximate proportions as in such Underlying Index. A Fund using a 
representative sampling strategy will hold a significant number, but 
not all of the Component Securities of its Underlying Index.\5\ 
Applicants state that in using the representative sampling strategy, a 
Fund is not expected to track its Underlying Index with the same degree 
of accuracy as a Fund would employing the replication strategy. 
Applicants expect that each Fund will have a tracking error relative to 
the performance of its Underlying Index of less than 5 percent.
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    \4\ Applicants represent that at least 80% of each Fund's total 
assets (``80% Basket'') will be invested in component securities 
that comprised of its Underlying Index (``Component Securities'') or 
TBA Transactions (as defined below) representing Component 
Securities, or in the case of Global and International Funds, 
Depositary Receipts (defined below) representing such Component 
Securities. Each Fund may also invest up to 20% of its assets in 
securities not included in its Underlying Index and other assets, 
which the Adviser and/or Sub-Adviser believes will assist the Fund 
in tracking the performance of its Underlying Index.
    \5\ Using the sampling strategy, the Adviser or Subadviser will 
select each security for inclusion in the Fund's portfolio to have 
aggregate investment characteristics, fundamental characteristics, 
and liquidity measures similar to those of the Fund's Underlying 
Index, taken in its entirety.
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    6. The Trust will sell and redeem Creation Units Aggregations on a 
``Business Day,'' which is defined to include any day that the Trust is 
required to be open under section 22(e) of the Act. Fund Shares will 
range from $25 to $250 per Share and the price of Creation Unit 
Aggregations will range from $1 million to $10 million. All orders to 
purchase Creation Unit Aggregations must be placed with the Distributor 
by or through a party that has entered into an agreement with the 
Distributor (``Authorized Participant''). The Distributor will be 
responsible for transmitting the orders to the relevant Fund. 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, 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 purchased in Creation Units Aggregations in 
exchange for an in-kind deposit by the purchaser of a portfolio of 
securities (the ``Deposit Securities''), designated by the Adviser, 
together with the deposit of a specified cash payment (``Cash Amount'' 
and together with the Deposit Securities, the ``Creation Deposit''). 
The Cash Amount will be an amount equal to the difference between: (a) 
The net asset value (``NAV'') per Creation Unit Aggregation of a Fund; 
and (b) the total aggregate market value per Creation Unit Aggregation 
of the Deposit Securities.\6\ The Trust may permit an in-kind purchase 
to substitute cash in lieu of some or all of the requisite Deposit 
Securities under certain circumstances. To preserve maximum efficiency 
and flexibility, the Trust reserves the right to accept and deliver 
Creation Unit Aggregations entirely for cash if the Trust and the 
Adviser believe that doing so would substantially minimize 
transactional costs or enhance operational efficiencies of the Trust.
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    \6\ On each Business Day, prior to the opening of trading on 
each Fund's Listing Exchange (as defined below), a list of the names 
and the required number of shares of each Deposit Security, included 
in the current Creation Deposit (based on information at the end of 
the previous Business Day) for the relevant Fund, along with the 
Cash Amount will be made available. Any national securities exchange 
(as defined in section 2(a)(26) of the Act) (``Listing Exchange'') 
on which Shares are listed 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 the current value of the Deposit Securities and 
the estimated Cash Amount.
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    7. An investor purchasing or redeeming a Creation Unit Aggregation 
from a Fund will be charged a fee (``Transaction Fee'') to protect 
shareholders from the dilutive costs associated with the purchase or 
redemption of Creation Unit Aggregations.\7\ All orders to purchase 
Creation Unit Aggregations 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 
will then furnish the purchaser with a confirmation and a prospectus. 
In addition, the Distributor will maintain a record of the instructions 
given to a Fund to implement the delivery of its Shares.
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    \7\ Where a Fund permits an in-kind purchaser to substitute 
cash-in-lieu of depositing one or more of the requisite Deposit 
Securities, the purchaser may be assessed a higher Transaction Fee 
to cover the cost of purchasing such Deposit Securities.
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    8. Purchasers of Shares in Creation Unit Aggregations may hold such 
Shares or may sell such Shares into the secondary market. Shares will 
be listed and traded at negotiated prices on one or more national 
securities exchanges as defined in section 2(a)(26) of the Act (each an 
``Exchange''). It is expected that one or more Exchange market maker 
will be designated to act as a specialist or market maker (``Market 
Makers'') and maintain a market for Shares trading on the Listing 
Exchange or another Exchange. Price of Shares trading on an Exchange 
will be based on a current bid-offer market. The sale of Shares on an 
Exchange will be subject to customary brokerage commissions and 
charges.
    9. Applicants expect that purchasers of Creation Unit Aggregations 
will include institutional investors and arbitrageurs. Authorized 
Participants also may purchase or redeem Creation Unit Aggregations in 
connection with their market making activities. Applicants expect that 
secondary market purchasers of Shares will include both institutional 
investors and retail investors.\8\ The price at which Shares trade will 
be disciplined by arbitrage opportunities created by the ability to 
purchase or redeem Creation Unit Aggregations at NAV, which should help 
to ensure that 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 record or registered owner of all 
outstanding Shares. Beneficial ownership of Shares will be shown on 
the records of DTC or DTC Participants.
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    10. 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 Unit Aggregations only. To redeem, 
an investor must accumulate enough Shares to constitute a Creation Unit 
Aggregation. Redemption requests must be placed by or through an 
Authorized Participant. An investor redeeming a Creation Unit 
Aggregation generally will receive (a) Portfolio Securities designated 
to be delivered for redemptions (``Redemption Securities'') on the date 
that the request for redemption is submitted and (b) a ``Cash 
Redemption Payment,'' consisting of an amount calculated in the same 
manner as the Cash Amount, although the actual amount of the Cash 
Redemption Payment may differ 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 when the redeeming investor is unable to own a 
particular Redemption Security.
    11. Applicants state that in accepting Deposit Securities and 
satisfying redemptions with Redemption Securities, 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 of 1933 (``Securities 
Act'').\9\ Deposit Securities and Redemption Securities either (a) will 
correspond pro rata to the Portfolio

[[Page 80426]]

Securities of a Fund, or (b) will not correspond pro rata to the 
Portfolio Securities, provided that the Deposit Securities and 
Redemption Securities (i) consist of the same representative sample of 
Portfolio Securities designed to generate performance that is highly 
correlated to the performance of the Portfolio Securities, (ii) consist 
only of securities that are already included among the existing 
Portfolio Securities, and (iii) are the same for all Authorized 
Participants on a given Business Day.\10\
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    \9\ 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.
    \10\ In either case, a basket of Deposit Securities and 
Redemption Securities (and a true pro rata slice of the Portfolio) 
may differ solely to the extent necessary (1) because it is 
impossible to break up bonds beyond certain minimum sizes needed for 
transfer and settlement, (2) because, in the case of equity 
securities, rounding is necessary to eliminate fractional shares or 
lots, that are not tradeable round lots or (3) for temporary 
periods, to effect changes in the Portfolio Securities as a result 
of the rebalancing of an Underlying Index. A tradable round lot will 
be the standard unit of trading in that particular type of security 
in its primary market.
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    12. Neither the Trust nor any Fund will be marketed or otherwise 
held out as a traditional open-end investment company or ``mutual 
fund.'' Instead, each Fund will be marketed as an ``exchange-traded 
fund'' or an ``ETF''. All marketing materials that describe the 
features or method of obtaining, buying or selling Creation Unit 
Aggregations, or Shares traded on an Exchange, or refer to 
redeemability, will prominently disclose that Shares are not 
individually redeemable and that the owners of Shares may acquire or 
tender such Shares for redemption to the Fund in Creation Unit 
Aggregations only. The same approach will be followed in 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 shareholders.

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 (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 provisions 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 the Funds to redeem 
Shares in Creation Unit Aggregations only. Applicants state that 
Creation Unit Aggregations will be redeemable in accordance with the 
provisions of the Act. Applicants state that because Creation Unit 
Aggregations may always be purchased and redeemed at NAV, the market 
price of the Shares should 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 an 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 a 
Fund's 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, and (c) ensure an orderly distribution system of shares 
by eliminating price competition from non-contract 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 competitive forces will ensure that the 
difference between the market price of Shares and their NAV remains 
narrow.

Section 22(e) of the Act

    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 of Creation Unit Aggregations for 
International Funds and Global Funds will be contingent not only on the 
settlement cycle of the U.S. securities markets but also on the 
delivery cycles in foreign markets in which those Funds invests. 
Applicants state that delivery cycles for transferring Portfolio 
Securities to redeeming investors,

[[Page 80427]]

coupled with local market holiday schedules, will cause a delivery 
process of up to twelve (12) calendar days. Applicants therefore 
request relief from section 22(e) in order to provide for payment or 
satisfaction of redemptions within a longer number of calendar days 
required for such payment or satisfaction in the principal local 
markets where transactions in the Portfolio Securities of each Global 
and International Fund customarily clear and settle, but in all cases 
no later than 12 calendar days following the tender of a Creation Unit 
Aggregation.\11\ With respect to Future Funds based on a global or an 
international Underlying Index, applicants seek the same relief from 
section 22(e) only to the extent that circumstances exist similar to 
those described in the application.
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    \11\ Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will affect any obligations applicants 
may have under rule 15c6-1 under the Exchange Act. Rule 15c6-1 
requires that most securities transactions be settled within three 
business days of the trade.
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    8. Applicants state that Congress adopted section 22(e) to prevent 
unreasonable, undisclosed and unforeseen delays in the actual payment 
of redemption proceeds. Applicants state that allowing redemption 
payments for Creation Unit Aggregations of a Fund to be made within the 
number of days indicated above would not be inconsistent with the 
spirit and intent of section 22(e). 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 each affected 
Global Fund and International Fund. Applicants are not seeking relief 
from section 22(e) with respect to Global Funds or International Funds 
that do not effect redemptions of Creation Unit Aggregations in-kind.

Section 12(d)(1) of the Act

    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 an exemption to permit management investment 
companies (``Acquiring Management Companies'') and unit investment 
trusts (``Acquiring Trusts'') registered under the Act that are not 
sponsored or advised by the Adviser or an entity controlling, 
controlled by, or under common control with the Adviser and are not 
part of the same ``group of investment companies,'' as defined in 
section 12(d)(1)(G)(ii) of the Act, as the Funds (collectively, 
``Acquiring Funds'') to acquire shares of a Fund beyond the limits of 
section 12(d)(1)(A). In addition, applicants seek relief to permit each 
Fund and/or Broker to sell Shares to Acquiring Funds in excess of the 
limits of section 12(d)(1)(B).
    11. Each Acquiring Management Company will be advised by an 
investment adviser within the meaning of section 2(a)(20)(A) of the Act 
(the ``Acquiring Fund Adviser'') and may be sub-advised by one or more 
investment advisers within the meaning of section 2(a)(20)(B) of the 
Act (each an ``Acquiring Fund Sub-Adviser''). Any investment adviser to 
an Acquiring Management Company will be registered under the Advisers 
Act. Each Acquiring Trust will be sponsored by a sponsor (``Sponsor'').
    12. Applicants submit that the proposed conditions to the requested 
relief adequately address the concerns underlying the limits in section 
12(d)(1)(A) and (B), which include concerns about undue influence by a 
fund of funds over underlying funds, excessive layering of fees and 
overly complex fund structures. Applicants believe that the requested 
exemption is consistent with the public interest and the protection of 
investors.
    13. Applicants believe that neither an Acquiring Fund nor an 
Acquiring Funds Affiliate would be able to exert undue influence over a 
Fund.\12\ To limit the control that an Acquiring Fund may have over a 
Fund, applicants propose a condition prohibiting the Acquiring Fund 
Adviser, Sponsor, any person controlling, controlled by, or under 
common control with the Acquiring Fund Adviser or Sponsor, and any 
investment company and any 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 Acquiring Fund Adviser, the Sponsor, or any person 
controlling, controlled by, or under common control with the Acquiring 
Fund Adviser or Sponsor (``Acquiring 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 Acquiring Fund Sub-Adviser, any person controlling, controlled 
by or under common control with the Acquiring Fund 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 Acquiring 
Fund Sub-Adviser or any person controlling, controlled by or under 
common control with the Acquiring Fund Sub-Adviser (``Acquiring Funds' 
Sub-Advisory Group''). Applicants propose other conditions to limit the 
potential for undue influence over the Funds, including that no 
Acquiring Fund or Acquiring 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 offering of securities during the 
existence of an 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, Acquiring Fund Adviser, Acquiring Fund Sub-
Adviser, Sponsor, employee or Sponsor of the Acquiring Fund, or a 
person of which any such officer, director, member of an advisory 
board, Acquiring Fund Adviser, Acquiring Fund 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).
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    \12\ An ``Acquiring Funds Affiliate'' is any Acquiring Fund 
Adviser, Acquiring Fund Sub-Adviser(s), Sponsor, promoter and 
principal underwriter of an Acquiring Fund, and any person 
controlling, controlled by or under common control with any of these 
entities. A ``Fund Affiliate'' is an investment 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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    14. Applicants do not believe that the proposed arrangement will 
involve excessive layering of fees. The board of directors or trustees 
of any Acquiring Management Company, including a majority of the 
directors or trustees who are not interested directors or trustees 
within the meaning of section 2(a)(19) of

[[Page 80428]]

the Act (``disinterested directors or trustees''), will find that the 
advisory fees charged under the contract are based on services provided 
that will be in addition to, rather than duplicative of, services 
provided under the advisory contract of any Fund in which the Acquiring 
Management Company may invest. In addition, under condition 13, an 
Acquiring Fund Adviser, or an Acquiring Trust's trustee (``Trustee'') 
or Sponsor, will waive fees otherwise payable to it by the Acquiring 
Fund in an amount at least equal to any compensation (including fees 
received pursuant to any plan adopted by a Fund under rule 12b-1 under 
the Act) received from a Fund by the Acquiring Fund Adviser, Trustee or 
Sponsor or an affiliated person of the Acquiring Fund Adviser, Trustee 
or Sponsor, in connection with the investment by the Acquiring Fund in 
the Fund. Applicants also state that any sales charges and/or service 
fees charged with respect to shares of an Acquiring Fund will not 
exceed the limits applicable to a fund of funds as set forth in NASD 
Conduct Rule 2830.\13\
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    \13\ All references to NASD Conduct Rule 2830 include any 
successor or replacement rule that may be adopted by the Financial 
Industry Regulatory Authority.
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    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 
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, except to the 
extent permitted by exemptive relief from the Commission permitting the 
Fund to purchase shares of other investment companies for short-term 
cash management purposes. To ensure that an Acquiring Fund understands 
and will comply with the terms and conditions of the requested order, 
the Acquiring Funds must enter into an agreement with the respective 
Funds (``Acquiring Fund Agreement''). The Acquiring Fund Agreement will 
include an acknowledgement from the Acquiring Fund that it may rely on 
the order only to invest in the Funds and not in any other investment 
company.
    16. Applicants also note that a Fund may choose to reject a direct 
purchase of Shares in Creation Unit Aggregations by an Acquiring Fund. 
A Fund would also retain its right to reject any initial investment by 
an Acquiring Fund in excess of the limits in Section 12(d)(l)(A) of the 
Act by declining to execute an Acquiring Fund Agreement with an 
Acquiring Fund.

Section 17 of the Act

    17. Section 17(a) of the Act generally prohibits 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 acquiring any security from the company. Section 2(a)(3) of the Act 
defines ``affiliated person'' to include (a) 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, (b) any 
person 5% or more of whose outstanding voting securities are directly 
or indirectly owned, controlled or held with the power to vote by the 
other person, and (c) 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.
    18. Applicants request an exemption under sections 6(c) and 17(b) 
of the Act from sections 17(a)(1) and 17(a)(2) of the Act in order to 
permit in-kind purchases and redemptions of Creation Unit Aggregations 
from the Funds 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 Shares of 
one or more Funds; (b) having 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. Applicants 
also request an exemption in order to permit each Fund to sell Shares 
to and redeem Shares from, and engage in any in-kind transactions that 
would accompany such sales and redemptions with, any Acquiring Fund of 
which the Fund is an affiliated person or second-tier affiliate.
    19. Applicants contend that no useful purpose would be served by 
prohibiting such affiliated persons from making in-kind purchases or 
in-kind redemptions of Shares of a Fund in Creation Unit Aggregations. 
The deposit procedures for both in-kind purchases and in-kind 
redemptions of Creation Unit Aggregations will be the same for all 
purchases and redemptions. Deposit Securities, Redemption Securities, 
and the balancing Cash Amounts (except for any permitted cash-in-lieu 
amounts) will be the same regardless of the identity of the purchaser 
or redeemer. Deposit Securities and Redemption Securities for each Fund 
will be valued in the same manner as the Portfolio Securities currently 
held by such Fund, and will be valued in this same manner, regardless 
of the identity of the purchaser or redeemer. Therefore, applicants 
state that in-kind purchases and redemptions will afford no opportunity 
for the affiliated persons of a Fund to effect a transaction 
detrimental to the other holders of Shares. Applicants also believe 
that in-kind purchases and redemptions will not result in self-dealing 
or overreaching of the Fund.
    20. Applicants seek an exemption from Section 17(a) pursuant to 
Section 17(b) and Section 6(c) of the Act to permit a Fund, to the 
extent that the Fund is an affiliated person (as defined in Section 
2(a)(3)(B) of the Act) of an Acquiring Fund, to sell Shares to, and 
purchase Shares from, an Acquiring Fund, and to engage in any 
accompanying in-kind Creation Unit Aggregation transactions.\14\ 
Applicants state that the terms of the transactions are fair and 
reasonable and do not involve overreaching. Applicants note that any 
consideration paid for the purchase or redemption of Shares directly 
from a Fund will be based on the NAV of the Shares.\15\ Deposit 
Securities, Redemption Securities, and the balancing cash amounts 
(except for any permitted cash-in-lieu amounts) will be the same 
regardless of the identity of the purchaser or redeemer. Applicants 
believe that any proposed transactions directly between the Funds and 
Acquiring Funds will be consistent with the policies of each Acquiring 
Fund. The purchase of Creation Unit Aggregations by an Acquiring Fund 
directly from a Fund will be accomplished in accordance with the 
policies and procedures set forth in the Fund's registration statement. 
The Acquiring Fund Agreement will require any Acquiring Fund that 
purchases Creation Unit Aggregations directly from a Fund to represent 
that the purchase of Creation Unit Aggregations from a Fund by an 
Acquiring Fund will be accomplished in compliance with the

[[Page 80429]]

investment restrictions of the Acquiring Fund and will be consistent 
with the investment policies set forth in the Acquiring Fund's 
registration statement.
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    \14\ To the extent that purchases of Shares of a Fund occur in 
the secondary market and through principal transactions directly 
between an Acquiring Fund and a Fund, relief from section 17(a) 
would not be necessary. However, the requested relief would apply to 
direct sales of Shares in Creation Unit Aggregations by a Fund to an 
Acquiring Fund and redemptions of those Shares. The requested relief 
is also intended to cover the in-kind transactions that would 
accompany such sales and redemptions.
    \15\ Applicants acknowledge that receipt of compensation by (a) 
an affiliated person of an Acquiring Fund, or an affiliated person 
of such person, for the purchase by the Acquiring Fund of Shares or 
(b) an affiliated person of a Fund, or an affiliated person of such 
person, for the sale by the Fund of its Shares to an Acquiring Fund 
may be prohibited by section 17(e)(1) of the Act. The Acquiring Fund 
Agreement also will include this acknowledgment.
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Applicants' Conditions

    Applicants agree that any order of the Commission granting the 
requested relief will be subject to the following conditions:

ETF Relief

    1. As long as each Fund operates in reliance on the requested 
order, its Shares will be listed on an Exchange.
    2. Neither the Trust 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 Unit 
Aggregations or refers to redeemability will prominently disclose that 
Shares are not individually redeemable and that owners of Shares may 
acquire those Shares from a Fund and tender those Shares for redemption 
to a Fund in Creation Unit Aggregations 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 the 
midpoint of the bid/ask spread at the time of the calculation of such 
NAV (``Bid/Ask Price''), and a calculation of the premium or discount 
of the market closing price or the Bid/Ask Price against such NAV.
    4. The requested relief to permit ETF operations will expire on the 
effective date of any Commission rule under the Act that provides 
relief permitting the operation of index-based exchange-traded funds.

Section 12(d)(1) Relief

    Applicants agree that any order granting the requested 12(d)(1) 
relief will be subject to the following conditions:
    5. The members of an Acquiring 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 an Acquiring 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 
Acquiring Funds' Advisory Group or the Acquiring Funds' Sub-Advisory 
Group, each in the aggregate, becomes a holder of more than 25% of the 
outstanding voting securities of a Fund, it will vote its Shares in the 
same proportion as the vote of all other holders of the Fund Shares. 
This condition does not apply to the Acquiring Funds' Sub-Advisory 
Group with respect to a Fund for which the Acquiring Fund Sub-Adviser 
or a person controlling, controlled by, or under common control with 
the Acquiring Fund Sub-Adviser acts as the investment adviser within 
the meaning of section 2(a)(20)(A) of the Act.
    6. No Acquiring Fund or Acquiring Funds Affiliate will cause any 
existing or potential investment by the Acquiring Fund in a Fund to 
influence the terms of any services or transactions between the 
Acquiring Fund or an Acquiring Funds Affiliate and the Fund or a Fund 
Affiliate.
    7. The board of directors or trustees of an Acquiring Management 
Company, including a majority of the disinterested directors or 
trustees, will adopt procedures reasonably designed to ensure that the 
Acquiring Fund Adviser and any Acquiring Fund Sub-Adviser are 
conducting the investment program of the Acquiring Management Company 
without taking into account any consideration received by the Acquiring 
Management Company or an Acquiring Funds Affiliate from a Fund or a 
Fund Affiliate in connection with any services or transactions.
    8. Once an investment by an Acquiring Fund in Shares exceeds the 
limit in section 12(d)(1)(A)(i) of the Act, the board of trustees of 
the Trust (``Board''), including a majority of the disinterested 
directors/trustees, will determine that any consideration paid by the 
Fund to the Acquiring Fund or an Acquiring Funds Affiliate in 
connection with any services or transactions: (a) Is fair and 
reasonable in relation to the nature and quality of the services and 
benefits received by the Fund; (b) 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 (c) 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).
    9. No Acquiring Fund or Acquiring Funds Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to a Fund) 
will cause the Fund to purchase a security in any Affiliated 
Underwriting.
    10. The Board, including a majority of the disinterested trustees, 
will adopt procedures reasonably designed to monitor any purchases of 
securities by a Fund in an Affiliated Underwriting, once an investment 
by an Acquiring Fund in the securities of the Fund exceeds the limit of 
section 12(d)(1)(A)(i) of the Act, including any purchases made 
directly from an Underwriting Affiliate. The Board will review these 
purchases periodically, but no less frequently than annually, to 
determine whether the purchases were influenced by the investment by 
the Acquiring Fund in the Fund. The Board will consider, among other 
things: (a) Whether the purchases were consistent with the investment 
objectives and policies of the Fund; (b) 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 (c) 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 of the Fund.
    11. Each Fund will maintain and preserve permanently in an easily 
accessible place a written copy of the procedures described in the 
preceding condition, and any modifications to such procedures, and will 
maintain and preserve for a period of not less than six years from the 
end of the fiscal year in which any purchase in an Affiliated 
Underwriting occurred, the first two years in an easily accessible 
place, a written record of each purchase of securities in Affiliated 
Underwritings, once an investment by an Acquiring Fund 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.
    12. Before investing in Shares in excess of the limits in section 
12(d)(1)(A), each Acquiring Fund and the Fund will execute an Acquiring 
Fund Participation Agreement stating, without limitation, that their 
respective boards of directors or trustees and their investment 
adviser(s) or their Sponsors or Trustees, as applicable, understand the 
terms and conditions of the order,

[[Page 80430]]

and agree to fulfill their responsibilities under the order. At the 
time of its investment in Shares of a Fund in excess of the limit in 
section 12(d)(1)(A)(i), an Acquiring Fund will notify the Fund of the 
investment. At such time, the Acquiring Fund will also transmit to the 
Fund a list of the names of each Acquiring Funds Affiliate and 
Underwriting Affiliate. The Acquiring Fund will notify the Fund of any 
changes to the list of names as soon as reasonably practicable after a 
change occurs. The Fund and the Acquiring Fund will maintain and 
preserve a copy of the order, the Acquiring Fund 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.
    13. The Acquiring Fund Adviser, Trustee or Sponsor, as applicable, 
will waive fees otherwise payable to it by the Acquiring Fund in an 
amount at least equal to any compensation (including fees received 
pursuant to any plan adopted by a Fund under rule 12b-1 under the Act) 
received from the Fund by the Acquiring Fund Adviser, Trustee or 
Sponsor, or an affiliated person of the Acquiring Fund Adviser, Trustee 
or Sponsor, other than any advisory fees paid to the Acquiring Fund 
Adviser, Trustee, or Sponsor, or its affiliated person by the Fund, in 
connection with the investment by the Acquiring Fund in the Fund. Any 
Acquiring Fund Sub-Adviser will waive fees otherwise payable to the 
Acquiring Fund Sub-Adviser, directly or indirectly, by the Acquiring 
Management Company in an amount at least equal to any compensation 
received from a Fund by the Acquiring Fund Sub-Adviser, or an 
affiliated person of the Acquiring Fund Sub-Adviser, other than any 
advisory fees paid to the Acquiring Fund Sub-Adviser or its affiliated 
person by the Fund, in connection with any investment by the Acquiring 
Management Company in the Fund made at the direction of the Acquiring 
Fund Sub-Adviser. In the event that the Acquiring Fund Sub-Adviser 
waives fees, the benefit of the waiver will be passed through to the 
Acquiring Management Company.
    14. Any sales charges and/or service fees charged with respect to 
shares of an Acquiring Fund will not exceed the limits applicable to a 
fund of funds as set forth in NASD Conduct Rule 2830.
    15. 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 ct, except to the 
extent permitted by exemptive relief from the Commission permitting the 
Fund to purchase shares of other investment companies for short-term 
cash management purposes.
    16. Before approving any advisory contract under section 15 of the 
Act, the board of directors or trustees of each Acquiring Management 
Company, including a majority of the disinterested directors or 
trustees, will find that the advisory fees charged under such advisory 
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 Acquiring Management Company may 
invest. These findings and their basis will be recorded fully in the 
minute books of the appropriate Acquiring Management Company.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32935 Filed 12-22-11; 8:45 am]
BILLING CODE 8011-01-P


