
[Federal Register Volume 78, Number 64 (Wednesday, April 3, 2013)]
[Notices]
[Pages 20149-20155]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-07729]



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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 30439; 812-14035]


Sage Quant Management LLC, et al.; Notice of Application

March 28, 2013.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (``Act'') for an exemption from sections 
2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act and rule 22c-1 under the 
Act, under sections 6(c) and 17(b) of the Act for an exemption from 
sections 17(a)(1) and (a)(2) of the Act, and under section 12(d)(1)(J) 
for an exemption from sections 12(d)(1)(A) and 12(d)(1)(B) of the Act.

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

DATES:  Filing Dates: The application was filed on May 29, 2012, and 
amended on October 9, 2012, March 12, 2013 and March 27, 2013.
    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 April 22, 2013, 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, 
500 West Putnam Ave., Suite 400, Greenwich, CT 06830.

FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Senior Counsel, at 
(202) 551-6868 or Daniele Marchesani, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Exemptive Applications Office).

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

Applicants' Representations

    1. The Trust is registered as an open-end management investment 
company under the Act and organized as a Delaware statutory trust. The 
Trust will initially offer one series, the Sage Quant Low Volatility 
and Dividend Fund (``Initial Fund''), whose performance will correspond 
to the price and yield performance, before fees and expenses, of a 
specified securities index (``Underlying Index'').\1\
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    \1\ The Underlying Index for the Initial Fund is SQ Low 
Volatility and Dividend Index.
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    2. Applicants request that the order apply to the Initial Fund and 
any future series of the Trust or other registered open-end management 
investment company or series thereof that seeks to track an Underlying 
Index (``Future Funds,'' and together with the Initial Fund, the 
``Funds'').\2\ Any Fund (a) will be advised by the Adviser or an entity 
controlling, controlled by, or under common control with the Adviser 
(each, an ``Adviser'') and (b) will comply with the terms and 
conditions of the application.
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    \2\ All entities that currently intend to rely on the order have 
been named as applicants. Any other existing or future entity that 
subsequently relies on the order will comply with the terms and 
conditions of the application. An Acquiring Fund (as defined below) 
may rely on the order only to invest in Funds and not in any other 
registered investment company.
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    3. Funds may be based on Underlying Indices that contain: (i) Only 
domestic equity securities (``Domestic Equity''), (ii) only domestic 
fixed income securities (``Domestic Fixed Income''), (iii) a blend of 
domestic equity and fixed income securities (``Blended Domestic,'' 
collectively Blended Domestic, Domestic Equity and Domestic Fixed 
Income Funds, are referred to as ``Domestic Funds''); (iv) only 
international equity securities (``International Equity''); (v) only 
international fixed income securities (``International Fixed Income''); 
or (vi) a blend of International Equity and International Fixed Income 
securities (``Blended International,'' collectively Blended 
International, International Equity and International Fixed Income 
Funds, are referred to as ``International Funds''). Collectively, the 
Blended Domestic Funds, Blended International Funds and a combination 
of Blended Domestic and Blended International Funds (``Blended Global 
Funds'') are the ``Blended Funds.'' Future Funds also may be based on 
Underlying Indices that only contain global equity securities (``Global 
Equities'') and Underlying Indices that only contain global fixed 
income securities (``Global Fixed Income'') (collectively, any Future 
Fund based on a Global Fixed Income Index or Global Equity Index are 
``Global Funds'').
    4. An Adviser will be the investment adviser to the Funds. Sage 
Quant Management LLC is a Delaware limited liability company. Any 
Adviser is or will be registered as an investment adviser under Section 
203 of the Investment Advisers Act of 1940 (``Advisers Act''). The 
Adviser may enter into sub-advisory agreements with one or more 
investment advisers each of which will serve as a sub-adviser to a Fund 
(each, a ``Sub-adviser''). Each Sub-adviser will be registered or not 
subject to registration under the Advisers Act. ETF Distributors LLC is 
a broker-dealer registered under the Securities Exchange Act of 1934 
(``Exchange Act''). ETF Distributors LLC will serve as the distributor 
and principal underwriter of the Shares of Funds (``Distributor''). In 
the future another broker-dealer registered under the Exchange Act may 
act as Distributor. No Distributor may be an affiliated person with any 
Exchange or any Index Provider (as defined below).
    5. Each Fund will consist of a portfolio of securities and other 
assets and positions (``Portfolio Instruments'') selected to correspond 
generally to the price and yield performance of an Underlying Index.\3\ 
No entity that

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creates, compiles, sponsors or maintains an Underlying Index (``Index 
Provider'') is or will be an affiliated person, as defined in section 
2(a)(3) of the Act, or an affiliated person of an affiliated person of 
the Trust, a Fund, the Adviser, any Sub-adviser, or promoter of a Fund, 
or of a Distributor.
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    \3\ Applicants represent that at least 80% of each Fund's total 
assets (exclusive of collateral held from securities lending) will 
be invested in securities that comprise its respective Underlying 
Index (``Component Securities''), or in the case of Domestic Fixed 
Income Funds and Blended Domestic Funds, in Component Securities of 
its respective Underlying Index and TBA Transactions (as defined 
below) representing Component Securities, and in the case of Global 
Funds and International Funds, in Component Securities and 
depositary receipts. Each Fund may also invest the remaining 20% of 
its total assets in securities not included in its Underlying Index 
and other financial instruments which the Adviser or Sub-adviser 
believes will help the Fund in tracking the performance of the 
Underlying Index.
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    6. A Fund will utilize either a replication or representative 
sampling strategy to track its Underlying Index. A Fund using a 
replication strategy will invest in substantially all of the Component 
Securities in its Underlying Index in the same approximate proportions 
as in the Underlying Index. A Fund using a representative sampling 
strategy will hold some, but may not hold all, of the Component 
Securities of its Underlying Index. Applicants state that use of the 
representative sampling strategy may prevent a Fund from tracking the 
performance of its Underlying Index with the same degree of accuracy as 
would a Fund that invests in every Component Security of the Underlying 
Index. Applicants expect that each Fund will have a tracking error 
relative to the performance of its Underlying Index of no more than 5 
percent.
    7. The Trust will sell and redeem Creation Units Aggregations on a 
``Business Day,'' which is defined to include any day that the Trust is 
required to be open under section 22(e) of the Act. Fund Shares will 
range from $25 to $250 per Share and the price of Creation Unit 
Aggregations will range from $1 million to $10 million. All orders to 
purchase Creation Unit Aggregations must be placed with the Distributor 
by or through a party that has entered into an agreement with the 
Distributor (``Authorized Participant''). Distributor will deliver 
Fund's prospectus and a confirmation to those persons acquiring 
Creation Unit Aggregations and will maintain a record of the 
instructions given to the applicable Fund to implement the delivery of 
its Shares. An Authorized Participant must be either (1) a 
``Participating Party,'' (i.e., a broker-dealer or other participant in 
the Continuous Net Settlement System of the National Securities 
Clearing Corporation (``NSCC''), a clearing house registered with the 
Commission, or (2) a participant in the Depository Trust Company 
(``DTC,'' and such participant, ``DTC Participant''), which, in either 
case, has signed a ``Participant Agreement'' with the Distributor.
    8. Shares will be purchased and redeemed in Creation Unit 
Aggregations 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 Unit Aggregations 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 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, unless the 
Fund is Rebalancing (as defined below). In addition, the Deposit 
Instruments and the Redemption Instruments will each correspond pro 
rata to the positions in a Fund's portfolio (including cash 
positions),\5\ 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; \6\ (c) ``to be announced'' transactions 
(``TBA Transactions''),\7\ short positions, derivatives and other 
positions that cannot be transferred in kind \8\ will be excluded from 
the Deposit Instruments and the Redemption Instruments; \9\ (d) to the 
extent the Fund determines, on a given Business Day, to use a 
representative sampling of the Fund's portfolio; \10\ or (e) for 
temporary periods, to effect changes in the Fund's portfolio as a 
result of the rebalancing of its Underlying Index (any such change, a 
``Rebalancing''). If there is a difference between the net asset value 
(``NAV'') attributable to a Creation Unit Aggregation and the aggregate 
market value of the Deposit Instruments or Redemption Instruments 
exchanged for the Creation Unit Aggregation, 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\ The portfolio used for this purpose will be the same 
portfolio used to calculate the Fund's NAV for the Business Day.
    \6\ A tradeable round lot for a security will be the standard 
unit of trading in that particular type of security in its primary 
market.
    \7\ 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. The actual pools delivered generally are determined two 
days prior to the settlement date.
    \8\ 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.
    \9\ Because these instruments will be excluded from the Deposit 
Instruments and the Redemption Instruments, their value will be 
reflected in the determination of the Cash Amount (defined below).
    \10\ A Fund may only use sampling for this purpose if the 
sample: (i) Is designed to generate performance that is highly 
correlated to the performance of the Fund's portfolio; (ii) consists 
entirely of instruments that are already included in the Fund's 
portfolio; and (iii) is the same for all Authorized Participants on 
a given Business Day.
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    9. Purchases and redemptions of Creation Unit Aggregations 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 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;\11\ 
(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

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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 International Funds, Blended Global Funds 
and 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 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 Aggregation, 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 an 
International Fund, Blended Global Fund or Global Fund would be subject 
to unfavorable income tax treatment if the holder receives redemption 
proceeds in kind.\12\
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    \11\ In determining whether a particular Fund will sell or 
redeem Creation Unit Aggregations entirely on a cash or in kind 
basis (whether for a given day or a given order), the key 
consideration will be the benefit that would accrue to the Fund and 
its investors. For instance, in bond transactions, the Adviser may 
be able to obtain better execution than Share purchasers because of 
the Adviser's or Sub-adviser's size, experience and potentially 
stronger relationships in the fixed income markets. Purchases of 
Creation Unit Aggregations either on an all cash basis or in kind 
are expected to be neutral to the Funds from a tax perspective. In 
contrast, cash redemptions typically require selling portfolio 
holdings, which may result in adverse tax consequences for the 
remaining Fund shareholders that would not occur with an in kind 
redemption. As a result, tax considerations may warrant in kind 
redemptions.
    \12\ 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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    10. Each Business Day, before the open of trading on a the 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 Deposit Instruments and the Redemption Instruments, as 
well as the estimated Cash Amount (if any), for that day. The list of 
Deposit Instruments and the list of Redemption Instruments will apply 
until new lists are announced on the following Business Day, and there 
will be no intra-day changes to the lists except to correct errors in 
the published lists. The Exchange will disseminate every 15 seconds 
throughout the regular trading hours through the facilities of the 
Consolidated Tape Association the estimated intra-day NAV calculated 
and disseminated in accordance with the relevant listing standards of 
the relevant Exchange.
    11. Shares will be listed and traded on an Exchange. It is expected 
that one or more member firms of an Exchange will be designated to act 
as a market maker and maintain a market for Shares trading on the 
Exchange. Prices of Shares trading on an Exchange will be based on the 
current bid/ask market. Shares sold in the secondary market will be 
subject to customary brokerage commissions and charges.
    12. Applicants expect that purchasers of Creation Unit Aggregations 
will include institutional investors, arbitrageurs, traders and other 
market participants. Exchange specialists or market makers also may 
purchase Creation Unit Aggregations for use in market-making 
activities. Applicants expect that secondary market purchasers of 
Shares will include both institutional investors and retail 
investors.\13\ Applicants expect that the price at which Shares trade 
will be disciplined by arbitrage opportunities created by the option to 
continually purchase or redeem Creation Unit Aggregations at their NAV, 
which should ensure that Shares will not trade at a material discount 
or premium in relation to their NAV.
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    \13\ Shares will be registered in book-entry form only. DTC or 
its nominee will be the registered owner of all outstanding Shares. 
DTC or DTC Participants will maintain records reflecting beneficial 
owners of Shares.
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    13. Shares will not be individually redeemable. To redeem, an 
investor must accumulate enough Shares to constitute Creation Unit 
Aggregations. Redemption orders must be placed by or through an 
Authorized Participant.
    14. Neither the Trust nor any Fund will be advertised, marketed or 
otherwise held out as a traditional open-end investment company or a 
mutual fund. Instead, each Fund will be marketed as an ``exchange-
traded fund'', an ``investment company,'' a ``fund,'' or a ``trust.'' 
All marketing materials that describe the features or method of 
obtaining, buying or selling Creation Unit Aggregations, or Shares 
listed and traded on an Exchange or refer to redeemability, will 
prominently disclose that (1) Shares are not individually redeemable 
and that the owners of Shares may purchase or redeem Shares from the 
Fund in Creation Unit Aggregations only, and (2) the purchase and sale 
price of individual Shares trading on an Exchange may be below, at, or 
above the most recently calculated NAV for such Shares. The same 
approach will be followed in the shareholder reports and other investor 
educational materials issued or circulated in connection with the 
Shares. The Funds will provide copies of their annual and semi-annual 
shareholder reports to DTC Participants for distribution to 
shareholders.

 Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act for an 
exemption from sections 2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act 
and rule 22c-1 under the Act, and under sections 6(c) and 17(b) of the 
Act for an exemption from sections 17(a)(1) and (2) of the Act, and 
under section 12(d)(1)(J) of the Act for an exemption from sections 
12(d)(1)(A) and 12(d)(1)(B) of the Act.
    2. Section 6(c) of the Act provides that the Commission may exempt 
any person, security or transaction, or any class of persons, 
securities or transactions, from any provision of the Act, if and to 
the extent that such exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act. 
Section 17(b) of the Act authorizes the Commission to exempt a proposed 
transaction from section 17(a) of the Act if evidence establishes that 
the terms of the transaction, including the consideration to be paid or 
received, are reasonable and fair and do not involve overreaching on 
the part of any person concerned, and the proposed transaction is 
consistent with the policies of the registered investment company and 
the general provisions of the Act. Section 12(d)(1)(J) of the Act 
provides that the Commission may exempt any person, security, or 
transaction, or any class or classes of persons, securities or 
transactions, from any provisions of section 12(d)(1) if the exemption 
is consistent with the public interest and the protection of investors.

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

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

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Section 22(d) of the Act and Rule 22c-1 Under the Act

    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 a Fund's prospectus and not at a price based on NAV. Thus, purchases 
and sales of Shares in the secondary market will not comply with 
section 22(d) of the Act and rule 22c-1 under the Act. Applicants 
request an exemption under section 6(c) from these provisions.
    4. Applicants assert that the concerns sought to be addressed by 
section 22(d) of the Act and rule 22c-1 under the Act with respect to 
pricing are equally satisfied by the proposed method of pricing Shares. 
Applicants maintain that, while there is little legislative history 
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to (a) prevent dilution caused by 
certain riskless-trading schemes by principal underwriters and contract 
dealers, (b) prevent unjust discrimination or preferential treatment 
among buyers, and (c) ensure an orderly distribution system of 
investment company shares by eliminating price competition from non-
contract dealers offering shares at less than the published sales price 
and repurchasing shares at more than the published redemption price.
    5. 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 Fund assets and will not result in dilution of an 
investment in Shares, and (b) to the extent different prices exist 
during a given trading day, or from day to day, such variances occur as 
a result of third-party market forces, such as supply and demand. 
Therefore, applicants assert that secondary market transactions in 
Shares will not lead to discrimination or preferential treatment among 
purchasers. Finally, applicants contend that the proposed distribution 
system will be orderly because competitive forces will ensure that the 
difference between the market price of Shares and their NAV remains 
narrow.

Section 22(e) of the Act

    7. Section 22(e) of the Act generally prohibits a registered 
investment company from suspending the right of redemption or 
postponing the date of payment of redemption proceeds for more than 
seven days after the tender of a security for redemption. Applicants 
observe that settlement of redemptions of Creation Unit Aggregations 
for International Funds, Blended Global Funds, and Global Funds will be 
contingent not only on the settlement cycle of the U.S. securities 
markets but also on the delivery cycles in foreign markets in which 
those Funds invests. Applicants state that 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 twelve (12) calendar days. Applicants 
therefore request relief from section 22(e) in order to provide for 
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 International Fund, Blended Global Fund and Global Fund 
customarily clear and settle, but in all cases no later than 12 
calendar days following the tender of a Creation Unit Aggregation.\14\ 
With respect to Future Funds that are International Funds, Blended 
Global Funds or 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.
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    \14\ Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will affect any obligations applicants 
may have under rule 15c6-1 under the Exchange Act. Rule 15c6-1 
requires that most securities transactions be settled within three 
business days of the trade.
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    8. Applicants submit that Congress adopted section 22(e) to prevent 
unreasonable, undisclosed and unforeseen delays in the actual payment 
of redemption proceeds. Applicants state that allowing redemption 
payments for Creation Unit Aggregations of a Fund to be made within 
twelve (12) calendar days would not be inconsistent with the spirit and 
intent of section 22(e). Applicants state that the SAI will disclose 
those local holidays (over the period of at least one year following 
the date of the SAI), if any, that are expected to prevent the delivery 
of redemption proceeds in seven calendar days, and the maximum number 
of days needed to deliver the proceeds for each affected International 
Fund, Blended Global Fund and Global Fund. Applicants are not seeking 
relief from section 22(e) with respect to International Funds, Blended 
Global Funds or Global Funds that do not effect redemptions of Creation 
Unit Aggregations in-kind.

Section 12(d)(1) of the Act

    9. Section 12(d)(1)(A) of the Act, in relevant part, prohibits a 
registered investment company from acquiring securities of an 
investment company if such 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 the investment 
company's shares to another investment company if the sale will cause 
the acquiring company to own more than 3% of the acquired company's 
voting stock, or if the sale will cause more than 10% of the acquired 
company's voting stock to be owned by investment companies generally.
    10. Applicants request an exemption to permit management investment 
companies (``Acquiring Management Companies'') and unit investment 
trusts (``Acquiring Trusts'') registered under the Act that are not 
sponsored or advised by the Adviser and are not part of the same 
``group of investment companies,'' as defined in section 
12(d)(1)(G)(ii) of the Act, as the Funds (collectively, ``Acquiring 
Funds'') to acquire Shares beyond the limits of section 12(d)(1)(A). In 
addition, applicants seek relief to permit each Fund and any broker-
dealer that is registered under the Exchange Act to sell Shares to 
Acquiring Funds in excess of the limits of section 12(d)(1)(B).
    11. Each Acquiring Management Company will be advised by an 
investment adviser within the meaning of section 2(a)(20)(A) of the Act 
(the ``Acquiring Fund Adviser'') and may be sub-advised by one or more 
investment advisers within the meaning of section 2(a)(20)(B) of the 
Act (each an ``Acquiring Fund Sub-adviser''). Any Acquiring Fund 
Adviser or Acquiring Fund Sub-adviser will be registered or not subject 
to registration under the Advisers Act. Each Acquiring Trust will be 
sponsored by a sponsor (``Sponsor'').
    12. Applicants submit that the proposed conditions to the requested 
relief adequately address the concerns underlying the limits in section

[[Page 20153]]

12(d)(1)(A) and (B), which include concerns about undue influence by a 
fund of funds over underlying funds, excessive layering of fees and 
overly complex fund structures. Applicants believe that the requested 
exemption is consistent with the public interest and the protection of 
investors.
    13. Applicants believe that neither an Acquiring Fund nor an 
Acquiring Fund Affiliate would be able to exert undue influence over a 
Fund.\15\ To limit the control that an Acquiring Fund may have over a 
Fund, applicants propose a condition prohibiting an Acquiring Fund 
Adviser, Sponsor, any person controlling, controlled by, or under 
common control with the Acquiring Fund Adviser or Sponsor, and any 
investment company or issuer that would be an investment company but 
for sections 3(c)(1) or 3(c)(7) of the Act that is advised or sponsored 
by the Acquiring Fund Adviser, the Sponsor, or any person controlling, 
controlled by, or under common control with the Acquiring Fund Adviser 
or Sponsor (``Acquiring 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 Acquiring 
Fund Sub-adviser, any person controlling, controlled by or under common 
control with the Acquiring Fund Sub-adviser, and any investment company 
or issuer that would be an investment company but for section 3(c)(1) 
or 3(c)(7) of the Act (or portion of such investment company or issuer) 
advised or sponsored by the Acquiring Fund Sub-adviser or any person 
controlling, controlled by or under common control with the Acquiring 
Fund Sub-adviser (``Acquiring Fund's Sub-Advisory Group''). Applicants 
propose other conditions to limit the potential for undue influence 
over the Funds, including that no Acquiring Fund or Acquiring 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, Acquiring 
Fund Adviser, Acquiring Fund Sub-adviser, Sponsor or employee of the 
Acquiring Fund, or a person of which any such officer, director, member 
of an advisory board, Acquiring Fund Adviser, Acquiring Fund Sub-
adviser, employee or Sponsor is an affiliated person (except any person 
whose relationship to the Fund is covered by section 10(f) of the Act 
is not an Underwriting Affiliate).
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    \15\ An ``Acquiring Fund Affiliate'' is the Acquiring Fund 
Adviser, Acquiring Fund Sub-adviser(s), Sponsor, promoter or 
principal underwriter of an Acquiring Fund, and any person 
controlling, controlled by or under common control with any of these 
entities. A ``Fund Affiliate'' is the Adviser, Sub-adviser, 
promoter, or principal underwriter of a Fund or any person 
controlling, controlled by or under common control with any of these 
entities.
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    14. Applicants do not believe that the proposed arrangement will 
involve excessive layering of fees. The board of directors or trustees 
of any Acquiring Management Company, including a majority of the 
directors or trustees who are not interested directors or trustees 
within the meaning of section 2(a)(19) of the Act (``disinterested 
directors or trustees''), will find that the advisory fees charged 
under the contract are based on services provided that will be in 
addition to, rather than duplicative of, services provided under the 
advisory contract of any Fund in which the Acquiring Management Company 
may invest. In addition, under condition 13, an Acquiring Fund Adviser, 
or an Acquiring Trust's trustee (``Trustee'') or Sponsor, will waive 
fees otherwise payable to it by the Acquiring Fund in an amount at 
least equal to any compensation (including fees received pursuant to 
any plan adopted by a Fund under rule 12b-1 under the Act) received 
from a Fund by the Acquiring Fund Adviser, Trustee or Sponsor or an 
affiliated person of the Acquiring Fund Adviser, Trustee or Sponsor, in 
connection with the investment by the Acquiring Fund in the Fund. 
Applicants state that any sales loads or service fees charged with 
respect to shares of an Acquiring Fund will not exceed the limits 
applicable to a fund of funds set forth in NASD Conduct Rule 2830.\16\
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    \16\ All 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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    15. Applicants submit condition 15 addresses concerns over 
meaninglessly complex fund structures. Under condition 15, no Fund may 
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. To ensure that Acquiring Funds comply with the terms and 
conditions of the requested order, the Acquiring Funds must enter into 
an agreement with the respective Funds (``Acquiring Fund Agreement''). 
The Acquiring Fund Agreement will require the Acquiring Fund to adhere 
to the terms and conditions of the requested order and participate in 
the proposed transactions in a manner that addresses concerns regarding 
the requested relief from section 12(d)(1). The Acquiring Fund 
Agreement also will include an acknowledgement from the Acquiring Fund 
that it may rely on the requested order only to invest in Funds and not 
in any other investment company. Applicants also note that a Fund may 
choose to reject a direct purchase of Shares in Creation Unit 
Aggregations by an Acquiring Fund. To the extent that an Acquiring Fund 
purchases Shares in the secondary market, a Fund would still retain its 
ability to reject initial purchases of Shares made in reliance on the 
requested order by declining to enter into the Acquiring Fund Agreement 
prior to any investment by an Acquiring Fund in excess of the limits of 
section 12(d)(1)(A).

Section 17 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 or 
other property to or acquiring any security or other property from the 
company. Section 2(a)(3) of the Act defines ``affiliated person'' of 
another person to include (a) any person directly or indirectly owning, 
controlling, or holding with power to vote 5% or more of the 
outstanding voting securities of the other person, and (c) any person 
directly or indirectly controlling, controlled by, or under common 
control with, the other person. Section 2(a)(9) of the Act defines 
control as the power to exercise a controlling influence over the 
management of policies of a company. It also provides that a control 
relationship will be presumed where one person owns more than 25% of a 
company's voting securities. The Funds may be deemed to be controlled 
by the 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 the 
Adviser (an ``Affiliated Fund'').
    17. Applicants request an exemption from section 17(a) of the Act 
pursuant to sections 17(b) and 6(c) of the Act to permit persons to 
effectuate in-kind purchases and redemptions with a Fund when they are 
affiliated persons or

[[Page 20154]]

second-tier affiliates of the Fund solely by virtue of one or more of 
the following: (1) Holding 5% or more, or more than 25%, of the 
outstanding Shares of one or more Funds; (2) having an affiliation with 
a person with an ownership interest described in (1); or (3) holding 5% 
or more, or more than 25%, of the shares of one or more Affiliated 
Funds.
    18. Applicants assert that no useful purpose would be served by 
prohibiting these types of affiliated persons from acquiring or 
redeeming Creation Unit Aggregations through in-kind transactions. 
Except for permitted cash-in-lieu amounts, the Deposit Instruments and 
Redemption Instruments will be the same for all purchasers and 
redeemers regardless of the their identity. The deposit procedures for 
both in-kind purchases and in-kind redemptions of Creation Unit 
Aggregations will be the same for all purchases and redemptions, 
regardless of size or number. Deposit Instruments and Redemption 
Instruments will be valued in the same manner as Portfolio Instruments 
are valued for purposes of calculating NAV. Applicants submit that, by 
using the same standards for valuing Portfolio Instruments as are used 
for calculating the value of Deposit Instruments and Redemption 
Instruments, the Fund will ensure that its NAV will not be adversely 
affected by such transactions. Applicants also believe that in-kind 
purchases and redemptions will not result in self-dealing or 
overreaching of the Fund.
    19. Applicants also seek relief from section 17(a) to permit a Fund 
that is an affiliated person or second-tier affiliate of an Acquiring 
Fund to sell its Shares to and redeem its Shares from an Acquiring 
Fund, and to engage in the accompanying in-kind transactions with the 
Acquiring Fund.\17\ Applicants state that the terms of the proposed 
transactions will be fair and reasonable and will not involve 
overreaching. Applicants note that any consideration paid by an 
Acquiring Fund 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.\18\ The 
Acquiring Fund Agreement will require any Acquiring Fund that purchases 
Creation Unit Aggregations directly from a Fund to represent that the 
purchase will be in compliance with the investment restrictions of the 
Acquiring Fund and will be consistent with the investment policies set 
forth in the Acquiring Fund's registration statement. Further, 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 Instruments, except as described 
above. 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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    \17\ To the extent that purchases and sales of Shares occur in 
the secondary market and not through principal transactions directly 
between an Acquiring Fund and a Fund, relief from section 17(a) 
would not be necessary. However, the requested relief would apply to 
direct sales of Shares in Creation Unit Aggregations by a Fund to an 
Acquiring Fund and redemptions of those Shares. The requested relief 
also is intended to cover the in-kind transactions that may 
accompany such sales and redemptions. 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 second-tier affiliate of an Acquiring Fund because the 
Adviser provides investment advisory services to the Acquiring Fund.
    \18\ Applicants acknowledge that receipt of compensation by (a) 
an affiliated person of an Acquiring Fund, or an affiliated person 
of such person, for the purchase by the Acquiring Fund of Shares or 
(b) an affiliated person of a Fund, or an affiliated person of such 
person, for the sale by the Fund of its Shares to an Acquiring Fund 
may be prohibited by section 17(e)(1) of the Act. The Acquiring Fund 
Agreement also will include this acknowledgment.
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Applicants' Conditions

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

ETF Relief

    1. As long as a Fund operates in reliance on the requested order, 
its Shares will be listed on an Exchange.
    2. Neither the Trust nor any Fund will be advertised or marketed as 
an open-end investment company or a mutual fund. Any advertising 
material that describes the purchase or sale of Creation Unit 
Aggregations or refers to redeemability will prominently disclose that 
Shares are not individually redeemable and that owners of Shares may 
acquire those Shares from a Fund and tender those Shares for redemption 
to a Fund in Creation Unit Aggregations only.
    3. The Web site for the Funds, which is and will be publicly 
accessible at no charge, will contain, on a per Share basis for each 
Fund, the prior Business Day's NAV and the market closing price or the 
midpoint of the bid/ask spread at the time of the calculation of such 
NAV (``Bid/Ask Price''), and a calculation of the premium or discount 
of the market closing price or Bid/Ask Price against such NAV.
    4. The requested relief to permit ETF operations will expire on the 
effective date of any Commission rule under the Act that provides 
relief permitting the operation of index-based exchange-traded funds.

Section 12(d)(1) Relief

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

[[Page 20155]]

the disinterested directors/trustees, will determine that any 
consideration paid by the Fund to the Acquiring Fund or an Acquiring 
Funds Affiliate in connection with any services or transactions: (a) Is 
fair and reasonable in relation to the nature and quality of the 
services and benefits received by the Fund; (b) is within the range of 
consideration that the Fund would be required to pay to another 
unaffiliated entity in connection with the same services or 
transactions; and (c) does not involve overreaching on the part of any 
person concerned. This condition does not apply with respect to any 
services or transactions between a Fund and its investment adviser(s), 
or any person controlling, controlled by, or under common control with 
such investment adviser(s).
    9. No Acquiring Fund or Acquiring Fund Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to a Fund) 
will cause the Fund to purchase a security in any Affiliated 
Underwriting.
    10. The Board, including a majority of the disinterested directors/
trustees, will adopt procedures reasonably designed to monitor any 
purchases of securities by a Fund in an Affiliated Underwriting, once 
an investment by an Acquiring Fund in the securities of the Fund 
exceeds the limit of section 12(d)(1)(A)(i) of the Act, including any 
purchases made directly from an Underwriting Affiliate. The Board will 
review these purchases periodically, but no less frequently than 
annually, to determine whether the purchases were influenced by the 
investment by the Acquiring Fund in the Fund. The Board will consider, 
among other things: (a) Whether the purchases were consistent with the 
investment objectives and policies of the Fund; (b) how the performance 
of securities purchased in an Affiliated Underwriting compares to the 
performance of comparable securities purchased during a comparable 
period of time in underwritings other than Affiliated Underwritings or 
to a benchmark such as a comparable market index; and (c) whether the 
amount of securities purchased by the Fund in Affiliated Underwritings 
and the amount purchased directly from an Underwriting Affiliate have 
changed significantly from prior years. The Board will take any 
appropriate actions based on its review, including, if appropriate, the 
institution of procedures designed to assure that purchases of 
securities in Affiliated Underwritings are in the best interest of 
shareholders of the Fund.
    11. Each Fund will maintain and preserve permanently in an easily 
accessible place a written copy of the procedures described in the 
preceding condition, and any modifications to such procedures, and will 
maintain and preserve for a period of not less than six years from the 
end of the fiscal year in which any purchase in an Affiliated 
Underwriting occurred, the first two years in an easily accessible 
place, a written record of each purchase of securities in Affiliated 
Underwritings, once an investment by an Acquiring Fund in the 
securities of the Fund exceeds the limit of section 12(d)(1)(A)(i) of 
the Act, setting forth from whom the securities were acquired, the 
identity of the underwriting syndicate's members, the terms of the 
purchase, and the information or materials upon which the Board's 
determinations were made.
    12. Before investing in Shares in excess of the limits in section 
12(d)(1)(A), each Acquiring Fund and the Fund will execute an Acquiring 
Fund Agreement stating, without limitation, that their respective 
boards of directors or trustees and their investment adviser(s) or 
their Sponsors or Trustees, as applicable, understand the terms and 
conditions of the order, and agree to fulfill their responsibilities 
under the order. At the time of its investment in Shares of a Fund in 
excess of the limit in section 12(d)(1)(A)(i), an Acquiring Fund will 
notify the Fund of the investment. At such time, the Acquiring Fund 
will also transmit to the Fund a list of the names of each Acquiring 
Fund Affiliate and Underwriting Affiliate. The Acquiring Fund will 
notify the Fund of any changes to the list of names as soon as 
reasonably practicable after a change occurs. The Fund and the 
Acquiring Fund will maintain and preserve a copy of the order, the 
Acquiring Fund Agreement, and the list with any updated information for 
the duration of the investment and for a period of not less than six 
years thereafter, the first two years in an easily accessible place.
    13. The Acquiring Fund Adviser, Trustee or Sponsor, as applicable, 
will waive fees otherwise payable to it by the Acquiring Fund in an 
amount at least equal to any compensation (including fees received 
pursuant to any plan adopted by a Fund under rule 12b-1 under the Act) 
received from the Fund by the Acquiring Fund Adviser, Trustee or 
Sponsor, or an affiliated person of the Acquiring Fund Adviser, Trustee 
or Sponsor, other than any advisory fees paid to the Acquiring Fund 
Adviser, Trustee, or Sponsor, or its affiliated person by the Fund, in 
connection with the investment by the Acquiring Fund in the Fund. Any 
Acquiring Fund Sub-adviser will waive fees otherwise payable to the 
Acquiring Fund Sub-adviser, directly or indirectly, by the Acquiring 
Management Company in an amount at least equal to any compensation 
received from a Fund by the Acquiring Fund Sub-adviser, or an 
affiliated person of the Acquiring Fund Sub-adviser, other than any 
advisory fees paid to the Acquiring Fund Sub-adviser or its affiliated 
person by the Fund, in connection with any investment by the Acquiring 
Management Company in the Fund made at the direction of the Acquiring 
Fund Sub-adviser. In the event that the Acquiring Fund Sub-adviser 
waives fees, the benefit of the waiver will be passed through to the 
Acquiring Management Company.
    14. Any sales charges and/or service fees charged with respect to 
shares of an Acquiring Fund will not exceed the limits applicable to a 
fund of funds as set forth in NASD Conduct Rule 2830.
    15. No Fund will acquire securities of an investment company or 
company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of 
the limits contained in section 12(d)(1)(A) of the 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.
    16. Before approving any advisory contract under section 15 of the 
Act, the board of directors or trustees of each Acquiring Management 
Company, including a majority of the disinterested directors or 
trustees, will find that the advisory fees charged under such advisory 
contract are based on services provided that will be in addition to, 
rather than duplicative of, the services provided under the advisory 
contract(s) of any Fund in which the Acquiring Management Company may 
invest. These findings and their basis will be recorded fully in the 
minute books of the appropriate Acquiring Management Company.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-07729 Filed 4-2-13; 8:45 am]
BILLING CODE 8011-01-P


