
[Federal Register Volume 77, Number 208 (Friday, October 26, 2012)]
[Notices]
[Pages 65425-65431]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-26344]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 30237; 812-13757]


Legg Mason ETF Trust, et al.; Notice of Application

October 22, 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) 
for an exemption from sections 12(d)(1)(A) and (B) of the Act.

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Applicants:  Legg Mason ETF Trust (the ``Trust''), Legg Mason Partners 
Fund Advisor, LLC (the ``Adviser''), and Legg Mason Investor Services, 
LLC (``LMIS'').

Summary of Application:  Applicants request an order that permits: (a) 
Actively-managed series of certain open-end management investment 
companies to issue shares (``Shares'') redeemable in large aggregations 
only (``Creation Units''); (b) secondary market transactions in Shares 
to occur at negotiated market prices; (c) certain series to pay 
redemption proceeds, under certain circumstances, more than seven days 
from the tender of Shares for redemption; (d) certain affiliated 
persons of the series to deposit securities into, and receive 
securities from, the series in connection with the purchase and 
redemption of Creation Units; and (e) certain registered management 
investment companies and unit investment trusts outside of the same 
group of investment companies as the series to acquire Shares.

Filing Dates:  The application was filed on February 22, 2010, and 
amended on July 7, 2010, April 15, 2011, May 3, 2012, August 22, 2012, 
and October 17, 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 November 15, 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: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-1090. Applicants, 
620 Eighth Avenue, New York, NY 10018.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at 
(202) 551-6817 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 organized as a Maryland statutory trust and is 
registered as an open-end management investment company under the Act. 
The Trust will initially offer three actively-managed investment 
series: Legg Mason Western Asset Ultra-Short Duration ETF, Legg Mason 
Capital Management Systematic Equity Fund and Legg Mason Equal-Weighted 
Equity Sector Fund (the ``Initial Funds''). The investment objective of 
Legg Mason Western Asset Ultra-Short Duration Fund will be to seek 
current income. The investment objective of the Legg Mason Capital 
Management Systematic Equity Fund and Legg Mason Equal Weighted Equity 
Sector Fund will be to seek long term growth of capital.

[[Page 65426]]

    2. Applicants request that the order apply to the Initial Funds and 
any future series of the Trust or of any other open-end management 
companies that may use active management investment strategies 
(``Future Funds''). Any Future Fund will (a) be 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.\1\ The Initial Funds and Future Funds together are the 
``Funds.'' Each Fund will consist of a portfolio of securities, 
including fixed income securities and/or equity securities. 
(``Portfolio Securities'').\2\ Funds may invest in ``Depositary 
Receipts.'' A Fund will not invest in any Depositary Receipts that the 
Adviser deems to be illiquid or for which pricing information is not 
readily available.\3\ Each Fund will operate as an actively managed 
exchange-traded fund (``ETF''). The Future Funds may 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. A Fund of Funds (as defined below) may rely on the 
order only to invest in a Fund that is not a ``Fund of Funds ETF'' 
and not in any other registered investment company or Fund of Funds 
ETF. A ``Fund of Funds ETF'' is a Fund which invests in other open-
end and/or closed-end investment companies and/or exchange-traded 
funds.
    \2\ Neither the Initial Funds nor any Future Fund will invest in 
options contracts, futures contracts or swap agreements.
    \3\ 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, the Advisers, or any Sub-
Adviser will serve as the depositary bank for any Depositary 
Receipts held by a Fund.
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    3. The Adviser, a Delaware limited liability company, will be the 
investment adviser to each Fund. The Adviser is registered as an 
investment adviser under the Investment Advisers Act of 1940 (the 
``Advisers Act''). The Adviser may enter sub-advisory agreements with 
one or more investment advisers, each of which will serve as sub-
advisers to a Fund (each, a ``Sub-Adviser''). Each Sub-Adviser will be 
registered under the Advisers Act or exempt from registration. The 
Trust will enter into a distribution agreement with one or more 
distributors, including LMIS, a Delaware limited liability company. 
LMIS will be the distributor for the Initial Funds. Each distributor 
will be a broker or dealer registered under the Securities Exchange Act 
of 1934 (``Exchange Act'' and such persons registered under the 
Exchange Act, a ``Broker'') and will serve as principal underwriter and 
distributor (``Distributor'') of one or more Funds. Applicants request 
that the order also apply to any other Distributor to the Funds that 
complies with the terms and conditions of the application.
    4. Applicants also request that any exemption under section 
12(d)(1)(J) of the Act from sections 12(d)(1)(A) and (B) apply to: (i) 
Any Fund that is currently or subsequently part of the same ``group of 
investment companies'' as a Fund within the meaning of section 
12(d)(1)(G)(ii) of the Act; (ii) any principal underwriter for the 
Fund; (iii) any Brokers selling Shares of a Fund to a Fund of Funds (as 
defined below); and (iv) each management investment company or unit 
investment trust registered under the Act that is not part of the same 
``group of investment companies'' as the Funds within the meaning of 
section 12(d)(1)(G)(ii) of the Act and that enters into a FOF 
Participation Agreement (as defined below) with a Fund (such management 
investment companies, ``Investing Management Companies,'' such unit 
investment trusts, ``Investing Trusts,'' and Investing Management 
Companies and Investing Trusts together, ``Fund of Funds''). Fund of 
Funds do not include the Funds.
    5. Applicants anticipate that a Creation Unit will consist of at 
least 25,000 Shares and that the price of a Share will range from $20 
to $100. 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 Trust (``Authorized 
Participant'') with respect to the creation and redemption of Creation 
Units. An Authorized Participant is either: (a) A 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'').
    6. The Shares will be purchased and redeemed in Creation Units and 
generally on an in-kind basis. Except where the purchase or redemption 
will include cash under the limited circumstances specified below, 
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'').\4\ On any given 
Business Day \5\ 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 redemption, as the ``Creation Basket.'' In 
addition, the Creation Basket will correspond pro rata to the positions 
in a Fund's portfolio (including cash positions),\6\ 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; \7\ or (c) 
TBA Transactions,\8\ short positions and other positions that cannot be 
transferred in kind \9\ will be excluded from the Creation Basket.\10\ 
If there is a difference between the net asset value (``NAV'') 
attributable to a Creation Unit and the aggregate market value of the 
Creation 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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    \4\ 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 of 1933 (``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.
    \5\ Each Fund will sell and redeem Creation Units on any day the 
Fund is open, including as required by section 22(e) of the Act 
(each a ``Business Day'').
    \6\ The portfolio used for this purpose will be the same 
portfolio used to calculate the Fund's NAV for that Business Day.
    \7\ A tradeable round lot for a security will be the standard 
unit of trading in that particular type of security in its primary 
market.
    \8\ 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.
    \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 
Creation Basket, their value will be reflected in the determination 
of the Cash Amount (as defined below).
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    7. 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, a Fund announces 
before the open of trading that all purchases, all redemptions or all

[[Page 65427]]

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, a Fund determines to require the purchase or 
redemption, as applicable, to be made entirely in cash; (d) if, on a 
given Business Day, a 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 or 
DTC; or (ii) in the case of Funds holding securities traded on global 
markets (``Foreign 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 a 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 
Foreign 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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    8. Each Business Day, before the open of trading on a national 
securities exchange as defined in section 2(a)(26) of the Act 
(``Exchange'') on which Shares are listed, each Fund will cause to be 
published through the NSCC the names and quantities of the instruments 
comprising the Creation Basket, as well as the estimated Cash Amount 
(if any), for that day. The published Creation Basket will apply until 
a new Creation Basket is announced on the following Business Day, and 
there will be no intra-day changes to the Creation Basket except to 
correct errors in the published Creation Basket. An 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 
Deposit Instruments and the estimated Cash Amount.
    9. An investor purchasing or redeeming 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 by or through an 
Authorized Participant 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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    10. Shares will be listed and traded at negotiated prices on an 
Exchange and traded in the secondary market. Applicants expect that 
exchange specialists and market makers (collectively, ``Market 
Makers'') will be assigned to Shares. The price of Shares trading on 
the Exchange will be based on a current bid/offer in the secondary 
market. Transactions involving the purchases and sales of Shares on an 
Exchange will be subject to customary brokerage commissions and 
charges.
    11. Applicants expect that purchasers of Creation Units will 
include institutional investors and arbitrageurs. Market Makers, acting 
in their 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 per Share should ensure that the Shares will not trade at a 
material discount or premium in relation to their NAV.
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    \13\ If Shares are listed on NYSE Arca, Nasdaq or a similar 
electronic Exchange, one or more member firms of that Exchange will 
act as Market Maker and maintain a market for Shares trading on the 
Exchange. On Nasdaq, no particular Market Maker would be 
contractually obligated to make a market in Shares. However, the 
listing requirements on Nasdaq, for example, stipulate that at least 
two Market Makers must be registered in Shares to maintain a 
listing. In addition, on Nasdaq and NYSE Arca, registered Market 
Makers are required to make a continuous two-sided market or subject 
themselves to regulatory sanctions. No Market Maker will be an 
affiliated person, or an affiliated person of an affiliated person, 
of the Funds, except within section 2(a)(3)(A) or (C) of the Act due 
to ownership of Shares, as described below.
    \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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    12. Shares will not be individually redeemable and owners of Shares 
may acquire Shares from a Fund or tender shares for redemption to the 
Fund in Creation Units only. To redeem, an investor must accumulate 
enough Shares to constitute a Creation Unit. Redemption requests must 
be placed by or through an Authorized Participant. As discussed above, 
redemptions of Creation Units will generally be made on an in-kind 
basis, subject to certain specified exceptions under which redemptions 
may be made in whole or in part on a cash basis, and will be subject to 
a Transaction Fee.
    13. 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.'' All marketing materials 
that describe the features of obtaining, buying or selling Creation 
Units, or Shares traded on the Exchange, or refer 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.
    14. The Funds' Web site, which will be publicly available prior to 
the public offering of Shares, will include the Prospectus 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 Exchange, the Fund will disclose on its Web site the 
identities and quantities of the Portfolio Securities and other assets 
held by the Fund that will form the basis for the Fund's calculation of 
NAV at the end of the Business Day.\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

[[Page 65428]]

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.

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 
immaterial.

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 Foreign 
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 
Redemption Instruments to redeeming investors, coupled with local 
market holiday schedules, will require a delivery process of up to 15 
calendar days.\16\ Applicants therefore 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, up to a maximum of 15 calendar days, in the principal 
local markets where transactions in the Portfolio Securities of each 
Foreign Fund customarily clear and settle but in all cases no later 
than 15 calendar days following the tender of a Creation Unit.
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    \16\ In the past, settlement in certain countries, including 
Russia, has extended to 15 calendar days.
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    8. Applicants state that section 22(e) was designed to prevent 
unreasonable, undisclosed and unforeseen delays in the actual payment 
of redemption proceeds. Applicants assert that the requested relief 
will not lead to the problems that section 22(e) was designed to 
prevent. Applicants state that allowing redemption payments for 
Creation Units of a Fund to be made within a maximum of 15 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 Foreign Fund. Applicants are 
not seeking relief from section 22(e) with respect to Foreign Funds 
that do not effect creations or redemptions in-kind.

Section 12(d)(1) of the Act

    9. Section 12(d)(1)(A) of the Act prohibits a registered investment

[[Page 65429]]

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 relief to permit Fund of Funds 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 Broker to sell 
Shares to a Fund of Funds in excess of the limits in section 
12(d)(l)(B) of the Act. Applicants submit that the proposed conditions 
to the requested relief address the concerns underlying the limits in 
section 12(d)(1) which include concerns about undue influence, 
excessive layering of fees and overly complex structures.
    11. Applicants submit that their proposed conditions address any 
concerns regarding the potential for undue influence. To limit the 
control that a Fund of Funds may have over a Fund, applicants propose a 
condition prohibiting the adviser of an Investing Management Company 
(``Fund of Funds Adviser''), sponsor of an Investing Trust 
(``Sponsor''), any person controlling, controlled by, or under common 
control with the Fund of Funds Adviser or Sponsor, and any investment 
company or issuer that would be an investment company but for sections 
3(c)(l) or 3(c)(7) of the Act that is advised or sponsored by the Fund 
of Funds Adviser, the Sponsor, or any person controlling, controlled 
by, or under common control with the Fund of Funds Adviser or Sponsor 
(``Fund of Fund's 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 sub-adviser to an 
Investing Management Company (``Fund of Funds Sub-Adviser''), any 
person controlling, controlled by, or under common control with the 
Fund of Funds Sub-Adviser, and any investment company or issuer that 
would be an investment company but for sections 3(c)(l) or 3(c)(7) of 
the Act (or portion of such investment company or issuer) advised or 
sponsored by the Fund of Funds Sub-Adviser or any person controlling, 
controlled by or under common control with the Fund of Funds Sub-
Adviser (``Fund of Funds' Sub-Advisory Group'').
    12. Applicants propose a condition to ensure that no Fund of Funds 
or Fund of Funds Affiliate \17\ (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, Fund of Funds Adviser, Fund of Funds Sub-Adviser, 
employee or Sponsor of the Fund of Funds, or a person of which any such 
officer, director, member of an advisory board, Fund of Funds Adviser, 
Fund of Funds Sub-Adviser, employee or Sponsor is an affiliated person 
(except any person whose relationship to the Fund is covered by section 
10(f) of the Act is not an Underwriting Affiliate).
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    \17\ A ``Fund of Funds Affiliate'' is any Fund of Funds Adviser, 
Fund of Funds Sub-Adviser, Sponsor, promoter and principal 
underwriter of a Fund of Funds, and any person controlling, 
controlled by or under common control with any of these entities. 
``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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    13. Applicants propose several conditions to address the potential 
for layering of fees. Applicants note that the board of directors or 
trustees (``Board'') 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. Applicants also state that any 
sales charges and/or service fees charged with respect to shares of a 
Fund of Funds will not exceed the limits applicable to a fund of funds 
as set forth in NASD Conduct Rule 2830.\18\
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    \18\ Any references to NASD Conduct Rule 2830 include any 
successor or replacement rule to NASD Conduct Rule 2830 that may be 
adopted by the Financial Industry Regulatory Authority.
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    14. 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.
    15. To ensure that a Fund of Funds is aware of the terms and 
conditions of the requested order, the Fund of Funds must enter into an 
agreement with the respective Funds (``FOF Participation Agreement''). 
The FOF Participation Agreement will include an acknowledgment from the 
Fund of Funds that it may rely on the order only to invest in a Fund 
that is not a Fund of Funds ETF and not in any other investment company 
or Fund of Funds ETF.

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

    16. 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 Adviser and hence affiliated persons of each other. 
In addition, the Funds may be deemed to be under common control with 
any other registered investment company (or series thereof) advised by 
an Adviser (an ``Affiliated Fund'').
    17. 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

[[Page 65430]]

by virtue of: (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.\19\ 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 Fund of Funds of which the Funds are an 
affiliated person or a second-tier affiliate.\20\
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    \19\ 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 a Fund of Funds because an investment 
adviser to the Funds is also an investment adviser to a Fund of 
Funds.
    \20\ Although applicants believe that most Fund of Funds will 
purchase and sell Shares in the secondary market, a Fund of Funds 
might seek to transact in Shares directly with a Fund.
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    18. 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 purchasers and redeemers, respectively, and will 
correspond pro rata to the Fund's Portfolio Securities. The deposit 
procedures for in-kind purchases of Creation Units and the redemption 
procedures for in-kind redemptions will be the same for all purchases 
and redemptions. Deposit Instruments and Redemption Instruments will be 
valued in the same manner as those Portfolio Securities currently held 
by the relevant Funds. Applicants do not believe that in-kind purchases 
and redemptions will result in abusive self-dealing or overreaching of 
the Fund.
    19. Applicants also submit that the sale of Shares to and 
redemption of Shares from a Fund of Funds 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.\21\ 
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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    \21\ Applicants acknowledge that the receipt of compensation by 
(a) an affiliated person of a Fund of Funds, or an affiliated person 
of such person, for the purchase by the Fund of Funds 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 a Fund of Funds 
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. The requested order, other than the section 12(d)(1) relief, 
will expire on the effective date of any Commission rule under the Act 
that provides relief permitting the operation of actively-managed ETFs.
    2. As long as a Fund operates in reliance on the requested order, 
the Shares of such Fund will be listed on an Exchange.
    3. 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 the Creation Units or 
refers to redeemability will prominently disclose that the Shares are 
not individually redeemable and that owners of Shares may acquire those 
Shares from the Fund and tender those Shares for redemption to a Fund 
in Creation Units only.
    4. The Web site for the Funds, which is and will be publicly 
accessible at no charge, will contain, on a per Share basis for each 
Fund, the prior Business Day's NAV and the market closing price or Bid/
Ask Price of the Shares, and a calculation of the premium or discount 
of the market closing price or Bid/Ask Price against such NAV.
    5. No Adviser or Sub-Adviser, directly or indirectly, will cause 
any Authorized Participant (or any investor on whose behalf an 
Authorized Participant may transact with the Fund) to acquire any 
Deposit Instrument for the Fund through a transaction in which the Fund 
could not engage directly.
    6. On each Business Day, before the commencement of trading in 
Shares on the Fund's listing Exchange, the Fund will disclose on its 
Web site the identities and quantities of the Portfolio Securities and 
other assets held by the Fund that will form the basis of the Fund's 
calculation of NAV at the end of the Business Day.

B. Section 12(d)(1) Relief

    1. The members of the Fund of Funds' Advisory Group will not 
control (individually or in the aggregate) a Fund within the meaning of 
section 2(a)(9) of the Act. The members of the Fund of Funds' Sub-
Advisory Group will not control (individually or in the aggregate) a 
Fund within the meaning of section 2(a)(9) of the Act. If, as a result 
of a decrease in the outstanding voting securities of a Fund, the Fund 
of Funds' Advisory Group or the Fund of Funds' Sub-Advisory Group, each 
in the aggregate, becomes a holder of more than 25 percent of the 
outstanding voting securities of a Fund, it will vote its Shares of the 
Fund in the same proportion as the vote of all other holders of the 
Fund's Shares. This condition does not apply to the Fund of Funds' Sub-
Advisory Group with respect to a Fund for which the Fund of Funds Sub-
Adviser or a person controlling, controlled by or under common control 
with the Fund of Funds Sub-Adviser acts as the investment adviser 
within the meaning of section 2(a)(20)(A) of the Act.
    2. No Fund of Funds or Fund of Funds Affiliate will cause any 
existing or potential investment by the Fund of Funds in a Fund to 
influence the terms of any services or transactions between the Fund of 
Funds or a Fund of Funds Affiliate and the Fund or a Fund Affiliate.
    3. The board of directors or trustees of an Investing Management 
Company, including a majority of the non-interested directors or 
trustees, will adopt procedures reasonably designed to ensure that the 
Fund of Funds Adviser and any Fund of Funds Sub-Adviser are conducting 
the investment program of the Investing Management Company without 
taking into account any consideration received by the Investing 
Management Company or a Fund of Funds Affiliate from a Fund or a Fund 
Affiliate in connection with any services or transactions.
    4. Once an investment by a Fund of Funds in the securities of a 
Fund exceeds the limit in section 12(d)(1)(A)(i) of the Act, the Board 
of a Fund, including a majority of the non-interested Board members, 
will determine that any consideration paid by the Fund to the Fund of 
Funds or a Fund of Funds Affiliate in connection with any services or 
transactions: (i) Is fair and reasonable in relation to the nature and 
quality of the services and benefits received by the Fund; (ii) is 
within the range of consideration that the Fund would be required to 
pay to another unaffiliated entity in connection with the same services 
or transactions; and (iii) does not involve overreaching on the part of 
any person concerned. This condition does not apply with respect to any 
services or transactions between a Fund and its investment adviser(s), 
or any person controlling, controlled by or under common control with 
such investment adviser(s).

[[Page 65431]]

    5. The Fund of Funds Adviser, or trustee or Sponsor of an Investing 
Trust, as applicable, will waive fees otherwise payable to it by the 
Fund of Funds in an amount at least equal to any compensation 
(including fees received pursuant to any plan adopted by a Fund under 
rule 12b-1 under the Act) received from a Fund by the Fund of Funds 
Adviser, or trustee or Sponsor of the Investing Trust, or an affiliated 
person of the Fund of Funds Adviser, or trustee or Sponsor of the 
Investing Trust, other than any advisory fees paid to the Fund of Funds 
Adviser, or trustee or Sponsor of an Investing Trust, or its affiliated 
person by the Fund, in connection with the investment by the Fund of 
Funds in the Fund. Any Fund of Funds Sub-Adviser will waive fees 
otherwise payable to the Fund of Funds Sub-Adviser, directly or 
indirectly, by the Investing Management Company in an amount at least 
equal to any compensation received from a Fund by the Fund of Funds 
Sub-Adviser, or an affiliated person of the Fund of Funds Sub-Adviser, 
other than any advisory fees paid to the Fund of Funds Sub-Adviser or 
its affiliated person by the Fund, in connection with the investment by 
the Investing Management Company in the Fund made at the direction of 
the Fund of Funds Sub-Adviser. In the event that the Fund of Funds Sub-
Adviser waives fees, the benefit of the waiver will be passed through 
to the Investing Management Company.
    6. No Fund of Funds or Fund of Funds Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to a Fund) 
will cause a Fund to purchase a security in an Affiliated Underwriting.
    7. The Board of each Fund, including a majority of the non-
interested Board members, will adopt procedures reasonably designed to 
monitor any purchases of securities by the Fund in an Affiliated 
Underwriting, once an investment by a Fund of Funds in the securities 
of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act, 
including any purchases made directly from an Underwriting Affiliate. 
The Board will review these purchases periodically, but no less 
frequently than annually, to determine whether the purchases were 
influenced by the investment by the Fund of Funds in the Fund. The 
Board will consider, among other things: (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 
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 a Fund of Funds in the securities 
of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act, 
setting forth from whom the securities were acquired, the identity of 
the underwriting syndicate's members, the terms of the purchase, and 
the information or materials upon which the Board's determinations were 
made.
    9. Before investing in a Fund in excess of the limits in section 
12(d)(1)(A), a Fund of Funds will execute a FOF Participation Agreement 
with the Fund stating that their respective boards of directors or 
trustees and their investment advisers, or trustee and Sponsor, as 
applicable, understand the terms and conditions of the order, and agree 
to fulfill their responsibilities under the order. At the time of its 
investment in Shares of a Fund in excess of the limit in section 
12(d)(1)(A)(i), a Fund of Funds will notify the Fund of the investment. 
At such time, the Fund of Funds will also transmit to the Fund a list 
of the names of each Fund of Funds Affiliate and Underwriting 
Affiliate. The Fund of Funds will notify the Fund of any changes to the 
list of the names as soon as reasonably practicable after a change 
occurs. The Fund and the Fund of Funds will maintain and preserve a 
copy of the order, the 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 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 non-interested 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 in the minute books of the 
appropriate Investing Management Company.
    11. Any sales charges and/or service fees with respect to shares of 
a Fund of Funds will not exceed the limits applicable to a fund of 
funds as set forth in NASD Conduct Rule 2830.
    12. No Fund will acquire securities of an investment company or 
company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of 
the limits contained in section 12(d)(1)(A) of the Act, except to the 
extent that the Fund acquires securities of another investment company 
pursuant to exemptive relief from the Commission permitting the Fund to 
acquire securities of one or more 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. 2012-26344 Filed 10-25-12; 8:45 am]
BILLING CODE 8011-01-P


