
[Federal Register Volume 77, Number 111 (Friday, June 8, 2012)]
[Notices]
[Pages 34095-34101]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-13860]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 30093; 812-13946]


Federated Investment Management Company and Federated ETF Trust; 
Notice of Application

June 1, 2012.
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) 
of the Act for an exemption from sections 12(d)(1)(A) and (B) of the 
Act.

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Applicants: Federated Investment Management Company (``Federated'') and 
Federated ETF Trust (the ``Trust'').

Summary of Application: Applicants request an order that permits: (a) 
Series of 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; (d) certain affiliated 
persons of the series to deposit securities into, and receive 
securities from, the series in connection with the purchase and 
redemption of Creation Units; and (e) certain registered management 
investment companies and unit investment trusts outside of the same 
group of investment companies as the series to acquire Shares.

Filing Dates: The application was filed on August 26, 2011, and amended 
on February 22, 2012, March 21, 2012, May 8, 2012, and May 22, 2012.

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 June 25, 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: c/o Stacy L. Fuller, 
Esq., K&L Gates LLP, 1601 K Street NW., Washington, DC 20006.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at 
(202) 551-6817 or Daniele Marchesani, 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 a statutory trust organized under the laws of 
Delaware and will be registered as an open-end management investment 
company under the Act. The Trust will initially offer one actively-
managed investment series: Federated Active Ultrashort Fixed Income ETF 
(the ``Initial Fund''). The investment objective of the Initial Fund 
will be to seek to outperform the 3-month LIBOR by investing in fixed 
and floating rate fixed income instruments.
    2. Applicants request that the order apply to the Initial Fund and 
any future series of the Trust or of other existing or future open-end 
management companies that may utilize active management investment 
strategies (``Future Funds''). Any Future Fund will (a) be advised by 
Federated or an entity controlling, controlled by, or under common 
control with Federated (together with Federated, an ``Advisor''), and 
(b) comply with the terms and conditions of the application.\1\ The 
Initial Fund and Future Funds together are the ``Funds.'' Each Fund 
will consist of a portfolio of securities (including

[[Page 34096]]

fixed income securities \2\ and/or equity securities) and/or currencies 
and other assets (``Portfolio Instruments'').\3\ Funds may also invest 
in ``Depositary Receipts.'' A Fund will not invest in any Depositary 
Receipts that the Advisor deems to be illiquid or for which pricing 
information is not readily available.\4\ Each Fund will operate as an 
actively managed exchange-traded fund (``ETF''). The Future Funds might 
include one or more ETFs which invest in other open-end and/or closed-
end investment companies and/or ETFs.
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    \1\ All entities that currently intend to rely on the order are 
named as applicants. Any other entity that relies on the order in 
the future will comply with the terms and conditions of the 
application. An Investing Fund (as defined below) may rely on the 
order only to invest in Funds and not in any other registered 
investment company.
    \2\ Fixed income securities may include ``to-be-announced 
transactions'' (``TBA Transactions''). A TBA Transaction is a method 
of trading mortgage-backed securities. In a TBA Transaction, the 
buyer and seller agree on general trade parameters such as agency, 
settlement date, par amount and price.
    \3\ Neither the Initial Fund nor any Future Fund will invest in 
options contracts, futures contracts or swap agreements.
    \4\ Depositary Receipts are typically issued by a financial 
institution, a ``depositary'', and evidence ownership in a security 
or pool of securities that have been deposited with the depositary. 
No affiliated persons of applicants will serve as the depositary 
bank for any Depositary Receipts held by a Fund.
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    3. Federated, a Pennsylvania corporation, will be the investment 
advisor to the Initial Fund. Each Advisor is or will be registered as 
an ``investment adviser'' under the Investment Advisers Act of 1940 
(the ``Advisers Act''). The Advisor may retain investment advisers as 
sub-advisers in connection with the Funds (each, a ``Subadvisor''). Any 
Subadvisor will be registered under the Advisers Act. A registered 
broker-dealer under the Securities Exchange Act of 1934 (``Exchange 
Act''), which may be an affiliate of the Advisor, will act as the 
distributor and principal underwriter of the Funds (``Distributor''). 
Applicants request that the order apply also to any future Distributor 
of Shares that complies with the terms and conditions of the 
application.
    4. Shares of each Fund will be purchased from the Trust only in 
Creation Units through the Distributor on a continuous basis at net 
asset value (``NAV'') next determined after an order in proper form is 
received.\5\ Applicants anticipate that a Creation Unit will consist of 
at least 50,000 Shares and that the price of a Share will range from 
$20 to $200. All orders to purchase Creation Units must be placed with 
the Distributor by or through a party that has entered into a 
participant agreement with the Distributor and the transfer agent of 
the Trust (``Authorized Participant'') with respect to the creation and 
redemption of Creation Units. An Authorized Participant is either: (a) 
a broker or dealer registered under the Exchange Act (``Broker'') or 
other participant in the Continuous Net Settlement System of the 
National Securities Clearing Corporation, a clearing agency registered 
with the Commission and affiliated with the Depository Trust Company 
(``DTC''), or (b) a participant in the DTC (such participant, ``DTC 
Participant'').
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    \5\ A Trust will issue, sell and redeem Creation Units of the 
applicable Fund on any day that the Trust is open for business, 
including as required by section 22(e) of the Act (each, a 
``Business Day'').
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    5. The Initial Fund and certain Future Funds will generally be 
purchased entirely for cash as permissible under the procedures 
described below and will generally be redeemed in-kind. However, the 
Trust reserves the right to accept and deliver Creation Units of the 
Initial Fund and any Future Fund by means of an in-kind tender of 
specified instruments. Purchasers will be required to purchase Creation 
Units by making an in-kind deposit of specified instruments (``Deposit 
Instruments''), and shareholders redeeming their Shares will receive an 
in-kind transfer of specified instruments (``Redemption 
Instruments'').\6\ On any given Business Day the names and quantities 
of the instruments that constitute the Deposit Instruments and the 
names and quantities of the instruments that constitute the Redemption 
Instruments will be identical, and these instruments may be referred 
to, in the case of either a purchase or a redemption, as the ``In-Kind 
Basket.'' In addition, the In-Kind Basket will correspond pro rata to 
the positions in the Fund's portfolio (including cash positions),\7\ 
except: (a) In the case of bonds, for minor differences when it is 
impossible to break up bonds beyond certain minimum sizes needed for 
transfer and settlement; (b) for minor differences when rounding is 
necessary to eliminate fractional shares or lots that are not tradeable 
round lots; \8\ or (c) TBA Transactions, short positions and other 
positions that cannot be transferred in kind \9\ will be excluded from 
the In-Kind Basket.\10\ If there is a difference between the NAV 
attributable to a Creation Unit and the aggregate market value of the 
In-Kind Basket exchanged for the Creation Unit, the party conveying 
instruments with the lower value will also pay to the other an amount 
in cash equal to that difference (the ``Cash Amount'').
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    \6\ The Funds must comply with the federal securities laws in 
accepting Deposit Instruments and satisfying redemptions with 
Redemption Instruments, including that the Deposit Instruments and 
Redemption Instruments are sold in transactions that would be exempt 
from registration under the Securities Act. In accepting Deposit 
Instruments and satisfying redemptions with Redemption Instruments 
that are restricted securities eligible for resale pursuant to rule 
144A under the Securities Act, the Funds will comply with the 
conditions of Rule 144A.
    \7\ The portfolio used for this purpose will be the same 
portfolio used to calculate the Fund's NAV for that Business Day.
    \8\ A tradeable round lot for a security will be the standard 
unit of trading in that particular type of security in its primary 
market.
    \9\ This includes instruments that can be transferred in kind 
only with the consent of the original counterparty to the extent the 
Fund does not intend to seek such consents.
    \10\ Because these instruments will be excluded from the In-Kind 
Basket, their value will be reflected in the determination of the 
Cash Amount (defined below).
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    6. Purchases and redemptions of Creation Units may be made in whole 
or in part on a cash basis, rather than in kind, solely under the 
following circumstances: (a) To the extent there is a Cash Amount, as 
described above; (b) if, on a given Business Day, the Fund announces 
before the open of trading that all purchases, all redemptions or all 
purchases and redemptions on that day will be made entirely in cash; 
(c) if, upon receiving a purchase or redemption order from an 
Authorized Participant, the Fund determines to require the purchase or 
redemption, as applicable, to be made entirely in cash; (d) if, on a 
given Business Day, the Fund requires all Authorized Participants 
purchasing or redeeming Shares on that day to deposit or receive (as 
applicable) cash in lieu of some or all of the Deposit Instruments or 
Redemption Instruments, respectively, solely because: (i) Such 
instruments are not eligible for transfer through either the NSCC 
Process or DTC Process; or (ii) in the case of Funds holding non-U.S. 
investments (``Global Funds''), such instruments are not eligible for 
trading due to local trading restrictions, local restrictions on 
securities transfers or other similar circumstances; or (e) if the Fund 
permits an Authorized Participant to deposit or receive (as applicable) 
cash in lieu of some or all of the Deposit Instruments or Redemption 
Instruments, respectively, solely because: (i) such instruments are, in 
the case of the purchase of a Creation Unit, not available in 
sufficient quantity; (ii) such instruments are not eligible for trading 
by an Authorized Participant or the investor on whose behalf the 
Authorized Participant is acting; or (iii) a holder of Shares of a 
Global Fund would be subject to unfavorable income tax treatment if the 
holder receives redemption proceeds in kind.\11\
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    \11\ A ``custom order'' is any purchase or redemption of Shares 
made in whole or in part on a cash basis in reliance on clause 
(e)(i) or (e)(ii).
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    7. Each Business Day, before the open of trading on the national 
securities

[[Page 34097]]

exchange as defined in section 2(a)(26) of the Act (``Stock Exchange'') 
upon which its Shares are listed and traded, the Fund will cause to be 
published through the NSCC the names and quantities of the instruments 
comprising the In-Kind Basket, as well as the estimated Cash Amount (if 
any), for that day. The published In-Kind Basket will apply until a new 
In-Kind Basket is announced on the following Business Day, and there 
will be no intra-day changes to the In-Kind Basket except to correct 
errors in the published In-Kind Basket. The Stock Exchange will 
disseminate every 15 seconds throughout the trading day an amount 
representing, on a per Share basis, the sum of the current value of the 
Portfolio Instruments that were publicly disclosed prior to the 
commencement of trading in Shares on the Stock Exchange.
    8. An investor purchasing a Creation Unit from a Fund may be 
charged a fee (``Transaction Fee'') to protect existing shareholders of 
the Funds from the dilutive costs associated with the purchase and 
redemption of Creation Units.\12\ All orders to purchase Creation Units 
will be placed with the Distributor and the Distributor will transmit 
all purchase orders to the relevant Fund. The Distributor will be 
responsible for delivering a prospectus (``Prospectus'') to those 
persons purchasing Creation Units and for maintaining records of both 
the orders placed with it and the confirmations of acceptance furnished 
by it.
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    \12\ Where a Fund permits an in-kind purchaser to substitute 
cash in lieu of depositing one or more Deposit Instruments, the 
purchaser may be assessed a higher Transaction Fee to offset the 
cost to the Fund of buying those particular Deposit Instruments.
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    9. Shares will be listed and traded at negotiated prices on the 
Stock Exchange and traded in the secondary market. Applicants expect 
that Stock Exchange specialists (``Specialists'') or market makers 
(``Market Makers'') will be assigned to Shares. The price of Shares 
trading on the Stock Exchange will be based on a current bid/offer 
market. Transactions involving the purchases and sales of Shares on the 
Stock Exchange will be subject to customary brokerage commissions and 
charges.
    10. Applicants expect that purchasers of Creation Units will 
include arbitrageurs. Specialists or Market Makers, acting in their 
unique role to provide a fair and orderly secondary market for Shares, 
also may purchase Creation Units for use in their own market making 
activities.\13\ Applicants expect that secondary market purchasers of 
Shares will include both institutional and retail investors.\14\ 
Applicants expect that arbitrage opportunities created by the ability 
to continually purchase or redeem Creation Units at their NAV should 
ensure that the Shares will not trade at a material discount or premium 
in relation to NAV per individual Share.
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    \13\ If Shares are listed on NASDAQ, no Specialist will be 
contractually obligated to make a market in Shares. Rather, under 
NASDAQ's listing requirements, two or more Market Makers will be 
registered in Shares and required to make a continuous, two-sided 
market or face regulatory sanctions.
    \14\ 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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    11. Neither the Trust nor any Fund will be marketed or otherwise 
held out as a ``mutual fund.'' Instead, each Fund will be marketed as 
an ``actively-managed exchange-traded fund.'' Any advertising material 
where features of obtaining, buying or selling Creation Units are 
described or where there is 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.
    12. The Funds' Web site, which will be publicly available prior to 
the public offering of Shares, will include the Prospectus for each 
Fund and additional quantitative information updated on a daily basis, 
including, on a per Share basis for each Fund, the prior Business Day's 
NAV and the market closing price or mid-point 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 
Bid/Ask Price against such NAV. On each Business Day, before 
commencement of trading in Shares on the Stock Exchange, the Fund will 
disclose on its Web site the identities and quantities of the Portfolio 
Instruments 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.\15\
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    \15\ Applicants note that under accounting procedures followed 
by the Funds, trades made on the prior Business Day will be booked 
and reflected in NAV on the current Business Day. 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 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 17(a)(2) of the Act, and 
under section 12(d)(1)(J) of the Act 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 provisions of the Act, if and to 
the extent that such exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act. 
Section 17(b) of the Act authorizes the Commission to exempt a proposed 
transaction from section 17(a) of the Act if evidence establishes that 
the terms of the transaction, including the consideration to be paid or 
received, are reasonable and fair and do not involve overreaching on 
the part of any person concerned, and the proposed transaction is 
consistent with the policies of the registered investment company and 
the general provisions of the Act. Section 12(d)(1)(J) of the Act 
provides that the Commission may exempt any person, security, or 
transaction, or any class or classes of persons, securities or 
transactions, from any provision of section 12(d)(1) if the exemption 
is consistent with the public interest and the protection of investors.

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

    3. Section 5(a)(1) of the Act defines an ``open-end company'' as a 
management investment company that is offering for sale or has 
outstanding any redeemable security of which it is the issuer. Section 
2(a)(32) of the Act defines a redeemable security as any security, 
other than short-term paper, under the terms of which the holder, upon 
its presentation to the issuer, is entitled to receive approximately a 
proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Shares will not be individually redeemable, 
applicants request an order that would permit the Trust to register as 
an open-end management investment company and redeem Shares in Creation 
Units only. Applicants state that investors may purchase Shares in 
Creation Units from each Fund and redeem Creation Units from each Fund. 
Applicants further state that because the market price of Creation 
Units will be disciplined by arbitrage opportunities, investors should 
be able to sell Shares in the secondary market at prices that do not 
vary materially from their NAV.

[[Page 34098]]

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 that 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 system of investment company shares by 
eliminating price competition from Brokers offering shares at less than 
the published sales price and repurchasing shares at more than the 
published redemption price.
    6. Applicants believe that none of these purposes will be thwarted 
by permitting Shares to trade in the secondary market at negotiated 
prices. Applicants state that (a) secondary market trading in Shares 
does not involve the Funds as parties and cannot result in dilution of 
an investment in Shares, and (b) to the extent different prices exist 
during a given trading day, or from day to day, such variances occur as 
a result of third-party market forces, such as supply and demand. 
Therefore, applicants assert that secondary market transactions in 
Shares will not lead to discrimination or preferential treatment among 
purchasers. Finally, applicants contend that the proposed distribution 
system will be orderly because arbitrage activity should ensure that 
the difference between the market price of Shares and their NAV remains 
low.

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 
observe that settlement of redemptions of Creation Units of Global 
Funds is contingent not only on the settlement cycle of the U.S. 
securities markets but also on the delivery cycles present in foreign 
markets in which those Funds invest. Applicants have been advised that, 
under certain circumstances, the delivery cycles for transferring 
Portfolio Instruments to redeeming investors, coupled with local market 
holiday schedules, will require a delivery process of up to 14 calendar 
days. With respect to Future Funds that are Global Funds, applicants 
seek the same relief from section 22(e) only to the extent that 
circumstances exist similar to those described in the application. 
Except as disclosed in the SAI for a Fund, deliveries of redemption 
proceeds for Global Funds are expected to be made within seven 
days.\16\
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    \16\ Rule 15c6-1 under the Exchange Act requires that most 
securities transactions be settled within three business days of the 
trade date. Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will affect any obligations that they 
have under rule 15c6-1.
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    8. Applicants submit that Congress adopted section 22(e) to prevent 
unreasonable, undisclosed or unforeseen delays in the actual payment of 
redemption proceeds. Applicants state that allowing redemption payments 
for Creation Units of a Fund to be made within a maximum of 14 calendar 
days would not be inconsistent with the spirit and intent of section 
22(e). Applicants state 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.
    9. Applicants request relief from section 22(e) in order to provide 
payment or satisfaction of redemptions within the maximum number of 
calendar days required for such payment or satisfaction in the 
principal local markets where transactions in the Portfolio Instruments 
of each Global Fund customarily clear and settle, but in all cases no 
later than 14 calendar days following the tender of a Creation Unit. 
Applicants are not seeking relief from section 22(e) with respect to 
Global Funds that do not effect creations or redemptions in-kind.

Section 12(d)(1) of the Act

    10. 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.
    11. Applicants request relief to permit Investing Funds (as defined 
below) to acquire Shares in excess of the limits in section 12(d)(l)(A) 
of the Act and to permit the Funds, their principal underwriters and 
any Brokers to sell Shares to Investing Funds in excess of the limits 
in section 12(d)(l)(B) of the Act. Applicants request that these 
exemptions apply to: (a) any Fund that is currently or subsequently 
part of the same ``group of investment companies'' as the Initial Fund 
within the meaning of section 12(d)(1)(G)(ii) of the Act as well as any 
principal underwriter for the Funds and any Brokers selling Shares of a 
Fund to an Investing Fund; and (b) each management investment company 
or unit investment trust registered under the Act that is not part of 
the same ``group of investment companies'' as the Funds and that enters 
into a FOF Participation Agreement (as defined below) with a Fund (such 
management investment companies are referred to herein as ``Investing 
Management Companies,'' such unit investment trusts are referred to 
herein as ``Investing Trusts,'' and Investing Management Companies and 
Investing Trusts together are referred to herein as ``Investing 
Funds'').\17\ Investing Funds do not include the Funds. Each Investing 
Trust will have a

[[Page 34099]]

sponsor (``Sponsor'') and each Investing Management Company will have 
an investment adviser within the meaning of section 2(a)(20)(A) of the 
Act (``Investing Fund Advisor'') that does not control, is not 
controlled by or under common control with the Advisor. Each Investing 
Management Company may also have one or more investment advisers within 
the meaning of section 2(a)(20)(B) of the Act (each, an ``Investing 
Fund Sub-Advisor''). Each Investing Fund Advisor and any Investing Fund 
Sub-Advisor will be registered as an investment adviser under the 
Advisers Act.
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    \17\ Applicants anticipate that there may be Investing Funds 
that are not part of the same group of investment companies as the 
Funds but may be subadvised by an Advisor.
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    12. Applicants submit that the proposed conditions to the requested 
relief are designed to address the concerns underlying the limits in 
section 12(d)(1), which include concerns about undue influence, 
excessive layering of fees and overly complex structures.
    13. Applicants propose a condition to prohibit an Investing Fund or 
Investing Fund Affiliate \18\ from causing an investment by an 
Investing Fund in a Fund to influence the terms of services or 
transactions between an Investing Fund or an Investing Fund Affiliate 
and the Fund or Fund Affiliate. Applicants propose a condition to limit 
the ability of the Investing Fund Advisor, or Sponsor, any person 
controlling, controlled by or under common control with such Advisor or 
Sponsor, and any investment company or issuer that would be an 
investment company but for sections 3(c)(l) or 3(c)(7) of the Act that 
is advised or sponsored by the Investing Fund Advisor, the Sponsor, or 
any person controlling, controlled by, or under common control with 
such Advisor or Sponsor (``Investing Fund's Advisory Group'') from 
(individually or in the aggregate) controlling a Fund within the 
meaning of section 2(a)(9) of the Act. The same prohibition would apply 
to any Investing Fund Sub-Advisor, any person controlling, controlled 
by, or under common control with the Investing Fund Sub-Advisor, and 
any investment company or issuer that would be an investment company 
but for sections 3(c)(l) or 3(c)(7) of the Act (or portion of such 
investment company or issuer) advised or sponsored by the Investing 
Fund Sub-Advisor or any person controlling, controlled by or under 
common control with the Investing Fund Sub-Advisor (``Investing Fund's 
Sub-Advisory Group'').
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    \18\ An ``Investing Fund Affiliate'' is defined as the Investing 
Fund Advisor, Investing Fund Sub-Advisor, Sponsor, promoter and 
principal underwriter of an Investing Fund, and any person 
controlling, controlled by or under common control with any of these 
entities. A ``Fund Affiliate'' is defined as an investment adviser, 
promoter or principal underwriter of a Fund and any person 
controlling, controlled by or under common control with any of these 
entities.
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    14. Applicants propose other conditions to limit the potential for 
an Investing Fund and certain affiliates of an Investing Fund 
(including Underwriting Affiliates) to exercise undue influence over a 
Fund and certain of its affiliates, including that no Investing Fund or 
Investing Fund Affiliate (except to the extent it is acting in its 
capacity as an investment adviser to a Fund) will cause a Fund to 
purchase a security in 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, Investing Fund Advisor, Investing Fund Sub-
Advisor, employee or Sponsor of the Investing Fund, or a person of 
which any such officer, director, member of an advisory board, 
Investing Fund Advisor or Investing Fund Sub-Advisor, employee or 
Sponsor is an affiliated person. An Underwriting Affiliate does not 
include any person whose relationship to the Fund is covered by section 
10(f) of the Act.
    15. Applicants propose several conditions to address the concerns 
regarding layering of fees and expenses. Applicants note that the board 
of directors or trustees of any Investing Management Company, including 
a majority of the directors or trustees who are not ``interested 
persons'' within the meaning of section 2(a)(19) of the Act 
(``disinterested directors or trustees''), will be required to 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 
Investing Management Company may invest. In addition, an Investing Fund 
Advisor, trustee of an Investing Trust (``Trustee'') or Sponsor, as 
applicable, will waive fees otherwise payable to it by the Investing 
Fund in an amount at least equal to any compensation (including fees 
received pursuant to any plan adopted by a Fund under rule 12b-1 under 
the Act) received from a Fund by the Investing Fund Advisor, Trustee or 
Sponsor or an affiliated person of the Investing Fund Advisor, Trustee 
or Sponsor, other than any advisory fees paid to the Investing Fund 
Advisor, Trustee or Sponsor or its affiliated person by a Fund, in 
connection with the investment by the Investing Fund in the Fund. 
Applicants also propose a condition to prevent any sales charges or 
service fees on shares of an Investing Fund from exceeding the limits 
applicable to a fund of funds set forth in NASD Conduct Rule 2830.\19\
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    \19\ Any references to NASD Conduct Rule 2830 include any 
successor or replacement rule to NASD Conduct Rule that may be 
adopted by FINRA.
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    16. 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 sections 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.
    17. To ensure that the Investing Funds understand and comply with 
the terms and conditions of the requested order, any Investing Fund 
that intends to invest in a Fund in reliance on the requested order 
will be required to enter into a participation agreement (``FOF 
Participation Agreement'') with the Fund. The FOF Participation 
Agreement will include an acknowledgment from the Investing Fund that 
it may rely on the order only to invest in the Funds and not in any 
other investment company.

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

    18. 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 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 
defines ``control'' as the power to exercise a controlling influence 
over the management or policies of a company and provides that a 
control relationship will be presumed where one person owns more than 
25% of another person's voting securities. Each Fund may be deemed to 
be controlled by an 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

[[Page 34100]]

company (or series thereof) advised by an Advisor (an ``Affiliated 
Fund'').
    19. 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 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: (a) Holding 5% or more, or in 
excess of 25% of the outstanding 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.\20\ Applicants also request an 
exemption in order to permit a Fund to sell its Shares to and redeem 
its Shares from, and engage in the in-kind transactions that would 
accompany such sales and redemptions with, certain Investing Funds of 
which the Funds are affiliated persons or a second-tier affiliate.\21\
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    \20\ Applicants are not seeking relief from section 17(a) for, 
and the requested relief will not apply to, transactions where a 
Fund could be deemed an affiliated person, or an affiliated person 
of an affiliated person, of an Investing Fund because an investment 
adviser to the Funds is also an investment adviser to an Investing 
Fund.
    \21\ Applicants expect most Investing Funds will purchase Shares 
in the secondary market and will not purchase Creation Units 
directly from a Fund. To the extent that purchases and sales of 
Shares occur in the secondary market and not through principal 
transactions directly between an Investing 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 Units by a 
Fund to an Investing Fund and redemptions of those Shares. The 
requested relief is also intended to cover any in-kind transactions 
that may accompany such sales and redemptions.
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    20. Applicants assert 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 Units. Absent the 
unusual circumstances discussed in the application, the Deposit 
Instruments and Redemption Instruments available for a Fund will be the 
same for all purchases and redeemers, respectively, and will correspond 
pro rata to the Fund's portfolio instruments. Deposit Instruments and 
Redemption Instruments will be valued in the same manner as those 
Portfolio Instruments currently held by the relevant Funds. Therefore, 
applicants state that the in-kind purchases and redemptions create no 
opportunity for affiliated persons or the Applicants to effect a 
transaction detrimental to other holders of Shares of that Fund. 
Applicants do not believe that in-kind purchases and redemptions will 
result in abusive self-dealing or overreaching of the Fund.
    21. Applicants also submit that the sale of Shares to and 
redemption of Shares from an Investing Fund meets the standards for 
relief under sections 17(b) and 6(c) of the Act. 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 Fund in accordance 
with policies and procedures set forth in the Fund's registration 
statement.\22\ Applicants also state that the proposed transactions are 
consistent with the general purposes of the Act and appropriate in the 
public interest.
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    \22\ Applicants acknowledge that the receipt of compensation by 
(a) an affiliated person of an Investing Fund, or an affiliated 
person of such person, for the purchase by the Investing Fund of 
Shares of the Fund 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 Investing Fund, may be prohibited by section 17(e)(1) 
of the Act. The FOF Participation 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:

A. Actively-Managed Exchange-Traded Fund Relief

    1. As long as a Fund operates in reliance on the requested order, 
the Shares of the Fund will be listed on a Stock 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 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, 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 Stock Exchange, the Fund will disclose on its Web site the 
identities and quantities of the Portfolio Instruments and other held 
by the Fund that will form the basis for the Fund's calculation of NAV 
at the end of the Business Day.
    5. 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 Instrument for the Fund through a transaction in which the Fund 
could not engage directly.
    6. 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 actively-managed exchange-traded 
funds.

B. Section 12(d)(1) Relief

    1. The members of the Investing Fund's Advisory Group will not 
control (individually or in the aggregate) a Fund within the meaning of 
section 2(a)(9) of the Act. The members of the Investing Fund's 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 
Investing Fund's Advisory Group or the Investing Fund's Sub-Advisory 
Group, each in the aggregate, becomes a holder of more than 25 percent 
of the outstanding voting securities of a Fund, it will vote its Shares 
of the Fund in the same proportion as the vote of all other holders of 
the Fund's Shares. This condition does not apply to the Investing 
Fund's Sub-Advisory Group with respect to a Fund for which the 
Investing Fund Sub-Advisor or a person controlling, controlled by or 
under common control with the Investing Fund Sub-Advisor acts as the 
investment adviser within the meaning of section 2(a)(20)(A) of the 
Act.
    2. No Investing Fund or Investing Fund Affiliate will cause any 
existing or potential investment by the Investing Fund in a Fund to 
influence the terms of any services or transactions between the 
Investing Fund or an Investing Fund Affiliate and the Fund or a Fund 
Affiliate.
    3. The board of directors or trustees of an Investing Management 
Company, including a majority of the disinterested directors or 
trustees, will adopt procedures reasonably designed to ensure that the 
Investing Fund Advisor and any Investing Fund Sub-Advisor are 
conducting the investment program of the Investing Management Company 
without taking into account any consideration received by the Investing 
Management Company or an Investing Fund Affiliate from a Fund or a Fund 
Affiliate in connection with any services or transactions.
    4. Once an investment by an Investing Fund in Shares of a Fund 
exceeds the limit in section 12(d)(1)(A)(i) of the Act, the Board of a 
Fund, including a

[[Page 34101]]

majority of the disinterested Board members, will determine that any 
consideration paid by the Fund to the Investing Fund or an Investing 
Fund Affiliate in connection with any services or transactions: (i) Is 
fair and reasonable in relation to the nature and quality of the 
services and benefits received by the Fund; (ii) is within the range of 
consideration that the Fund would be required to pay to another 
unaffiliated entity in connection with the same services or 
transactions; and (iii) does not involve overreaching on the part of 
any person concerned. This condition does not apply with respect to any 
services or transactions between a Fund and its investment adviser(s), 
or any person controlling, controlled by or under common control with 
such investment adviser(s).
    5. The Investing Fund Advisor, or Trustee or Sponsor, as 
applicable, will waive fees otherwise payable to it by the Investing 
Fund in an amount at least equal to any compensation (including fees 
received pursuant to any plan adopted by a Fund under rule 12b-1 under 
the Act) received from a Fund by the Investing Fund Advisor, or Trustee 
or Sponsor, or an affiliated person of the Investing Fund Advisor, or 
Trustee or Sponsor, other than any advisory fees paid to the Investing 
Fund Advisor, or Trustee, or Sponsor, or its affiliated person by the 
Fund, in connection with the investment by the Investing Fund in the 
Fund. Any Investing Fund Sub-Advisor will waive fees otherwise payable 
to the Investing Fund Sub-Advisor, directly or indirectly, by the 
Investing Management Company in an amount at least equal to any 
compensation received from a Fund by the Investing Fund Sub-Advisor, or 
an affiliated person of the Investing Fund Sub-Advisor, other than any 
advisory fees paid to the Investing Fund Sub-Advisor or its affiliated 
person by the Fund, in connection with the investment by the Investing 
Management Company in the Fund made at the direction of the Investing 
Fund Sub-Advisor. In the event that the Investing Fund Sub-Advisor 
waives fees, the benefit of the waiver will be passed through to the 
Investing Management Company.
    6. No Investing Fund or Investing Fund Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to a Fund) 
will cause a Fund to purchase a security in an Affiliated Underwriting.
    7. The Board of the Fund, including a majority of the disinterested 
Board members, will adopt procedures reasonably designed to monitor any 
purchases of securities by the Fund in an Affiliated Underwriting, once 
an investment by an Investing Fund in the securities of the Fund 
exceeds the limit of section 12(d)(1)(A)(i) of the Act, including any 
purchases made directly from an Underwriting Affiliate. The Board will 
review these purchases periodically, but no less frequently than 
annually, to determine whether the purchases were influenced by the 
investment by the Investing Fund in the Fund. The Board will consider, 
among other things: (i) Whether the purchases were consistent with the 
investment objectives and policies of the Fund; (ii) how the 
performance of securities purchased in an Affiliated Underwriting 
compares to the performance of comparable securities purchased during a 
comparable period of time in underwritings other than Affiliated 
Underwritings or to a benchmark such as a comparable market index; and 
(iii) whether the amount of securities purchased by the Fund in 
Affiliated Underwritings and the amount purchased directly from an 
Underwriting Affiliate have changed significantly from prior years. The 
Board will take any appropriate actions based on its review, including, 
if appropriate, the institution of procedures designed to ensure that 
purchases of securities in Affiliated Underwritings are in the best 
interest of shareholders.
    8. Each Fund will maintain and preserve permanently in an easily 
accessible place a written copy of the procedures described in the 
preceding condition, and any modifications to such procedures, and will 
maintain and preserve for a period of not less than six years from the 
end of the fiscal year in which any purchase in an Affiliated 
Underwriting occurred, the first two years in an easily accessible 
place, a written record of each purchase of securities in Affiliated 
Underwritings once an investment by an Investing Fund in the securities 
of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act, 
setting forth from whom the securities were acquired, the identity of 
the underwriting syndicate's members, the terms of the purchase, and 
the information or materials upon which the Board's determinations were 
made.
    9. Before investing in a Fund in excess of the limits in section 
12(d)(1)(A), an Investing Fund will execute a FOF Participation 
Agreement with the Fund stating that their respective boards of 
directors or trustees and their investment advisers, or Trustee and 
Sponsor, as applicable, understand the terms and conditions of the 
order, and agree to fulfill their responsibilities under the order. At 
the time of its investment in shares of a Fund in excess of the limit 
in section 12(d)(1)(A)(i), an Investing Fund will notify the Fund of 
the investment. At such time, the Investing Fund will also transmit to 
the Fund a list of the names of each Investing Fund Affiliate and 
Underwriting Affiliate. The Investing Fund will notify the Fund of any 
changes to the list as soon as reasonably practicable after a change 
occurs. The Fund and the Investing Fund will maintain and preserve a 
copy of the order, the FOF Participation Agreement, and the list with 
any updated information for the duration of the investment and for a 
period of not less than six years thereafter, the first two years in an 
easily accessible place.
    10. Before approving any advisory contract under section 15 of the 
Act, the board of directors or trustees of each Investing Management 
Company, including a majority of the disinterested directors or 
trustees, will find that the advisory fees charged under such contract 
are based on services provided that will be in addition to, rather than 
duplicative of, the services provided under the advisory contract(s) of 
any Fund in which the Investing Management Company may invest. These 
findings and their basis will be recorded fully in the minute books of 
the appropriate Investing Management Company.
    11. Any sales charges and/or service fees charged with respect to 
shares of an Investing Fund will not exceed the limits applicable to a 
fund of funds as set forth in NASD Conduct Rule 2830.
    12. No Fund relying on this section 12(d)(1) relief will acquire 
securities of any investment company or company relying on section 
3(c)(1) or 3(c)(7) of the Act in excess of the limits contained in 
section 12(d)(1)(A) of the Act, 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.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-13860 Filed 6-7-12; 8:45 am]
BILLING CODE 8011-01-P


