
[Federal Register Volume 79, Number 68 (Wednesday, April 9, 2014)]
[Notices]
[Pages 19664-19671]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-07893]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 31002; 812-14269]


Direxion Shares ETF Trust, et al.; Notice of Application

April 3, 2014.
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 (the ``Act'') for an exemption from 
sections 2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act and rule 22c-1 
under the Act, under sections 6(c) and 17(b) of the Act for an 
exemption from sections 17(a)(1) and (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 12(d)(1)(B) of the Act.

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Applicants: Direxion Shares ETF Trust (the ``Trust''), Rafferty Asset 
Management, LLC (``Rafferty''), and Foreside Fund Services, LLC 
(``Foreside'').

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

[[Page 19665]]

(``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 
((a) through (d), the ``ETF Relief''); and (e) certain registered 
management investment companies and unit investment trusts outside of 
the same group of investment companies as the series to acquire Shares.

DATES: Filing Dates: The application was filed on January 22, 2014, and 
amended on April 2, 2014.

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 28, 2014, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street NE., Washington, DC 20549-1090. Applicants: 1301 Avenue of the 
Americas (6th Avenue), 35th Floor, New York, NY 10019.

FOR FURTHER INFORMATION CONTACT: Mark N. Zaruba, Senior Counsel, at 
(202) 551-6878 or Mary Kay Frech, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Chief Counsel's 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 is a statutory trust organized under the laws 
of Delaware. The Trust intends to offer an actively managed investment 
series, Direxion Active Asset Allocation Shares (the ``Initial Fund''). 
The Initial Fund will seek to achieve its investment goal of providing 
risk adjusted returns by investing in shares of other investment 
companies, primarily ETFs, and other types of securities such as common 
and preferred stock, convertible securities, credit-linked notes and 
indexed floating rate securities, private placements and other 
restricted securities.
    2. Rafferty, a New York limited liability company, will be the 
investment adviser to the Initial Fund. Each Advisor (as defined below) 
is or will be registered as an ``investment adviser'' under the 
Investment Advisers Act of 1940 (the ``Advisers Act''), The Advisor may 
enter into sub-advisory agreements with investment advisers 
(``Subadvisors'') to act as sub-advisers with respect to the Funds (as 
defined below). Any Subadvisor 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 Advisor, will act as the distributor and 
principal underwriter of the Funds (``Distributor''). Foreside will 
serve as the initial Distributor.
    3. Applicants request that the order for ETF Relief apply to the 
Initial Fund and any future series of the Trust or of any other 
existing or future open-end management companies that utilize active 
management investment strategies (``Future Funds''). Any Future Fund 
will (a) be advised by Rafferty or an entity controlling, controlled 
by, or under common control with Rafferty (together with Rafferty, an 
``Advisor''), and (b) comply with the terms and conditions of the ETF 
Relief. The Initial Fund and Future Funds together are the ``Funds.'' 
\1\ Each Fund will consist of a portfolio of securities (including 
fixed income securities and/or equity securities) as well as currencies 
and other assets and positions (``Portfolio Positions''). For any Fund 
that invests in derivatives, the Fund's board of trustees or directors 
(for any entity, the ``Board'') periodically will review and approve 
the Fund's use of derivatives and how the Fund's Advisor or any 
Subadvisor assesses and manages risk with respect to the Fund's use of 
derivatives. Each Fund's disclosure of its use of derivatives in its 
offering documents and periodic reports will be consistent with 
relevant Commission and staff guidance. Funds may invest in 
``Depositary Receipts.'' A Fund will not invest in any Depositary 
Receipts that the Advisor or Subadvisor deems to be illiquid or for 
which pricing information is not readily available.\2\ Funds may also 
invest in ``to-be-announced transactions'' or ``TBA Transactions,'' \3\ 
short sales and forward commitment transactions. Each Fund will operate 
as an actively managed exchange traded fund (``ETF''). The Funds may 
invest in other open-end and/or closed-end investment companies and/or 
ETFs.
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    \1\ All entities that currently intend to rely on the order are 
named as applicants. Any other entity that relies on the order in 
the future will comply with the terms and conditions of the 
application. An Investing Fund (as defined below) may rely on the 
order only to invest in Funds and not in any other registered 
investment company.
    \2\ 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 Fund or any Subadvisor will 
serve as the depositary bank for any Depositary Receipts held by the 
Fund.
    \3\ 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.
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    4. Applicants also request that any exemption under section 
12(d)(1)(J) of the Act from sections 12(d)(1)(A) and (B) (``12(d)(1) 
Relief'') apply to: (i) Any Fund that is currently or subsequently part 
of the same ``group of investment companies'' as an Initial Fund within 
the meaning of section 12(d)(1)(G)(ii) of the Act; (ii) any principal 
underwriter for the Fund; (iii) any brokers selling Shares of a Fund to 
an Investing Fund (as defined below); and (iv) each management 
investment company or unit investment trust registered under the Act 
that is not part of the same ``group of investment companies'' as the 
Funds within the meaning of section 12(d)(1)(G)(ii) of the Act and that 
enters into a FOF Participation Agreement (as defined below) with a 
Fund (such management investment companies, ``Investing Management 
Companies,'' such unit investment trusts, ``Investing Trusts,'' and 
Investing Management Companies and Investing Trusts together, 
``Investing Funds''). Investing Funds do not include the Funds.
    5. Applicants anticipate that a Creation Unit will consist of at 
least 25,000 Shares and that the price of a Share will range from $20 
to $250. All orders to purchase Creation Units must be placed with the 
Distributor by or through a party that has entered into a participant 
agreement with the Distributor and the transfer agent of the Fund 
(``Authorized Participant'') with respect to the creation and 
redemption of Creation Units. An Authorized Participant is either: (a) 
A broker or dealer registered under the Exchange Act (``Broker'') or 
other participant in

[[Page 19666]]

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''). The Shares will be purchased and redeemed in Creation 
Units and generally on an in-kind basis. Except where the purchase or 
redemption will include cash under the limited circumstances specified 
below, purchasers will be required to purchase Creation Units by making 
an in-kind deposit of specified instruments (``Deposit Instruments''), 
and shareholders redeeming their Shares will receive an in-kind 
transfer of specified instruments (``Redemption Instruments'').\4\ On 
any given Business Day \5\ the names and quantities of the instruments 
that constitute the Deposit Instruments and the names and quantities of 
the instruments that constitute the Redemption Instruments will be 
identical, and these instruments may be referred to, in the case of 
either a purchase or redemption, as the ``Creation Basket.'' In 
addition, the Creation Basket will correspond pro rata to the positions 
in a Fund's portfolio (including cash positions),\6\ except: (a) In the 
case of bonds, for minor differences when it is impossible to break up 
bonds beyond certain minimum sizes needed for transfer and settlement; 
(b) for minor differences when rounding is necessary to eliminate 
fractional shares or lots that are not tradeable round lots;\7\ or (c) 
TBA transactions, short positions and other positions that cannot be 
transferred in kind \8\ will be excluded from the Creation Basket.\9\ 
If there is a difference between the net asset value (``NAV'') 
attributable to a Creation Unit and the aggregate market value of the 
Creation Basket exchanged for the Creation Unit, the party conveying 
instruments with the lower value will also pay to the other an amount 
in cash equal to that difference (the ``Balancing Amount'').
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    \4\ The Funds must comply with the federal securities laws in 
accepting Deposit Instruments and satisfying redemptions with 
Redemption Instruments, including that the Deposit Instruments and 
Redemption Instruments are sold in transactions that would be exempt 
from registration under the Securities Act of 1933 (``Securities 
Act''). In accepting Deposit Instruments and satisfying redemptions 
with Redemption Instruments that are restricted securities eligible 
for resale pursuant to Rule 144A under the Securities Act, the Funds 
will comply with the conditions of Rule 144A.
    \5\ Each Fund will sell and redeem Creation Units on any day the 
Fund is open for business, including as required by section 22(e) of 
the Act (each, a ``Business Day'').
    \6\ The portfolio used for this purpose will be the same 
portfolio used to calculate the Fund's NAV for that Business Day.
    \7\ A tradeable round lot for a security will be the standard 
unit of trading in that particular type of security in its primary 
market.
    \8\ 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 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, 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; (d) if, on a 
given Business Day, a Fund requires all Authorized Participants 
purchasing or redeeming Shares on that day to deposit or receive (as 
applicable) cash in lieu of some or all of the Deposit Instruments or 
Redemption Instruments, respectively, solely because: (i) Such 
instruments are not eligible for transfer through either the NSCC or 
DTC; or (ii) in the case of Funds holding 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 a Fund permits an 
Authorized Participant to deposit or receive (as applicable) cash in 
lieu of some or all of the Deposit Instruments or Redemption 
Instruments, respectively, solely because: (i) Such instruments are, in 
the case of the purchase of a Creation Unit, not available in 
sufficient quantity; (ii) such instruments are not eligible for trading 
by an Authorized Participant or the investor on whose behalf the 
Authorized Participant is acting; or (iii) a holder of Shares of a 
Global Fund would be subject to unfavorable income tax treatment if the 
holder receives redemption proceeds in kind.\10\
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    \10\ 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 a national 
securities exchange, as defined in section 2(a)(26) of the Act (``Stock 
Exchange''), on which Shares are listed, each Fund will cause to be 
published through the NSCC the names and quantities of the instruments 
comprising the Creation Basket, as well as the estimated 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.\11\ 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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    \11\ Where a Fund permits an in-kind purchaser to substitute 
cash in lieu of depositing one or more Deposit Instruments, the 
purchaser may be assessed a higher Transaction Fee to offset the 
cost to the Fund of buying those particular Deposit Instruments. The 
determination whether or not to impose a Transaction Fee, and the 
amounts of such Transaction Fee, will be determined on the same 
basis regardless of the identity of the Authorized Participant or 
the investor on whose behalf the Authorized Participant is acting.
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    9. Shares will be listed and traded at negotiated prices on a Stock 
Exchange and traded in the secondary market. Applicants expect that 
Stock Exchange specialists (``Specialists'') or market makers (``Market 
Makers'') will be assigned to Shares. The price of Shares trading on 
the Stock Exchange will be based on a current bid/offer in the 
secondary market. Transactions involving the purchases and sales of 
Shares on the Stock Exchange will be subject to customary brokerage 
fees and charges.
    10. Applicants expect that purchasers of Creation Units will 
include institutional investors and arbitrageurs. Specialists or Market 
Makers, acting in their unique role to provide a fair and orderly 
secondary market for Shares, also may purchase Creation Units for

[[Page 19667]]

use in their own market making activities.\12\ Applicants expect that 
secondary market purchasers of Shares will include both institutional 
and retail investors.\13\ Applicants expect that arbitrage 
opportunities created by the ability to continually purchase or redeem 
Creation Units at their NAV per Share should ensure that the Shares 
will not trade at a material discount or premium in relation to their 
NAV.
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    \12\ If Shares are listed on NYSE Arca, Nasdaq or a similar 
electronic Stock Exchange, one or more member firms of that Stock 
Exchange will act as Market Maker and maintain a market for Shares 
trading on the Stock Exchange. On Nasdaq or BATS Exchange, Inc., no 
particular Market Maker would be contractually obligated to make a 
market in Shares. However, the listing requirements on Nasdaq, for 
example, stipulate that at least two Market Makers must be 
registered in Shares to maintain a listing. In addition, on Nasdaq 
and NYSE Arca, registered Market Makers are required to make a 
continuous two-sided market or subject themselves to regulatory 
sanctions. If Shares are listed on a Stock Exchange such as the 
NYSE, one or more member firms will be designated to act as a 
Specialist and maintain a market for the Shares trading on the Stock 
Exchange. No Market Maker or Specialist will be an affiliated 
person, or an affiliated person of an affiliated person, of the 
Funds, except within section 2(a)(3)(A) or (C) of the Act due to 
ownership of Shares, as described below.
    \13\ 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 will not be individually redeemable and owners of Shares 
may acquire those Shares from a Fund, or tender such shares for 
redemption to the Fund, in Creation Units only. To redeem, an investor 
must accumulate enough Shares to constitute a Creation Unit. Redemption 
requests must be placed by or through an Authorized Participant. As 
discussed above, redemptions of Creation Units will generally be made 
on an in-kind basis, subject to certain specified exceptions under 
which redemptions may be made in whole or in part on a cash basis, and 
will be subject to a Transaction Fee.
    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.'' In any advertising 
material where features of obtaining, buying or selling Shares traded 
on the Stock Exchange are described there will be an appropriate 
statement to the effect that Shares are not individually redeemable.
    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 (including any short positions) that will 
form the basis for the Fund's calculation of NAV at the end of the 
Business Day.\14\
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    \14\ Applicants note that under accounting procedures followed 
by the Funds, trades made on the prior Business Day (``T'') will be 
booked and reflected in NAV on the current Business Day (``T+1''). 
Accordingly, the Funds will be able to disclose at the beginning of 
the Business Day the portfolio that will form the basis for the NAV 
calculation at the end of the Business Day.
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Applicants' Legal Analysis

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

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

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

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

    4. Section 22(d) of the Act, among other things, prohibits a dealer 
from selling a redeemable security that is currently being offered to 
the public by or through a principal underwriter, except at a current 
public offering price described in the prospectus. Rule 22c-1 under the 
Act generally requires that a dealer selling, redeeming, or 
repurchasing a redeemable security do so only at a price based on its 
NAV. Applicants state that secondary market trading in Shares will take 
place at negotiated prices, not at a current offering price described 
in the Prospectus, and not at a price based on NAV. Thus, purchases and 
sales of Shares in the secondary market will not comply with section 
22(d) of the Act and rule 22c-1 under the Act. Applicants request an 
exemption under section 6(c) from these provisions.
    5. Applicants assert that the concerns sought to be addressed by 
section 22(d) of the Act and rule 22c-1 under the Act with respect to 
pricing are equally satisfied by the proposed method of pricing Shares. 
Applicants maintain that while there is little legislative history 
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to (a) prevent dilution caused by 
certain riskless-trading schemes by principal underwriters and contract 
dealers, (b) prevent unjust discrimination or preferential treatment 
among buyers resulting from sales at different prices, and (c) assure 
an orderly distribution system of investment company shares by 
eliminating price competition from brokers offering shares at less than 
the

[[Page 19668]]

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

Section 22(e) of the Act

    7. Section 22(e) of the Act generally prohibits a registered 
investment company from suspending the right of redemption or 
postponing the date of payment of redemption proceeds for more than 
seven days after the tender of a security for redemption. Applicants 
observe that settlement of redemptions of Creation Units of 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, up 
to a maximum of 14 calendar days, 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.
    8. Applicants state that section 22(e) was designed to prevent 
unreasonable, undisclosed and unforeseen delays in the actual payment 
of redemption proceeds. Applicants assert that the requested relief 
will not lead to the problems that section 22(e) was designed to 
prevent. Applicants state that allowing redemption payments for 
Creation Units of a Fund to be made within a maximum of 14 calendar 
days would not be inconsistent with the spirit and intent of section 
22(e). Applicants state the SAI will disclose those local holidays 
(over the period of at least one year following the date of the SAI), 
if any, that are expected to prevent the delivery of redemption 
proceeds in seven calendar days and the maximum number of days needed 
to deliver the proceeds for each affected Global Fund. 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 shares of an investment company if the 
securities represent more than 3% of the total outstanding voting stock 
of the acquired company, more than 5% of the total assets of the 
acquiring company, or, together with the securities of any other 
investment companies, more than 10% of the total assets of the 
acquiring company. Section 12(d)(1)(B) of the Act prohibits a 
registered open-end investment company, its principal underwriter, or 
any other broker or dealer from selling its shares to another 
investment company if the sale will cause the acquiring company to own 
more than 3% of the acquired company's voting stock, or if the sale 
will cause more than 10% of the acquired company's voting stock to be 
owned by investment companies generally.
    10. Applicants request relief to permit Investing Funds to acquire 
Shares in excess of the limits in section 12(d)(1)(A) of the Act and to 
permit the Funds, their principal underwriters and any Broker 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 address the concerns underlying the limits in 
section 12(d)(1), which include concerns about undue influence, 
excessive layering of fees and overly complex structures.
    11. Applicants submit that their proposed conditions address any 
concerns regarding the potential for undue influence. To limit the 
control that an Investing Fund may have over a Fund, applicants propose 
a condition prohibiting the adviser of an Investing Management Company 
(``Investing Fund Advisor''), sponsor of an Investing Trust 
(``Sponsor''), any person controlling, controlled by, or under common 
control with the Investing Fund Advisor 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 
Investing Fund Advisor, the Sponsor, or any person controlling, 
controlled by, or under common control with the Investing Fund Advisor 
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 Sub-Advisor''), 
any person controlling, controlled by or under common control with the 
Investing Fund Sub-Advisor, and any investment company or issuer that 
would be an investment company but for sections 3(c)(1) or 3(c)(7) of 
the Act (or portion of such investment company or issuer) advised or 
sponsored by the Investing Fund Sub-Advisor or any person controlling, 
controlled by or under common control with the Investing Fund Sub-
Advisor (``Investing Fund's Sub-Advisory Group'').
    12. Applicants propose a condition to ensure that no Investing Fund 
or Investing Fund Affiliate \15\ (except to the extent it is acting in 
its capacity as an investment adviser to a Fund) will cause a Fund to 
purchase a security in an offering of securities during the existence 
of an underwriting or selling syndicate of which a principal 
underwriter is an Underwriting Affiliate (``Affiliated Underwriting''). 
An ``Underwriting Affiliate'' is a principal underwriter in any 
underwriting or selling syndicate that is an officer, director, member 
of an advisory board, Investing Fund Advisor, Investing Fund Sub-
Advisor, employee or Sponsor of the Investing Fund, or a person of 
which any such officer, director, member of an advisory board, 
Investing Fund Advisor, Investing Fund Sub-Advisor, 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 ``Investing Fund Affiliate'' is any Investing Fund 
Advisor, Investing Fund Sub-Advisor, Sponsor, promoter and principal 
underwriter of an Investing Fund, and any person controlling, 
controlled by or under common control with any of these entities. 
``Fund Affiliate'' is an investment adviser, promoter, or principal 
underwriter of a Fund or any person controlling, controlled by or 
under common control with any of these entities.
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    13. Applicants propose several conditions to address the potential 
for layering of fees. Applicants note that the board of directors or 
trustees of any

[[Page 19669]]

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 (``independent directors or trustees''), 
will be required to find that the advisory fees charged under the 
contract are based on services provided that will be in addition to, 
rather than duplicative of, services provided under the advisory 
contract of any Fund in which the Investing Management Company may 
invest. Applicants also state that any sales charges and/or service 
fees charged with respect to shares of an Investing Fund will not 
exceed the limits applicable to a fund of funds as set forth in NASD 
Conduct Rule 2830.\16\
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    \16\ Any reference to NASD Conduct Rule 2830 includes any 
successor or replacement rule that may be adopted by the Financial 
Industry Regulatory Authority.
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    14. Applicants submit that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that a Fund will be 
prohibited from acquiring securities of any investment company or 
company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of 
the limits contained in section 12(d)(1)(A) of the Act, except to the 
extent permitted by exemptive relief from the Commission permitting the 
Fund to purchase shares of other investment companies for short-term 
cash management purposes.
    15. To ensure that an Investing Fund is aware of the terms and 
conditions of the requested order, the Investing Funds must enter into 
an agreement with the respective Funds (``FOF Participation 
Agreement''). The FOF Participation Agreement will include an 
acknowledgement from the Investing Fund that it may rely on the order 
only to invest in a Fund 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 Advisor and hence affiliated persons of each other. 
In addition, the Funds may be deemed to be under common control with 
any other registered investment company (or series thereof) advised by 
an Advisor (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.\17\ Applicants also request an 
exemption in order to permit a Fund to sell its Shares to and redeem 
its Shares from, and also engage in any accompanying in-kind 
transactions that would accompany such sales and redemptions with, 
certain Investing Funds of which the Funds are affiliated persons or a 
second-tier affiliates.\18\
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    \17\ 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.
    \18\ 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 intended to also cover any in-kind transactions 
that would 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, nor by 
prohibiting Investing Funds and Funds transacting directly in Creation 
Units. Absent the circumstances discussed above, 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. The deposit 
procedures for in-kind purchases of Creation Units and the redemption 
procedures for in-kind redemptions will be the same for all purchases 
and redemptions. Deposit Instruments and Redemption Instruments will be 
valued in the same manner as those Portfolio Positions currently held 
by the relevant Funds. Applicants do not believe that in-kind purchases 
and redemptions will result in abusive self-dealing or overreaching of 
the Fund.
    19. Applicants also submit that the sale of Shares to and 
redemption of Shares from an Investing Fund meets the standards for 
relief under sections 17(b) and 6(c) of the Act. Applicants note that 
any consideration paid for the purchase or redemption of Shares 
directly from a Fund will be based on the NAV of the Fund in accordance 
with policies and procedures set forth in the Fund's registration 
statement.\19\ Absent the circumstances discussed above, 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. The FOF Participation Agreement will require any Investing 
Fund that purchases Creation Units directly from a Fund to represent 
that the purchase will be in compliance with its investment 
restrictions and consistent with the policies set forth in its 
registration statement. 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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    \19\ Applicants acknowledge that the receipt of compensation by 
(a) an affiliated person of an Investing Fund, or an affiliated 
person of such person, for the purchase by the Investing Fund of 
Shares of the Fund or (b) an affiliated person of a Fund, or an 
affiliated person of such person, for the sale by the Fund of its 
Shares to an Investing Fund, may be prohibited by section 17(e)(1) 
of the Act. The FOF Participation Agreement also will include this 
acknowledgment.
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Applicants' Conditions

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

A. ETF 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

[[Page 19670]]

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 Advisor or any Subadvisor, directly or indirectly, will not 
cause any Authorized Participant (or any investor on whose behalf an 
Authorized Participant may transact with the Fund) to acquire any 
Deposit Instrument for the Fund through a transaction in which the Fund 
could not engage directly.
    6. The requested relief to permit ETF operations will expire on the 
effective date of any Commission rule under the Act that provides 
relief permitting the operation of actively managed exchange traded 
funds.

B. 12(d)(1) Relief

    1. The members of the Investing Fund's Advisory Group will not 
control (individually or in the aggregate) a Fund within the meaning of 
section 2(a)(9) of the Act. The members of the Investing Fund's Sub-
Advisory Group will not control (individually or in the aggregate) a 
Fund within the meaning of section 2(a)(9) of the Act. If, as a result 
of a decrease in the outstanding voting securities of a Fund, the 
Investing Fund's Advisory Group or the Investing Fund's Sub-Advisory 
Group, each in the aggregate, becomes a holder of more than 25 percent 
of the outstanding voting securities of a Fund, it will vote its Shares 
of the Fund in the same proportion as the vote of all other holders of 
the Fund's Shares. This condition does not apply to the Investing 
Fund's Sub-Advisory Group with respect to a Fund for which the 
Investing Fund Sub-Advisor or a person controlling, controlled by or 
under common control with the Investing Fund Sub-Advisor acts as the 
investment adviser within the meaning of section 2(a)(20)(A) of the 
Act.
    2. No Investing Fund or Investing Fund Affiliate will cause any 
existing or potential investment by the Investing Fund in a Fund to 
influence the terms of any services or transactions between the 
Investing Fund or an Investing Fund Affiliate and the Fund or a Fund 
Affiliate.
    3. The board of directors or trustees of an Investing Management 
Company, including a majority of the independent directors or trustees, 
will adopt procedures reasonably designed to ensure that the Investing 
Fund Advisor and any Investing Fund Sub-Advisor are conducting the 
investment program of the Investing Management Company without taking 
into account any consideration received by the Investing Management 
Company or an Investing Fund Affiliate from a Fund or a Fund Affiliate 
in connection with any services or transactions.
    4. Once an investment by an Investing Fund in the Shares of a Fund 
exceeds the limit in section 12(d)(1)(A)(i) of the Act, the Board of 
the Fund, including a majority of the independent directors or 
trustees, will determine that any consideration paid by the Fund to the 
Investing Fund or an Investing Fund Affiliate in connection with any 
services or transactions: (i) Is fair and reasonable in relation to the 
nature and quality of the services and benefits received by the Fund; 
(ii) is within the range of consideration that the Fund would be 
required to pay to another unaffiliated entity in connection with the 
same services or transactions; and (iii) does not involve overreaching 
on the part of any person concerned. This condition does not apply with 
respect to any services or transactions between a Fund and its 
investment adviser(s), or any person controlling, controlled by or 
under common control with such investment adviser(s).
    5. The Investing Fund Advisor, or Trustee or Sponsor, as 
applicable, will waive fees otherwise payable to it by the Investing 
Fund in an amount at least equal to any compensation (including fees 
received pursuant to any plan adopted by a Fund under rule 12b-l under 
the Act) received from a Fund by the Investing Fund Advisor, or Trustee 
or Sponsor, or an affiliated person of the Investing Fund Advisor, or 
Trustee or Sponsor, other than any advisory fees paid to the Investing 
Fund Advisor, or Trustee or Sponsor, or its affiliated person by the 
Fund, in connection with the investment by the Investing Fund in the 
Fund. Any Investing Fund Sub-Advisor will waive fees otherwise payable 
to the Investing Fund Sub-Advisor, directly or indirectly, by the 
Investing Management Company in an amount at least equal to any 
compensation received from a Fund by the Investing Fund Sub-Advisor, or 
an affiliated person of the Investing Fund Sub-Advisor, other than any 
advisory fees paid to the Investing Fund Sub-Advisor or its affiliated 
person by the Fund, in connection with the investment by the Investing 
Management Company in the Fund made at the direction of the Investing 
Fund Sub-Advisor. In the event that the Investing Fund Sub-Advisor 
waives fees, the benefit of the waiver will be passed through to the 
Investing Management Company.
    6. No Investing Fund or Investing Fund Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to a Fund) 
will cause a Fund to purchase a security in an Affiliated Underwriting.
    7. The Board of a Fund, including a majority of the independent 
directors or trustees, will adopt procedures reasonably designed to 
monitor any purchases of securities by the Fund in an Affiliated 
Underwriting, once an investment by an Investing Fund in the securities 
of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act, 
including any purchases made directly from an Underwriting Affiliate. 
The Board will review these purchases periodically, but no less 
frequently than annually, to determine whether the purchases were 
influenced by the investment by the Investing Fund in the Fund. The 
Board will consider, among other things: (i) Whether the purchases were 
consistent with the investment objectives and policies of the Fund; 
(ii) how the performance of securities purchased in an Affiliated 
Underwriting compares to the performance of comparable securities 
purchased during a comparable period of time in underwritings other 
than Affiliated Underwritings or to a benchmark such as a comparable 
market index; and (iii) whether the amount of securities purchased by 
the Fund in Affiliated Underwritings and the amount purchased directly 
from an Underwriting Affiliate have changed significantly from prior 
years. The Board will take any appropriate actions based on its review, 
including, if appropriate, the institution of procedures designed to 
ensure that purchases of securities in Affiliated Underwritings are in 
the best interest of shareholders.
    8. Each Fund will maintain and preserve permanently in an easily 
accessible place a written copy of the procedures described in the 
preceding condition, and any modifications to such procedures, and will 
maintain and preserve for a period of not less than six years from the 
end of the fiscal year in

[[Page 19671]]

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 an FOF Participation 
Agreement with the Fund stating, without limitation, 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 independent directors or trustees, 
will find that the advisory fees charged under such contract are based 
on services provided that will be in addition to, rather than 
duplicative of, the services provided under the advisory contract(s) of 
any Fund in which the Investing Management Company may invest. These 
findings and their basis will be recorded fully in the minute books of 
the appropriate Investing Management Company.
    11. Any sales charges and/or service fees charged with respect to 
shares of an Investing Fund will not exceed the limits applicable to a 
fund of funds as set forth in NASD Conduct Rule 2830.
    12. No Fund relying on the 12(d)(1) Relief will acquire securities 
of any investment company or company relying on section 3(c)(1) or 
3(c)(7) of the Act in excess of the limits contained in section 
12(d)(1)(A) of the Act, except to the extent permitted by exemptive 
relief from the Commission permitting the Fund to purchase shares of 
other investment companies for short-term cash management purposes.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07893 Filed 4-8-14; 8:45 am]
BILLING CODE 8011-01-P


