
[Federal Register Volume 78, Number 187 (Thursday, September 26, 2013)]
[Notices]
[Pages 59383-59390]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-23426]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 30692; 812-14136]


Principal Management Corporation, et al.; Notice of Application

September 20, 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 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.

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    Applicants: Principal Management Corporation (``PMC''), Principal 
Exchange-Traded Funds (the ``Trust'') and Principal Funds Distributor, 
Inc. (the ``Distributor'').
    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 March 22, 2013, and 
amended on March 28, 2013 and on September 6, 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 October 15, 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: 
\c/o\ Drinker Biddle & Reath, LLP, 1500 K Street NW., Washington, DC 
20005-1209.

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 will be registered as an open-end management 
investment company under the Act and is a statutory trust organized 
under the laws of Delaware. The Trust will initially offer an actively-
managed series, Multi-Asset Income ETF (the ``Initial Fund''). The 
investment objective of the Initial Fund will be to seek to provide 
current income through a diversified, yield-focused investment 
strategy.
    2. PMC, an Iowa corporation, will be the investment adviser to the 
Initial Fund. PMC is and any other Adviser (as defined below) 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 investment advisers to act as 
sub-advisers with respect to the Funds (each, a ``Subadviser''). Any 
Subadviser will be registered under the Advisers Act or not subject to 
such registration. A registered broker-dealer under the Securities 
Exchange Act of 1934 (``Exchange Act''), which may be an affiliate of 
the Adviser, will act as the distributor and principal underwriter of 
the Funds (``Distributor'').
    3. Applicants request that the order apply to the Initial Fund and 
any future series of the Trust or of other existing or future open-end 
management companies that may utilize active management investment 
strategies (``Future Funds''). Any Future Fund will (a) be advised by 
PMC or an entity controlling, controlled by, or under common control 
with PMC or any successor thereto (each such entity included in the 
term ``Adviser''),\1\ and (b) comply with the terms and conditions of 
the application.\2\ The

[[Page 59384]]

Initial Fund and Future Funds together are the ``Funds''. Each Fund 
will operate as an actively managed exchange-traded fund (``ETF''). 
Each Fund will consist of a portfolio of securities (including fixed 
income securities and/or equity securities) and/or currencies, other 
assets and other positions including short sales and other short 
positions (``Short Positions'') traded in the U.S. and/or in non-U.S. 
markets (``Portfolio Positions''). To the extent consistent with other 
investment limitations, the Funds may invest in ETFs as well as shares 
of certain exchange-traded products that are not registered investment 
companies,\3\ cash and cash equivalents, mortgage- or asset-backed 
securities, including ``to-be-announced transactions'' (``TBA 
Transactions''),\4\ and may engage in forward commitment 
transactions,\5\ forward foreign currency contracts, options contracts, 
futures contracts or swap agreements.\6\ Funds may also invest in 
``Depositary Receipts''.\7\ A Fund will not invest in any Depositary 
Receipts that the Adviser, or Subadviser as applicable, deems to be 
illiquid or for which pricing information is not readily available. The 
Funds might include one or more ETFs which invest in other open-end 
and[sol]or closed-end investment companies and/or ETFs.\8\
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    \1\ For purposes of the requested order, a ``successor'' is 
limited to an entity that results from a reorganization into another 
jurisdiction or a change in the type of business organization.
    \2\ All entities that currently intend to rely on the order are 
named as applicants. Any entity that relies on the order in the 
future will comply with the terms and conditions of the application. 
An Investing Fund (as defined below) may rely on the order only to 
invest in Funds and not in any other registered investment company.
    \3\ The Funds may invest in exchange-traded products that invest 
primarily in commodities or currency but otherwise operate in a 
manner similar to ETFs. The Funds may also invest in exchange-traded 
notes.
    \4\ A TBA Transaction is a method of trading mortgage-backed 
securities. In a TBA Transaction, the buyer and seller agree upon 
general trade parameters such as agency, settlement date, par amount 
and price. The actual pools delivered generally are determined two 
days prior to the settlement date.
    \5\ In a forward commitment transaction, the buyer/seller enters 
into a contract to purchase/sell, for example, specific securities 
for a fixed price at a future date beyond normal settlement time.
    \6\ If a Fund invests in derivatives: (a) The Board (as defined 
below) periodically will review and approve (i) the Fund's use of 
derivatives and (ii) how the Fund's investment adviser assesses and 
manages risk with respect to the Fund's use of derivatives; and (b) 
the Fund's disclosure of its use of derivatives in its offering 
documents and periodic reports will be consistent with relevant 
Commission and staff guidance.
    \7\ 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, any Adviser, Subadviser or the 
Funds will serve as the depositary bank for any Depositary Receipts 
held by a Fund.
    \8\ In no case, however, will such a Fund rely on the exemption 
from section 12(d)(1) being requested in the application.
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    4. Applicants also request that any exemptions under section 
12(d)(1)(J) of the Act from sections 12(d)(1)(A) and (B) apply to: (1) 
Any Fund that is currently or subsequently part of the same ``group of 
investment companies'' as the Initial Fund within the meaning of 
section 12(d)(1)(G)(ii) of the Act as well as any principal underwriter 
for the Fund and any Brokers (as defined below) selling Shares of a 
Fund to an Investing Fund (as defined below); and (2) each management 
investment company or unit investment trust registered under the Act 
that is not part of the same ``group of investment companies'' as the 
Funds, and that enters into a FOF Participation Agreement (as defined 
below) with a Fund (such management investment companies are referred 
to herein as ``Investing Management Companies,'' such unit investment 
trusts are referred to herein as, ``Investing Trusts,'' and Investing 
Management Companies and Investing Trusts together are referred to 
herein as ``Investing Funds'').\9\ Investing Funds do not include the 
Funds.
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    \9\ Applicants anticipate that there may be Investing Funds that 
are not part of the same group of investment companies as the Funds, 
but are subadvised by an Adviser.
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    5. Applicants anticipate that a Creation Unit will consist of at 
least 25,000 Shares and the price of a Share will range from $20 to 
$200. All orders to purchase Creation Units must be placed with the 
Distributor by or through a party (``Authorized Participant'') that has 
entered into a participant agreement with the Distributor and the 
transfer agent of the Trust with respect to the creation and redemption 
of Creation Units. An Authorized Participant is either: (a) a broker or 
dealer registered under the Exchange Act (``Broker'') or other 
participant in the Continuous Net Settlement System of the National 
Securities Clearing Corporation (``NSCC''), 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''). Shares of the Funds 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'').\10\ On any given Business Day \11\, the 
names and quantities of the instruments that constitute the Deposit 
Instruments and the names and quantities of the instruments that 
constitute the Redemption Instruments will be identical, and these 
instruments may be referred to, in the case of either a purchase or a 
redemption, as the ``Creation Basket.'' In addition, the Creation 
Basket will correspond pro rata to the positions in the Fund's 
portfolio (including cash positions),\12\ 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; \13\ or 
(c) TBA Transactions, Short Positions or other positions that cannot be 
transferred in kind \14\ will be excluded from the Creation Basket.\15\ 
If there is a difference between the net asset value 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 pay to the other an amount in cash equal to that 
difference (the ``Balancing Amount'').
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    \10\ 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.
    \11\ ``Business Day'' is defined to include any day that the 
Trust is open for business as required by section 22(e) of the Act.
    \12\ The portfolio used for this purpose will be the same 
portfolio used to calculate the Fund's net assets value (``NAV'') 
for that Business Day.
    \13\ A tradeable round lot for a security will be the standard 
unit of trading in that particular type of security in its primary 
market.
    \14\ This includes instruments that can be transferred in kind 
only with the consent of the counterparty to the extent the Fund 
does not intend to seek such consents.
    \15\ Because these instruments will be excluded from the 
Creation Basket, their value will be reflected in the determination 
of the Balancing Amount (defined below).
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    6. Purchases and redemptions of Creation Units may be made in whole 
or in part on a cash basis, rather than in kind, solely under the 
following circumstances: (a) To the extent there is a Balancing Amount, 
as described above; (b) if, on a given Business Day, the Fund announces 
before the open of trading that all purchases, all redemptions or all 
purchases and redemptions on that day will be made entirely in cash; 
(c) if, upon receiving a purchase or redemption order from an 
Authorized Participant, the Fund determines to require the purchase or

[[Page 59385]]

redemption, as applicable, to be made entirely in cash; \16\ (d) if, on 
a given Business Day, the Fund requires all Authorized Participants 
purchasing or redeeming Shares on that day to deposit or receive (as 
applicable) cash in lieu of some or all of the Deposit Instruments or 
Redemption Instruments, respectively, solely because: (i) such 
instruments are not eligible for transfer through either the NSCC 
Process or DTC Process; or (ii) in the case of Funds holding non-U.S. 
investments (``Global Funds''), such instruments are not eligible for 
trading due to local trading restrictions, local restrictions on 
securities transfers, or other similar circumstances; or (e) if the 
Fund permits an Authorized Participant to deposit or receive (as 
applicable) cash in lieu of some or all of the Deposit Instruments or 
Redemption Instruments, respectively, solely because: (i) such 
instruments are, in the case of the purchase of a Creation Unit, not 
available in sufficient quantity; (ii) such instruments are not 
eligible for trading by an Authorized Participant or the investor on 
whose behalf the Authorized Participant is acting; or (iii) a holder of 
Shares of a Global Fund would be subject to unfavorable income tax 
treatment if the holder receives redemption proceeds in kind.\17\
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    \16\ In determining whether a particular Fund will sell or 
redeem Creation Units 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. Purchases 
of Creation Units 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 
Positions, 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.
    \17\ A ``custom order'' is any purchase or redemption of Shares 
made in whole or in part on a cash basis in reliance on clause 
(e)(i) or (e)(ii).
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    7. Each Business Day, before the open of trading on the national 
securities exchange, as defined in section 2(a)(26) of the Act (``Stock 
Exchange''), upon which its Shares are listed and traded, the Fund will 
cause to be published through the NSCC the names and quantities of the 
instruments comprising the Creation Basket, as well as the estimated 
Balancing 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. The 
Stock Exchange will disseminate every 15 seconds throughout the trading 
day through the facilities of the Consolidated Tape Association an 
amount representing, on a per Share basis, the sum of the current value 
of the Portfolio Positions that were publicly disclosed prior to the 
commencement of trading in Shares on the Stock Exchange.
    8. 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.\18\ 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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    \18\ Where a Fund permits an in-kind purchaser or redeemer to 
deposit or receive cash in lieu of one or more Deposit or Redemption 
Instruments, the purchaser or redeemer may be assessed a higher 
Transaction Fee to offset the transaction cost to the Fund of buying 
or selling those particular Deposit or Redemption Instruments.
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    9. Shares will be listed and traded at negotiated prices on the 
Stock Exchange and traded in the secondary market. Applicants expect 
that the Stock Exchange market makers (``Market Makers'') will be 
assigned to Shares. The price of Shares trading on the Stock Exchange 
will be based on a current bid/offer market. Transactions involving the 
purchases and sales of Shares on the Stock Exchange will be subject to 
customary brokerage commissions and charges.
    10. Applicants expect that purchasers of Creation Units will 
include arbitrageurs. Market Makers, acting in their unique role to 
provide a fair and orderly secondary market for Shares, also may 
purchase Creation Units for use in their own market making 
activities.\19\ Applicants expect that secondary market purchasers of 
Shares will include both institutional and retail investors.\20\ 
Applicants expect that arbitrage opportunities created by the ability 
to continually purchase or redeem Creation Units at their NAV should 
ensure that the Shares will not trade at a material discount or premium 
in relation to their NAV.
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    \19\ Unlike on other Stock Exchanges where a Market Maker may 
oversee trading in shares, on NASDAQ numerous Market Makers buy and 
sell Shares for their own accounts on a regular basis. If Shares are 
listed on NASDAQ, two or more Market Makers will be registered in 
Shares and required to make a continuous two-sided market or face 
regulatory sanctions. No Market Maker will be an affiliated person, 
or an affiliated person of an affiliated person, of the Funds, 
except within the meaning of section 2(a)(3)(A) or (C) of the Act 
due to ownership of Shares.
    \20\ Shares will be registered in book-entry form only. DTC or 
its nominee will be the record or registered owner of all 
outstanding Shares. Beneficial ownership of Shares will be shown on 
the records of DTC or DTC Participants.
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    11. Shares may be redeemed only if tendered in Creation Units. 
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.
    12. Neither the Trust nor any Fund will be marketed or otherwise 
held out as a ``mutual fund.'' Instead, each Fund will be marketed as 
an ``actively-managed exchange-traded fund.'' Any advertising material 
where features of obtaining, buying or selling Creation Units are 
described or where there is reference to redeemability will prominently 
disclose that Shares are not individually redeemable and that owners of 
Shares may acquire Shares from a Fund and tender those Shares for 
redemption to a Fund in Creation Units only.
    13. 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 Stock Exchange, the Fund will 
disclose on its Web site the identities and quantities of the Portfolio 
Positions held by the Fund that will form the basis for the Fund's 
calculation of NAV at the end of the Business Day.\21\
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    \21\ Applicants note that under accounting procedures followed 
by the Funds, trades made on the prior Business Day will be booked 
and reflected in NAV on the current Business Day. Accordingly, the 
Funds will be able to disclose at the beginning of the Business Day 
the portfolio that will form the basis for the NAV calculation at 
the end of the Business Day.
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Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act for an 
exemption from sections 2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act 
and rule 22c-1 under the Act, under sections 6(c) and 17(b) of the

[[Page 59386]]

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 and any Fund 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, to permit Shares to 
trade at negotiated prices.
    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 differences between the market price of Shares and their NAV remain 
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 Global 
Funds is contingent not only on the settlement cycle of the U.S. 
securities markets but also on the delivery cycles present in foreign 
markets in which those Funds invest. Applicants have been advised that, 
under certain circumstances, the delivery cycles for transferring 
Portfolio Positions to redeeming investors, coupled with local market 
holiday schedules, will require a delivery process of up to 14 calendar 
days. 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 in 
the principal local markets where transactions in the Portfolio 
Positions of each Global Fund customarily clear and settle, but in all 
cases no later than 14 calendar days following the tender of a Creation 
Unit.\22\
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    \22\ Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will affect any obligations that they 
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 date.
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    8. Applicants submit that Congress adopted section 22(e) to prevent 
unreasonable, undisclosed or unforeseen delays in the actual payment of 
redemption proceeds. Applicants state that allowing redemption payments 
for Creation Units of a Fund to be made within a maximum of 14 calendar 
days will not lead to unreasonable, undisclosed or unforeseen delays in 
the redemption process and would not be inconsistent with the spirit 
and intent of section 22(e). Applicants state the statement of 
additional information (``SAI'') will disclose those local holidays 
(over the period of at least one year following the date of the SAI), 
if any, that are expected to prevent the delivery of redemption 
proceeds in seven calendar days and the maximum number of days, up to 
14 calendar days, needed to deliver the proceeds for each affected 
Global Fund. Except as disclosed in the SAI for a Future Fund, 
deliveries of

[[Page 59387]]

redemption proceeds for Global Funds are expected to be made within 
seven days. Applicants are not seeking relief from section 22(e) with 
respect to Global Funds that do not effect redemptions in-kind.

Section 12(d)(1) of the Act

    9. Section 12(d)(1)(A) of the Act prohibits a registered investment 
company from acquiring securities 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 Investing 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 Brokers to sell 
Shares to Investing 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 are designed to address the concerns underlying 
the limits in section 12(d)(1), which include concerns about undue 
influence, excessive layering of fees and overly complex structures.
    11. Applicants submit that their proposed conditions address the 
concerns regarding the potential for undue influence. To limit the 
control that an Investing Fund may have over a Fund, applicants propose 
a condition prohibiting the adviser of an Investing Management Company 
(``Investing Fund Adviser''), sponsor of an Investing Trust 
(``Sponsor''), any person controlling, controlled by, or under common 
control with the Investing Fund 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 
Investing Fund Adviser, the Sponsor, or any person controlling, 
controlled by, or under common control with the Investing Fund Adviser 
or Sponsor (``Investing 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 (``Investing Fund Subadviser''), any 
person controlling, controlled by, or under common control with the 
Investing Fund Subadviser, and any investment company or issuer that 
would be an investment company but for sections 3(c)(l) or 3(c)(7) of 
the Act (or portion of such investment company or issuer) advised or 
sponsored by the Investing Fund Subadviser or any person controlling, 
controlled by or under common control with the Investing Fund 
Subadviser (``Investing Fund's Subadvisory Group'').
    12. Applicants propose a condition to ensure that no Investing Fund 
or Investing Fund Affiliate \23\ (except to the extent it is acting in 
its capacity as an investment adviser to a Fund) will cause a Fund to 
purchase a security in an offering of securities during the existence 
of an underwriting or selling syndicate of which a principal 
underwriter is an Underwriting Affiliate (``Affiliated Underwriting''). 
An ``Underwriting Affiliate'' is a principal underwriter in any 
underwriting or selling syndicate that is an officer, director, member 
of an advisory board, Investing Fund Adviser, Investing Fund 
Subadviser, employee or Sponsor of the Investing Fund, or a person of 
which any such officer, director, member of an advisory board, 
Investing Fund Adviser or Investing Fund Subadviser, employee or 
Sponsor is an affiliated person. An Underwriting Affiliate does not 
include any person whose relationship to the Fund is covered by section 
10(f) of the Act.
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    \23\ An ``Investing Fund Affiliate'' is defined as the Investing 
Fund Adviser, Investing Fund Subadviser, Sponsor, promoter and 
principal underwriter of an Investing Fund, and any person 
controlling, controlled by or under common control with any of these 
entities. A ``Fund Affiliate'' is defined as an investment adviser, 
promoter or principal underwriter of a Fund and any person 
controlling, controlled by or under common control with any of these 
entities.
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    13. Applicants propose several conditions to address the concerns 
regarding layering of fees and expenses. Applicants note that the board 
of directors or trustees of any Investing Management Company, including 
a majority of the directors or trustees who are not ``interested 
persons'' within the meaning of section 2(a)(19) of the Act 
(``disinterested directors or trustees''), will be required to find 
that the advisory fees charged under the contract are based on services 
provided that will be in addition to, rather than duplicative of, 
services provided under the advisory contract of any Fund in which the 
Investing Management Company may invest. In addition, an Investing Fund 
Adviser, trustee of an Investing Trust (``Trustee'') or Sponsor, as 
applicable, will waive fees otherwise payable to it by the Investing 
Fund in an amount at least equal to any compensation (including fees 
received pursuant to any plan adopted by a Fund under rule 12b-1 under 
the Act) received from a Fund by the Investing Fund Adviser, Trustee or 
Sponsor or an affiliated person of the Investing Fund Adviser, Trustee 
or Sponsor, other than any advisory fees paid to the Investing Fund 
Adviser, Trustee or Sponsor or its affiliated person by a Fund, in 
connection with the investment by the Investing Fund in the Fund. 
Applicants also propose a condition to prevent any sales charges or 
service fees on shares of an Investing Fund from exceeding the limits 
applicable to a fund of funds set forth in NASD Conduct Rule 2830.\24\
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    \24\ 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 sections 3(c)(1) or 3(c)(7) of the Act in excess of 
the limits contained in section 12(d)(1)(A) of the Act, except to the 
extent that the Fund (a) receives securities of another investment 
company as a dividend or as a result of a plan of reorganization of a 
company (other than a plan devised for the purpose of evading section 
12(d)(1) of the Act) or (b) acquires (or is deemed to have acquired) 
securities of another investment company pursuant to exemptive relief 
from the Commission permitting such Fund to (i) acquire securities of 
one or more investment companies for short-term cash management 
purposes or (ii) engage in interfund borrowing and lending 
transactions.
    15. To ensure that the Investing Funds understand and comply with 
the terms and conditions of the requested order, any Investing Fund 
that intends to invest in a Fund in reliance on the requested order 
will be required to enter into a participation agreement (``FOF 
Participation Agreement'') with the Fund. The FOF Participation 
Agreement will include an acknowledgment from the Investing Fund that 
it may rely on the order only to invest in the Funds

[[Page 59388]]

and not in any other investment company.

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 by 
virtue of one or more of the following: (a) Holding 5% or more, or in 
excess of 25% of the outstanding Shares of one or more Funds; (b) 
having an affiliation with a person with an ownership interest 
described in (a); or (c) holding 5% or more, or more than 25% of the 
Shares of one or more Affiliated Funds.\25\ Applicants also request an 
exemption in order to permit a Fund to sell its Shares to, and purchase 
its Shares from, an Investing Fund and to engage in any accompanying 
in-kind transactions with certain Investing Funds of which the Funds 
are affiliated persons or a second-tier affiliates.\26\
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    \25\ Applicants are not seeking relief from section 17(a) for, 
and the requested relief will not apply to, transactions where a 
Fund could be deemed an affiliated person, or an affiliated person 
of an affiliated person, of an Investing Fund because an investment 
adviser to the Funds is also an investment adviser to an Investing 
Fund.
    \26\ Applicants expect most Investing Funds will purchase Shares 
in the secondary market and will not purchase Creation Units 
directly from a Fund. To the extent that purchases and sales of 
Shares occur in the secondary market and not through principal 
transactions directly between an Investing Fund and a Fund, relief 
from section 17(a) would not be necessary. However, the requested 
relief would apply to direct sales of Shares in Creation Units by a 
Fund to an Investing Fund and redemptions of those Shares. The 
requested relief is also intended to cover any in-kind transactions 
that may accompany such sales and redemptions.
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    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. Both the 
deposit procedures for in-kind purchases of Creation Units and the 
redemption procedures for in-kind redemptions will be effected in 
exactly the same manner for all purchases and redemptions, regardless 
of size or number. Absent the circumstances discussed in section 
I.E.1.a of the application, on each Business Day 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 Positions. Applicants state 
that the method of valuing Portfolio Positions held by a Fund is the 
same as that used for calculating the value of in-kind purchases or 
redemptions and therefore, creates no opportunity for affiliated 
persons or the applicants to effect a transaction detrimental to other 
holders of Shares of that Fund. Applicants note that any consideration 
paid for the purchase or redemption of Shares directly from a Fund 
(including for any affiliated person and including any Investing Fund) 
will be based on the NAV of the Fund in accordance with policies and 
procedures set forth in the Fund's registration statement.\27\ 
Applicants do not believe that in-kind purchases and redemptions will 
result in abusive self-dealing or overreaching of the Fund.
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    \27\ Applicants acknowledge that the receipt of compensation by 
(a) an affiliated person of an Investing Fund, or an affiliated 
person of such person, for the purchase by the Investing Fund of 
Shares of a Fund or (b) an affiliated person of a Fund, or an 
affiliated person of such person, for the sale by the Fund of its 
Shares to an Investing Fund, may be prohibited by section 17(e)(1) 
of the Act. The FOF Participation Agreement also will include this 
acknowledgment.
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    19. Applicants also submit that the sale of Shares to and 
redemption of Shares from an Investing Fund meets the standards for 
relief under sections 17(b) and 6(c) of the Act. Applicants also state 
that the proposed transactions are consistent with the general purposes 
of the Act and appropriate in the public interest.

Applicants' Conditions

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

A. Actively-Managed Exchange-Traded Fund Relief

    1. As long as a Fund operates in reliance on the requested order, 
the Shares of the Fund will be listed on a Stock Exchange.
    2. Neither the Trust nor any Fund will be advertised or marketed as 
an open-end investment company or a mutual fund. Any advertising 
material that describes the purchase or sale of Creation Units or 
refers to redeemability will prominently disclose that the Shares are 
not individually redeemable and that owners of the Shares may acquire 
those Shares from the Fund and tender those Shares for redemption to 
the Fund in Creation Units only.
    3. The Web site for the Funds, which is and will be publicly 
accessible at no charge, will contain, on a per Share basis, for each 
Fund the prior Business Day's NAV and the market closing price or Bid/
Ask Price, and a calculation of the premium or discount of the market 
closing price or Bid/Ask Price against such NAV.
    4. On each Business Day, before commencement of trading in Shares 
on the Stock Exchange, the Fund will disclose on its Web site the 
identities and quantities of the Portfolio Positions held by the Fund 
that will form the basis for the Fund's calculation of NAV at the end 
of the Business Day.
    5. The Adviser or any Subadviser, directly or indirectly, will not 
cause any Authorized Participant (or any investor on whose behalf an 
Authorized Participant may transact with the Fund) to acquire any 
Deposit Instrument for the Fund through a transaction in which the Fund 
could not engage directly.
    6. The requested relief to permit ETF operations will expire on the 
effective date of any Commission rule under the Act that provides 
relief permitting the operation of actively managed exchange-traded 
funds.

B. Section 12(d)(1) Relief

    1. The members of the Investing Fund's Advisory Group will not 
control (individually or in the aggregate) a Fund within the meaning of 
section 2(a)(9) of the Act. The members of the Investing Fund's 
Subadvisory Group will not control (individually or in the aggregate) a 
Fund within the meaning of section 2(a)(9) of the Act. If, as a result 
of a decrease in the outstanding voting securities of a Fund, the 
Investing Fund's Advisory Group or the Investing Fund's Subadvisory 
Group, each in the aggregate, becomes a holder of more than 25 percent 
of the outstanding

[[Page 59389]]

voting securities of a Fund, it will vote its Shares of the Fund in the 
same proportion as the vote of all other holders of the Fund's Shares. 
This condition does not apply to the Investing Fund's Subadvisory Group 
with respect to a Fund for which the Investing Fund Subadviser or a 
person controlling, controlled by or under common control with the 
Investing Fund Subadviser acts as the investment adviser within the 
meaning of section 2(a)(20)(A) of the Act.
    2. No Investing Fund or Investing Fund Affiliate will cause any 
existing or potential investment by the Investing Fund in a Fund to 
influence the terms of any services or transactions between the 
Investing Fund or an Investing Fund Affiliate and the Fund or a Fund 
Affiliate.
    3. The board of directors or trustees of an Investing Management 
Company, including a majority of the disinterested directors or 
trustees, will adopt procedures reasonably designed to assure that the 
Investing Fund Adviser and any Investing Fund Subadviser are conducting 
the investment program of the Investing Management Company without 
taking into account any consideration received by the Investing 
Management Company or an Investing Fund Affiliate from a Fund or a Fund 
Affiliate in connection with any services or transactions.
    4. Once an investment by an Investing Fund in Shares of a Fund 
exceeds the limit in section 12(d)(1)(A)(i) of the Act, the board of 
the Fund (``Board''), including a majority of the disinterested Board 
members, will determine that any consideration paid by the Fund to the 
Investing Fund or an Investing Fund Affiliate in connection with any 
services or transactions: (i) is fair and reasonable in relation to the 
nature and quality of the services and benefits received by the Fund; 
(ii) is within the range of consideration that the Fund would be 
required to pay to another unaffiliated entity in connection with the 
same services or transactions; and (iii) does not involve overreaching 
on the part of any person concerned. This condition does not apply with 
respect to any services or transactions between a Fund and its 
investment adviser(s), or any person controlling, controlled by or 
under common control with such investment adviser(s).
    5. The Investing Fund Adviser, or Trustee or Sponsor, as 
applicable, will waive fees otherwise payable to it by the Investing 
Fund in an amount at least equal to any compensation (including fees 
received pursuant to any plan adopted by a Fund under rule 12b-1 under 
the Act) received from a Fund by the Investing Fund Adviser, or Trustee 
or Sponsor, or an affiliated person of the Investing Fund Adviser, or 
Trustee or Sponsor, other than any advisory fees paid to the Investing 
Fund Adviser, or Trustee, or Sponsor, or its affiliated person by the 
Fund, in connection with the investment by the Investing Fund in the 
Fund. Any Investing Fund Subadviser will waive fees otherwise payable 
to the Investing Fund Subadviser, directly or indirectly, by the 
Investing Management Company in an amount at least equal to any 
compensation received from a Fund by the Investing Fund Subadviser, or 
an affiliated person of the Investing Fund Subadviser, other than any 
advisory fees paid to the Investing Fund Subadviser or its affiliated 
person by the Fund, in connection with the investment by the Investing 
Management Company in the Fund made at the direction of the Investing 
Fund Subadviser. In the event that the Investing Fund Subadviser waives 
fees, the benefit of the waiver will be passed through to the Investing 
Management Company.
    6. No Investing Fund or Investing Fund Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to a Fund) 
will cause a Fund to purchase a security in an Affiliated Underwriting.
    7. The Board of a Fund, including a majority of the disinterested 
Board members, will adopt procedures reasonably designed to monitor any 
purchases of securities by the Fund in an Affiliated Underwriting, once 
an investment by an Investing Fund in the securities of the Fund 
exceeds the limit of section 12(d)(1)(A)(i) of the Act, including any 
purchases made directly from an Underwriting Affiliate. The Board will 
review these purchases periodically, but no less frequently than 
annually, to determine whether the purchases were influenced by the 
investment by the Investing Fund in the Fund. The Board will consider, 
among other things: (i) Whether the purchases were consistent with the 
investment objectives and policies of the Fund; (ii) how the 
performance of securities purchased in an Affiliated Underwriting 
compares to the performance of comparable securities purchased during a 
comparable period of time in underwritings other than Affiliated 
Underwritings or to a benchmark such as a comparable market index; and 
(iii) whether the amount of securities purchased by the Fund in 
Affiliated Underwritings and the amount purchased directly from an 
Underwriting Affiliate have changed significantly from prior years. The 
Board will take any appropriate actions based on its review, including, 
if appropriate, the institution of procedures designed to assure that 
purchases of securities in Affiliated Underwritings are in the best 
interest of shareholders of the Fund.
    8. Each Fund will maintain and preserve permanently in an easily 
accessible place a written copy of the procedures described in the 
preceding condition, and any modifications to such procedures, and will 
maintain and preserve for a period of not less than six years from the 
end of the fiscal year in which any purchase in an Affiliated 
Underwriting occurred, the first two years in an easily accessible 
place, a written record of each purchase of securities in Affiliated 
Underwritings once an investment by an Investing Fund in the securities 
of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act, 
setting forth from whom the securities were acquired, the identity of 
the underwriting syndicate's members, the terms of the purchase, and 
the information or materials upon which the Board's determinations were 
made.
    9. Before investing in a Fund in excess of the limits in section 
12(d)(1)(A), an Investing Fund will execute a FOF Participation 
Agreement with the Fund stating that their respective boards of 
directors or trustees and their investment advisers, or Trustee and 
Sponsor, as applicable, understand the terms and conditions of the 
order, and agree to fulfill their responsibilities under the order. At 
the time of its investment in Shares of a Fund in excess of the limit 
in section 12(d)(1)(A)(i), an Investing Fund will notify the Fund of 
the investment. At such time, the Investing Fund will also transmit to 
the Fund a list of the names of each Investing Fund Affiliate and 
Underwriting Affiliate. The Investing Fund will notify the Fund of any 
changes to the list as soon as reasonably practicable after a change 
occurs. The Fund and the Investing Fund will maintain and preserve a 
copy of the order, the FOF Participation Agreement, and the list with 
any updated information for the duration of the investment and for a 
period of not less than six years thereafter, the first two years in an 
easily accessible place.
    10. Before approving any advisory contract under section 15 of the 
Act, the board of directors or trustees of each Investing Management 
Company, including a majority of the disinterested directors or 
trustees, will find that the advisory fees charged under such contract 
are based on services provided that will be in addition to, rather than 
duplicative of, the services provided

[[Page 59390]]

under the advisory contract(s) of any Fund in which the Investing 
Management Company may invest. These findings and their basis will be 
recorded fully in the minute books of the appropriate Investing 
Management Company.
    11. Any sales charges and/or service fees charged with respect to 
shares of an Investing Fund will not exceed the limits applicable to a 
fund of funds as set forth in NASD Conduct Rule 2830.
    12. No Fund relying on this section 12(d)(1) Relief will acquire 
securities of any investment company or company relying on section 
3(c)(1) or 3(c)(7) of the Act in excess of the limits contained in 
section 12(d)(1)(A) of the Act, except to the extent that the Fund (a) 
receives securities of another investment company as a dividend or as a 
result of a plan of reorganization of a company (other than a plan 
devised for the purpose of evading section 12(d)(1) of the Act) or (b) 
acquires (or is deemed to have acquired) securities of another 
investment company pursuant to exemptive relief from the Commission 
permitting such Fund to (i) acquire securities of one or more 
investment companies for short-term cash management purposes or (ii) 
engage in interfund borrowing and lending transactions.

    For the Commission, by the Division of Investment Management, 
under delegated authority.

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-23426 Filed 9-25-13; 8:45 am]
BILLING CODE 8011-01-P


