
[Federal Register Volume 79, Number 120 (Monday, June 23, 2014)]
[Notices]
[Pages 35582-35591]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-14534]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 31085; File No. 812-14263]


Elkhorn Investments, LLC and Elkhorn ETF Trust; Notice of 
Application

June 17, 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 17(a)(2) of the Act, and under 
section 12(d)(1)(J) for an exemption from sections 12(d)(1)(A) and 
12(d)(1)(B) of the Act.

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SUMMARY: Summary of Application: Applicants request an order that would 
permit (a) 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 rather than at net asset value 
(``NAV''); (c) certain series to pay redemption proceeds, under certain 
circumstances, more than seven days after 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 Underlying 
Funds (defined below) to acquire shares of the Underlying Funds.
    Applicants: Elkhorn ETF Trust (the ``Trust'') and Elkhorn 
Investments, LLC (the ``Initial Adviser'').

DATES: Filing Dates: The application was filed on January 9, 2014 and 
amended on May 30, 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 July 14, 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, Securities and Exchange Commission, 100 F Street 
NE.,

[[Page 35583]]

Washington, DC 20549-1090; Applicants, Elkhorn Investments, LLC, 207 
Reber Street, Suite 201, Wheaton, IL 60187, Attn: Benjamin Fulton.

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 for an 
applicant using the Company name box, at http://www.sec.gov/search/search.htm or by calling (202) 551-8090.

Applicants' Representations

    1. The Trust is a business trust organized under the laws of the 
Commonwealth of Massachusetts and is registered under the Act as an 
open-end management investment company with multiple series.
    2. The Initial Adviser is registered as an investment adviser under 
the Investment Advisers Act of 1940 (the ``Advisers Act'') and will be 
the investment adviser to the Funds (defined below). Any other Adviser 
(defined below) will also be registered as an investment adviser under 
the Advisers Act. The Adviser may enter into sub-advisory agreements 
with one or more investment advisers to act as sub-advisers to 
particular Funds (each, a ``Sub-Adviser''). Any Sub-Adviser will either 
be registered under the Advisers Act or will not be required to 
register thereunder.
    3. The Trust will enter into a distribution agreement with one or 
more distributors (each, a ``Distributor''). Each Distributor will be a 
broker-dealer (``Broker'') registered under the Securities Exchange Act 
of 1934 (the ``Exchange Act'') and will act as distributor and 
principal underwriter of one or more of the Funds. The Distributor of 
any Fund may be an affiliated person, as defined in section 2(a)(3) of 
the Act (``Affiliated Person''), or an affiliated person of an 
Affiliated Person (``Second-Tier Affiliate''), of that Fund's Adviser 
and/or Sub-Advisers. No Distributor will be affiliated with any 
Exchange (defined below).
    4. Applicants request that the order apply to the initial series of 
the Trust described in the application (``Initial Fund''), as well as 
any additional series of the Trust and other open-end management 
investment companies, or series thereof, that may be created in the 
future (``Future Funds''), each of which will operate as an exchanged-
traded fund (``ETF'') and will track a specified index comprised solely 
of domestic or foreign equity and/or fixed income securities (each, an 
``Underlying Index''). Any Future Fund will (a) be advised by the 
Initial Adviser or an entity controlling, controlled by, or under 
common control with the Initial Adviser (each, an ``Adviser'') and (b) 
comply with the terms and conditions of the application. The Initial 
Fund and Future Funds, together, are the ``Funds.'' \1\
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    \1\ All existing entities that intend to rely on the requested 
order have been named as applicants. Any other existing or future 
entity that subsequently relies on the order will comply with the 
terms and conditions of the order. A Fund of Funds (as defined 
below) may rely on the order only to invest in Funds and not in any 
other registered investment company.
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    5. Each Fund will hold certain securities, currencies, other assets 
and other investment positions (``Portfolio Holdings'') selected to 
correspond generally to the performance of its Underlying Index. 
Certain Funds will be based on Underlying Indexes which will be 
comprised of equity and/or fixed income securities issued by one or 
more of the following categories of issuers: (i) Domestic issuers; and 
(ii) non-domestic issuers meeting the requirements for trading in U.S. 
markets. Other Funds will be based on Underlying Indexes which will be 
comprised of foreign and domestic or solely foreign equity and/or fixed 
income securities (``Foreign Funds'').
    6. Applicants represent that each Fund will invest at least 80% of 
its assets (excluding securities lending collateral) in the component 
securities of its respective Underlying Index (``Component 
Securities'') and TBA Transactions,\2\ and in the case of Foreign 
Funds, Component Securities and Depositary Receipts \3\ representing 
Component Securities. Each Fund may also invest up to 20% of its assets 
in certain index futures, options, options on index futures, swap 
contracts or other derivatives, as related to its respective Underlying 
Index and its Component Securities, cash and cash equivalents, other 
investment companies, as well as in securities and other instruments 
not included in its Underlying Index but which the Adviser or Sub-
Adviser believes will help the Fund track its Underlying Index. A Fund 
may also engage in short sales in accordance with its investment 
objective.
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    \2\ A ``to-be-announced transaction'' or ``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 settlement date.
    \3\ Depositary receipts representing foreign securities 
(``Depositary Receipts'') include American Depositary Receipts and 
Global Depositary Receipts. The Funds may invest in Depositary 
Receipts representing foreign securities in which they seek to 
invest. Depositary Receipts are typically issued by a financial 
institution (a ``depositary bank'') and evidence ownership interests 
in a security or a pool of securities that have been deposited with 
the depositary bank. A Fund will not invest in any Depositary 
Receipts that the Adviser or any Sub-Adviser deems to be illiquid or 
for which pricing information is not readily available. No 
affiliated person of a Fund, the Adviser or any Sub-Adviser will 
serve as the depositary bank for any Depositary Receipts held by a 
Fund.
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    7. The Trust may offer Funds that seek to track Underlying Indexes 
constructed using 130/30 investment strategies (``130/30 Funds'') or 
other long/short investment strategies (``Long/Short Funds''). Each 
Long/Short Fund will establish (i) exposures equal to approximately 
100% of the long positions specified by the Long/Short Index \4\ and 
(ii) exposures equal to approximately 100% of the short positions 
specified by the Long/Short Index. Each 130/30 Fund will include 
strategies that: (i) Establish long positions in securities so that 
total long exposure represents approximately 130% of a Fund's net 
assets; and (ii) simultaneously establish short positions in other 
securities so that total short exposure represents approximately 30% of 
such Fund's net assets. Each Business Day (defined below), for each 
Long/Short Fund and 130/30 Fund, the Adviser will provide full 
portfolio transparency on the Fund's publicly available Web site (``Web 
site'') by making available the Fund's Portfolio Holdings before the 
commencement of trading of Shares on the Listing Exchange (defined 
below). \5\ The information provided on the Web site will be formatted 
to be reader-friendly.
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    \4\ Underlying Indexes that include both long and short 
positions in securities are referred to as ``Long/Short Indexes.''
    \5\ Under accounting procedures followed by each Fund, 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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    8. A Fund will utilize either a replication or representative 
sampling strategy to track its Underlying Index. A Fund using a 
replication strategy will invest in the Component Securities of its 
Underlying Index in the same approximate proportions as in such 
Underlying Index. A Fund using a representative sampling strategy will 
hold some, but not necessarily all of the Component Securities of its 
Underlying Index. Applicants state that a Fund

[[Page 35584]]

using a representative sampling strategy will not be expected to track 
the performance of its Underlying Index with the same degree of 
accuracy as would an investment vehicle that invested in every 
Component Security of the Underlying Index with the same weighting as 
the Underlying Index. Applicants expect that each Fund will have an 
annual tracking error relative to the performance of its Underlying 
Index of less than 5%.
    9. Each Fund will be entitled to use its Underlying Index pursuant 
to either a licensing agreement with the entity that compiles, creates, 
sponsors or maintains the Underlying Index (each, an ``Index 
Provider'') or a sub-licensing arrangement with the Adviser, which will 
have a licensing agreement with such Index Provider.\6\ A ``Self-
Indexing Fund'' is a Fund for which an Affiliated Person, or a Second-
Tier Affiliate, of the Trust or a Fund, of the Adviser, of any Sub-
Adviser to or promoter of a Fund, or of the Distributor (each, an 
``Affiliated Index Provider'') \7\ will serve as the Index Provider. In 
the case of Self-Indexing Funds, an Affiliated Index Provider will 
create a proprietary, rules-based methodology to create Underlying 
Indexes (each an ``Affiliated Index'').\8\ Except with respect to the 
Self-Indexing Funds, no Index Provider is or will be an Affiliated 
Person, or a Second-Tier Affiliate, of the Trust or a Fund, of the 
Adviser, of any Sub-Adviser to or promoter of a Fund, or of the 
Distributor.
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    \6\ The licenses for the Self-Indexing Funds will specifically 
state that the Affiliated Index Provider (or in case of a sub-
licensing agreement, the Adviser) must provide the use of the 
Underlying Indexes and related intellectual property at no cost to 
the Trust and the Self-Indexing Funds.
    \7\ The applicants currently expect that the Initial Adviser 
will serve as the Affiliated Index Provider for the Self-Indexing 
Funds. In the event that an Adviser serves as the Affiliated Index 
Provider for a Self-Indexing Fund, the term ``Affiliated Index 
Provider,'' with respect to that Self-Indexing Fund, will refer to 
the employees of the Adviser that are responsible for creating, 
compiling and maintaining the relevant Underlying Index. Any future 
entity that acts as an Affiliated Index Provider will comply with 
the terms and conditions of the application.
    \8\ The Affiliated Indexes may be made available to registered 
investment companies, as well as separately managed accounts of 
institutional investors and privately offered funds that are not 
deemed to be ``investment companies'' in reliance on section 3(c)(1) 
or 3(c)(7) of the Act for which the Adviser acts as adviser or sub-
adviser (``Affiliated Accounts'') as well as other such registered 
investment companies, separately managed accounts and privately 
offered funds for which it does not act either as adviser or sub-
adviser (``Unaffiliated Accounts''). The Affiliated Accounts and the 
Unaffiliated Accounts, like the Funds, would seek to track the 
performance of one or more Underlying Index(es) by investing in the 
constituents of such Underlying Indexes or a representative sample 
of such constituents of the Underlying Index. Consistent with the 
relief requested from section 17(a), the Affiliated Accounts will 
not engage in Creation Unit transactions with a Fund.
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    10. Applicants recognize that Self-Indexing Funds could raise 
concerns regarding the ability of the Affiliated Index Provider to 
manipulate the Underlying Index to the benefit or detriment of the 
Self-Indexing Fund. Applicants further recognize the potential for 
conflicts that may arise with respect to the personal trading activity 
of personnel of the Affiliated Index Provider who have knowledge of 
changes to an Underlying Index prior to the time that information is 
publicly disseminated. Prior orders granted to self-indexing ETFs 
(``Prior Self-Indexing Orders'') addressed these concerns by creating a 
framework that required: (i) Transparency of the Underlying Indexes; 
(ii) the adoption of policies and procedures not otherwise required by 
the Act designed to mitigate such conflicts of interest; (iii) 
limitations on the ability to change the rules for index compilation 
and the component securities of the index; (iv) that the index provider 
enter into an agreement with an unaffiliated third party to act as 
``Calculation Agent''; and (v) certain limitations designed to separate 
employees of the index provider, adviser and Calculation Agent (clauses 
(ii) through (v) are hereinafter referred to as ``Policies and 
Procedures'').\9\
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    \9\ See, e.g., In the Matter of WisdomTree Investments Inc., et 
al., Investment Company Act Release Nos. 27324 (May 18, 2006) 
(notice) and 27391 (June 12, 2006) (order); In the Matter of IndexIQ 
ETF Trust, et al., Investment Company Act Release Nos. 28638 (Feb. 
27, 2009) (notice) and 28653 (March 20, 2009) (order); and Van Eck 
Associates Corporation, et al., Investment Company Act Release Nos. 
29455 (Oct. 1, 2010) (notice) and 29490 (Oct. 26, 2010) (order).
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    11. Instead of adopting the same or similar Policies and 
Procedures, applicants propose that each day that a Fund, the NYSE and 
the national securities exchange (as defined in section 2(a)(26) of the 
Act) (an ``Exchange'') on which the Fund's Shares are primarily listed 
(``Listing Exchange'') are open for business, including any day that a 
Fund is required to be open under section 22(e) of the Act (a 
``Business Day''), each Self-Indexing Fund will post on its Web site, 
before commencement of trading of Shares on the Listing Exchange, the 
identities and quantities of the Portfolio Holdings held by the Fund 
that will form the basis for the Fund's calculation of its NAV at the 
end of the Business Day. Applicants believe that requiring Self-
Indexing Funds to maintain full portfolio transparency will provide an 
effective alternative mechanism for addressing any such potential 
conflicts of interest.
    12. Applicants represent that each Self-Indexing Fund's Portfolio 
Holdings will be as transparent as the portfolio holdings of existing 
actively managed ETFs. Applicants observe that the framework set forth 
in the Prior Self-Indexing Orders was established before the Commission 
began issuing exemptive relief to allow the offering of actively-
managed ETFs.\10\ Unlike passively-managed ETFs, actively-managed ETFs 
do not seek to replicate the performance of a specified index but 
rather seek to achieve their investment objectives by using an 
``active'' management strategy. Applicants contend that the structure 
of actively managed ETFs presents potential conflicts of interest that 
are the same as those presented by Self-Indexing Funds because the 
portfolio managers of an actively managed ETF by definition have 
advance knowledge of pending portfolio changes. However, rather than 
requiring Policies and Procedures similar to those required under the 
Prior Self-Indexing Orders, applicants believe that actively managed 
ETFs address these potential conflicts of interest appropriately 
through full portfolio transparency, as the conditions to their 
relevant exemptive relief require.
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    \10\ See, e.g., In the Matter of Pyxis Capital, L.P., et al., 
Investment Company Act Release Nos. 30316 (Dec. 21, 2012) (notice) 
and 30352 (Jan. 16, 2013) (order); In the Matter of Franklin 
Advisers, Inc., et al., Investment Company Act Release Nos. 30312 
(Dec. 19, 2012) (notice) and 30350 (Jan. 15, 2013) (order); In the 
Matter of AllianceBernstein Active ETFs, Inc., et al., Investment 
Company Act Release Nos. 30305 (Dec. 13, 2012) (notice) and 30343 
(Jan. 8, 2013) (order); and In the Matter of Cambria Investment 
Management, L.P. and Cambria ETF Trust, Investment Company Act 
Release Nos. 30286 (Nov. 30, 2012), 30302 (Dec. 12, 2012) (notices) 
and 30340 (Jan. 4, 2013) (order).
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    13. In addition, applicants do not believe the potential for 
conflicts of interest raised by the Adviser's use of the Underlying 
Indexes in connection with the management of the Self Indexing Funds 
and the Affiliated Accounts will be substantially different from the 
potential conflicts presented by an adviser managing two or more 
registered funds. Both the Act and the Advisers Act contain various 
protections to address conflicts of interest where an adviser is 
managing two or more registered funds and these protections will also 
help address these conflicts with respect to the Self-Indexing 
Funds.\11\
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    \11\ See, e.g., rule 17j-1 under the Act and section 204A under 
the Advisers Act and rules 204A-1 and 206(4)-7 under the Advisers 
Act.
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    14. The Adviser and any Sub-Adviser have adopted or will adopt, 
pursuant to rule 206(4)-7 under the Advisers Act,

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written policies and procedures designed to prevent violations of the 
Advisers Act and the rules thereunder. These include policies and 
procedures designed to minimize potential conflicts of interest among 
the Self-Indexing Funds and the Affiliated Accounts, such as cross 
trading policies, as well as those designed to ensure the equitable 
allocation of portfolio transactions and brokerage commissions. In 
addition, the Adviser has adopted policies and procedures as required 
under section 204A of the Advisers Act, which are reasonably designed 
in light of the nature of its business to prevent the misuse, in 
violation of the Advisers Act or the Exchange Act or the rules 
thereunder, of material non-public information by the Adviser or an 
associated person (``Inside Information Policy''). Any Sub-Adviser will 
be required to adopt and maintain a similar Inside Information Policy. 
In accordance with the Code of Ethics \12\ and Inside Information 
Policy of the Adviser and Sub-Advisers, personnel of those entities 
with knowledge about the composition of the Portfolio Deposit \13\ will 
be prohibited from disclosing such information to any other person, 
except as authorized in the course of their employment, until such 
information is made public. In addition, an Index Provider will not 
provide any information relating to changes to an Underlying Index's 
methodology for the inclusion of component securities, the inclusion or 
exclusion of specific component securities, or methodology for the 
calculation of the return of component securities, in advance of a 
public announcement of such changes by the Index Provider. The Adviser 
will also include under Item 10.C. of Part 2 of its Form ADV a 
discussion of its relationship to any Affiliated Index Provider and any 
material conflicts of interest resulting therefrom, regardless of 
whether the Affiliated Index Provider is a type of affiliate specified 
in Item 10.
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    \12\ The Adviser has also adopted or will adopt a code of ethics 
pursuant to rule 17j-1 under the Act and rule 204A-1 under the 
Advisers Act, which contains provisions reasonably necessary to 
prevent Access Persons (as defined in rule 17j-1) from engaging in 
any conduct prohibited in rule 17j-1 (``Code of Ethics'').
    \13\ The instruments and cash that the purchaser is required to 
deliver in exchange for the Creation Units it is purchasing is 
referred to as the ``Portfolio Deposit.''
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    15. To the extent the Self-Indexing Funds transact with an 
Affiliated Person of the Adviser or Sub-Adviser, such transactions will 
comply with the Act, the rules thereunder and the terms and conditions 
of the requested order. In this regard, each Self-Indexing Fund's board 
of directors or trustees (``Board'') will periodically review the Self-
Indexing Fund's use of an Affiliated Index Provider. Subject to the 
approval of the Self-Indexing Fund's Board, the Adviser, Affiliated 
Persons of the Adviser (``Adviser Affiliates'') and Affiliated Persons 
of any Sub-Adviser (``Sub-Adviser Affiliates'') may be authorized to 
provide custody, fund accounting and administration and transfer agency 
services to the Self-Indexing Funds. Any services provided by the 
Adviser, Adviser Affiliates, Sub-Adviser and Sub-Adviser Affiliates 
will be performed in accordance with the provisions of the Act, the 
rules under the Act and any relevant guidelines from the staff of the 
Commission.
    16. In light of the foregoing, applicants believe it is appropriate 
to allow the Self-Indexing Funds to be fully transparent in lieu of 
Policies and Procedures from the Prior Self-Indexing Orders discussed 
above.
    17. The Shares of each Fund 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'').\14\ On any given Business Day, the names and quantities 
of the instruments that constitute the Deposit Instruments and the 
names and quantities of the instruments that constitute the Redemption 
Instruments will be identical, unless the Fund is Rebalancing (as 
defined below). In addition, the Deposit Instruments and the Redemption 
Instruments will each correspond pro rata to the positions in the 
Fund's portfolio (including cash positions) \15\ 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; \16\ (c) 
TBA Transactions, short positions, derivatives and other positions that 
cannot be transferred in kind \17\ will be excluded from the Deposit 
Instruments and the Redemption Instruments; \18\ (d) to the extent the 
Fund determines, on a given Business Day, to use a representative 
sampling of the Fund's portfolio; \19\ or (e) for temporary periods, to 
effect changes in the Fund's portfolio as a result of the rebalancing 
of its Underlying Index (any such change, a ``Rebalancing''). If there 
is a difference between the NAV attributable to a Creation Unit and the 
aggregate market value of the Deposit Instruments or Redemption 
Instruments exchanged for the Creation Unit, the party conveying 
instruments with the lower value will also pay to the other an amount 
in cash equal to that difference (the ``Cash Amount'').
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    \14\ 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.
    \15\ The portfolio used for this purpose will be the same 
portfolio used to calculate the Fund's NAV for the Business Day.
    \16\ A tradeable round lot for a security will be the standard 
unit of trading in that particular type of security in its primary 
market.
    \17\ 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.
    \18\ Because these instruments will be excluded from the Deposit 
Instruments and the Redemption Instruments, their value will be 
reflected in the determination of the Cash Amount (as defined 
below).
    \19\ A Fund may only use sampling for this purpose if the 
sample: (i) Is designed to generate performance that is highly 
correlated to the performance of the Fund's portfolio; (ii) consists 
entirely of instruments that are already included in the Fund's 
portfolio; and (iii) is the same for all Authorized Participants 
(defined below) on a given Business Day.
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    18. Purchases and redemptions of Creation Units may be made in 
whole or in part on a cash basis, rather than in kind, solely under the 
following circumstances: (a) To the extent there is a Cash Amount; (b) 
if, on a given Business Day, the Fund announces before the open of 
trading that all purchases, all redemptions or all purchases and 
redemptions on that day will be made entirely in cash; (c) if, upon 
receiving a purchase or redemption order from an Authorized 
Participant, the Fund determines to require the purchase or redemption, 
as applicable, to be made entirely in cash; \20\ (d) if, on a given 
Business Day,

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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 or DTC (defined below); or (ii) in the 
case of Foreign Funds holding non-U.S. investments, 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 Foreign Fund holding non-U.S. investments would be subject 
to unfavorable income tax treatment if the holder receives redemption 
proceeds in kind.\21\
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    \20\ 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. For 
instance, in bond transactions, the Adviser may be able to obtain 
better execution than Share purchasers because of the Adviser's 
size, experience and potentially stronger relationships in the fixed 
income markets. 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 holdings, which may result in adverse tax consequences for 
the remaining Fund shareholders that would not occur with an in-kind 
redemption. As a result, tax consideration may warrant in-kind 
redemptions.
    \21\ 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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    19. Creation Units will consist of specified large aggregations of 
Shares, e.g., at least 25,000 Shares, and it is expected that the 
initial price of a Creation Unit will range from $500,000 to $25 
million. All orders to purchase Creation Units must be placed with the 
Distributor by or through an ``Authorized Participant'' which is either 
(1) a ``Participating Party,'' i.e., a broker-dealer or other 
participant in the Continuous Net Settlement System of the NSCC, a 
clearing agency registered with the Commission, or (2) a participant in 
The Depository Trust Company (``DTC'') (``DTC Participant''), which, in 
either case, has signed a participant agreement with the Distributor. 
The Distributor will be responsible for transmitting the orders to the 
Funds and will furnish to those placing such orders confirmation that 
the orders have been accepted, but applicants state that the 
Distributor may reject any order which is not submitted in proper form.
    20. Each Business Day, before the open of trading on the Listing 
Exchange, each Fund will cause to be published through the NSCC the 
names and quantities of the instruments comprising the Deposit 
Instruments and the Redemption Instruments, as well as the estimated 
Cash Amount (if any), for that day. The list of Deposit Instruments and 
Redemption Instruments will apply until a new list is announced on the 
following Business Day, and there will be no intra-day changes to the 
list except to correct errors in the published list. Each Listing 
Exchange will disseminate, every 15 seconds during regular Exchange 
trading hours, through the facilities of the Consolidated Tape 
Association, an amount for each Fund stated on a per individual Share 
basis representing the sum of (i) the estimated Cash Amount and (ii) 
the current value of the Deposit Instruments.
    21. Transaction expenses, including operational processing and 
brokerage costs, will be incurred by a Fund when investors purchase or 
redeem Creation Units in-kind and such costs have the potential to 
dilute the interests of the Fund's existing shareholders. Each Fund 
will impose purchase or redemption transaction fees (``Transaction 
Fees'') in connection with effecting such purchases or redemptions of 
Creation Units. In all cases, such Transaction Fees will be limited in 
accordance with requirements of the Commission applicable to management 
investment companies offering redeemable securities. Since the 
Transaction Fees are intended to defray the transaction expenses as 
well as to prevent possible shareholder dilution resulting from the 
purchase or redemption of Creation Units, the Transaction Fees will be 
borne only by such purchasers or redeemers.\22\ The Distributor will be 
responsible for delivering the Fund's prospectus to those persons 
acquiring Shares in Creation Units and for maintaining records of both 
the orders placed with it and the confirmations of acceptance furnished 
by it. In addition, the Distributor will maintain a record of the 
instructions given to the applicable Fund to implement the delivery of 
its Shares.
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    \22\ Where a Fund permits an in-kind purchaser to substitute 
cash-in-lieu of depositing one or more of the requisite Deposit 
Instruments, the purchaser may be assessed a higher Transaction Fee 
to cover the cost of purchasing such Deposit Instruments.
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    22. Shares of each Fund will be listed and traded individually on 
an Exchange. It is expected that one or more member firms of an 
Exchange will be designated to act as a market maker (each, a ``Market 
Maker'') and maintain a market for Shares trading on the Exchange. 
Prices of Shares trading on an Exchange will be based on the current 
bid/offer market. Transactions involving the sale of Shares on an 
Exchange will be subject to customary brokerage commissions and 
charges.
    23. Applicants expect that purchasers of Creation Units will 
include institutional investors and arbitrageurs. Market Makers, acting 
in their roles to provide a fair and orderly secondary market for the 
Shares, may from time to time find it appropriate to purchase or redeem 
Creation Units. Applicants expect that secondary market purchasers of 
Shares will include both institutional and retail investors.\23\ The 
price at which Shares trade will be disciplined by arbitrage 
opportunities created by the option continually to purchase or redeem 
Shares in Creation Units, which should help prevent Shares from trading 
at a material discount or premium in relation to their NAV.
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    \23\ 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 the DTC Participants.
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    24. Shares will not be individually redeemable, and owners of 
Shares may acquire those Shares from the 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 through an Authorized Participant. A 
redeeming investor may pay a Transaction Fee, calculated in the same 
manner as a Transaction Fee payable in connection with purchases of 
Creation Units.
    25. Neither the Trust nor any Fund will be advertised or marketed 
or otherwise held out as a traditional open-end investment company or a 
``mutual fund.'' Instead, each such Fund will be marketed as an 
``ETF.'' All marketing materials that describe the features or method 
of obtaining, buying or selling Creation Units, or Shares traded on an 
Exchange, or refer to redeemability, will prominently disclose that 
Shares are not individually redeemable and will disclose that the 
owners of Shares may acquire those Shares from the Fund or tender such 
Shares for redemption to the Fund in Creation Units only. The Funds 
will provide copies of their annual and semi-annual shareholder reports 
to DTC Participants for distribution to beneficial owners of Shares.

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

[[Page 35587]]

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

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

    3. Section 5(a)(1) of the Act defines an ``open-end company'' as a 
management investment company that is offering for sale or has 
outstanding any redeemable security of which it is the issuer. Section 
2(a)(32) of the Act defines a redeemable security as any security, 
other than short-term paper, under the terms of which the owner, upon 
its presentation to the issuer, is entitled to receive approximately a 
proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Shares will not be individually redeemable, 
applicants request an order that would permit the Funds to register as 
open-end management investment companies and issue Shares that are 
redeemable in Creation Units only. Applicants state that investors may 
purchase Shares in Creation Units and redeem Creation Units from each 
Fund. Applicants further state that because Creation Units may always 
be purchased and redeemed at NAV, the price of Shares on the secondary 
market should not vary materially from 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 an underwriter, except at a current public 
offering price described in the prospectus. Rule 22c-1 under the Act 
generally requires that a dealer selling, redeeming or repurchasing a 
redeemable security do so only at a price based on its NAV. Applicants 
state that secondary market trading in Shares will take place at 
negotiated prices, not at a current offering price described in a 
Fund's prospectus, and not at a price based on NAV. Thus, purchases and 
sales of Shares in the secondary market will not comply with section 
22(d) of the Act and rule 22c-1 under the Act. Applicants request an 
exemption under section 6(c) from these provisions.
    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, and (c) ensure an orderly distribution of investment 
company shares by eliminating price competition from dealers 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 a Fund as a party and will not result in dilution of 
an investment in Shares, and (b) to the extent different prices exist 
during a given trading day, or from day to day, such variances occur as 
a result of third-party market forces, such as supply and demand. 
Therefore, applicants assert that secondary market transactions in 
Shares will not lead to discrimination or preferential treatment among 
purchasers. Finally, applicants contend that the price at which Shares 
trade will be disciplined by arbitrage opportunities created by the 
option continually to purchase or redeem Shares in Creation Units, 
which should help prevent Shares from trading at a material discount or 
premium in relation to their NAV.

Section 22(e)

    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 
state that settlement of redemptions for Foreign Funds will be 
contingent not only on the settlement cycle of the United States 
market, but also on current delivery cycles in local markets for 
underlying foreign portfolio securities held by a Foreign Fund. 
Applicants state that the delivery cycles currently practicable for 
transferring Redemption Instruments to redeeming investors, coupled 
with local market holiday schedules, may require a delivery process of 
up to fifteen (15) calendar days.\24\ Accordingly, with respect to 
Foreign Funds only, applicants hereby request relief under section 6(c) 
from the requirement imposed by section 22(e) to allow Foreign Funds to 
pay redemption proceeds within fifteen (15) calendar days following the 
tender of Creation Units for redemption.\25\
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    \24\ Certain countries in which a Fund may invest have 
historically had settlement periods of up to fifteen (15) calendar 
days.
    \25\ Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will affect any obligations applicants 
may otherwise have under rule 15c6-1 under the Exchange Act 
requiring that most securities transactions be settled within three 
business days of the trade date.
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    8. Applicants believe that Congress adopted section 22(e) to 
prevent unreasonable, undisclosed or unforeseen delays in the actual 
payment of redemption proceeds. Applicants propose that allowing 
redemption payments for Creation Units of a Foreign Fund to be made 
within fifteen calendar days would not be inconsistent with the spirit 
and intent of section 22(e). Applicants suggest that a redemption 
payment occurring within fifteen calendar days following a redemption 
request would adequately afford investor protection.
    9. Applicants are not seeking relief from section 22(e) with 
respect to Foreign Funds that do not effect creations and redemptions 
of Creation Units in-kind.

Section 12(d)(1)

    10. Section 12(d)(1)(A) of the Act prohibits a registered 
investment company from acquiring securities of an investment company 
if such securities represent more than 3% of the total

[[Page 35588]]

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 and 
any other broker-dealer from knowingly selling the investment company's 
shares to another investment company if the sale will cause the 
acquiring company to own more than 3% of the acquired company's voting 
stock, or if the sale will cause more than 10% of the acquired 
company's voting stock to be owned by investment companies generally.
    11. Applicants request an exemption to permit registered management 
investment companies and unit investment trusts (``UITs'') that are not 
advised or sponsored by the Adviser, and not part of the same ``group 
of investment companies,'' as defined in section 12(d)(1)(G)(ii) of the 
Act as the Underlying Funds (such management investment companies are 
referred to as ``Investing Management Companies,'' such UITs are 
referred to as ``Investing Trusts,'' and Investing Management Companies 
and Investing Trusts are collectively referred to as ``Funds of 
Funds''),\26\ to acquire Underlying Fund Shares beyond the limits of 
section 12(d)(1)(A) of the Act; and the Underlying Funds, and any 
principal underwriter for the Underlying Funds, and/or any Broker 
registered under the Exchange Act, to sell Underlying Fund Shares to 
Funds of Funds beyond the limits of section 12(d)(1)(B) of the Act. The 
``Underlying Funds'' are (a) the Funds and (b) any registered open-end 
management investment company or any series thereof that is advised by 
an Adviser and that, pursuant to a separate order of the Commission, in 
general terms, operates as an ETF that utilizes active management 
investment strategies. Shares of an Underlying Fund are referred to as 
``Underlying Fund Shares.''
---------------------------------------------------------------------------

    \26\ Funds of Funds do not include the Underlying Funds.
---------------------------------------------------------------------------

    12. Each Investing Management Company will be advised by an 
investment adviser within the meaning of section 2(a)(20)(A) of the Act 
(the ``Fund of Funds Adviser'') and may be sub-advised by investment 
advisers within the meaning of section 2(a)(20)(B) of the Act (each a 
``Fund of Funds Sub-Adviser''). Any investment adviser to an Investing 
Management Company will be registered under the Advisers Act. Each 
Investing Trust will be sponsored by a sponsor (``Sponsor'').
    13. Applicants submit that the proposed conditions to the requested 
relief adequately address the concerns underlying the limits in 
sections 12(d)(1)(A) and (B), which include concerns about undue 
influence by a fund of funds over underlying funds, excessive layering 
of fees and overly complex fund structures. Applicants believe that the 
requested exemption is consistent with the public interest and the 
protection of investors.
    14. Applicants believe that neither a Fund of Funds nor a Fund of 
Funds Affiliate would be able to exert undue influence over an 
Underlying Fund.\27\ To limit the control that a Fund of Funds may have 
over an Underlying Fund, applicants propose a condition prohibiting a 
Fund of Funds Adviser or Sponsor, any person controlling, controlled 
by, or under common control with a Fund of Funds Adviser or Sponsor, 
and any investment company and any 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 a Fund of Funds Adviser or Sponsor, or any person 
controlling, controlled by, or under common control with a Fund of 
Funds Adviser or Sponsor (``Fund of Funds Advisory Group'') from 
controlling (individually or in the aggregate) an Underlying Fund 
within the meaning of section 2(a)(9) of the Act. The same prohibition 
would apply to any Fund of Funds Sub-Adviser, any person controlling, 
controlled by or under common control with the Fund of Funds Sub-
Adviser, and any investment company or issuer that would be an 
investment company but for sections 3(c)(1) or 3(c)(7) of the Act (or 
portion of such investment company or issuer) advised or sponsored by 
the Fund of Funds Sub-Adviser or any person controlling, controlled by 
or under common control with the Fund of Funds Sub-Adviser (``Fund of 
Funds Sub-Advisory Group'').
---------------------------------------------------------------------------

    \27\ A ``Fund of Funds Affiliate'' is a Fund of Funds Adviser, 
Fund of Funds Sub-Adviser, Sponsor, promoter, and principal 
underwriter of a Fund of Funds, and any person controlling, 
controlled by, or under common control with any of those entities. 
An ``Underlying Fund Affiliate'' is an investment adviser, promoter, 
or principal underwriter of an Underlying Fund and any person 
controlling, controlled by or under common control with any of these 
entities.
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    15. Applicants propose other conditions to limit the potential for 
undue influence over the Underlying Funds, including that no Fund of 
Funds or Fund of Funds Affiliate (except to the extent it is acting in 
its capacity as an investment adviser to an Underlying Fund) will cause 
an Underlying Fund to purchase a security in an offering of securities 
during the existence of an underwriting or selling syndicate of which a 
principal underwriter is an Underwriting Affiliate (``Affiliated 
Underwriting''). An ``Underwriting Affiliate'' is a principal 
underwriter in any underwriting or selling syndicate that is an 
officer, director, member of an advisory board, Fund of Funds Adviser, 
Fund of Funds Sub-Adviser, employee or Sponsor of the Fund of Funds, or 
a person of which any such officer, director, member of an advisory 
board, Fund of Funds Adviser or Fund of Funds Sub-Adviser, employee or 
Sponsor is an affiliated person (except that any person whose 
relationship to the Underlying Fund is covered by section 10(f) of the 
Act is not an Underwriting Affiliate).
    16. Applicants do not believe that the proposed arrangement will 
involve excessive layering of fees. 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 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 Underlying Fund in which the Investing Management 
Company may invest. In addition, under condition B.5., a Fund of Funds 
Adviser, or a Fund of Funds' trustee or Sponsor, as applicable, will 
waive fees otherwise payable to it by the Fund of Funds in an amount at 
least equal to any compensation (including fees received pursuant to 
any plan adopted by a Fund under rule 12b-1 under the Act) received 
from an Underlying Fund by the Fund of Funds Adviser, trustee or 
Sponsor or an affiliated person of the Fund of Funds Adviser, trustee 
or Sponsor, other than any advisory fees paid to the Fund of Funds 
Adviser, trustee or Sponsor or its affiliated person by an Underlying 
Fund, in connection with the investment by the Fund of Funds in the 
Underlying Fund. Applicants state that any sales charges and/or service 
fees charged with respect to shares of a Fund of Funds will not exceed 
the limits applicable to a fund of funds as set forth in NASD Conduct 
Rule 2830.\28\
---------------------------------------------------------------------------

    \28\ Any references to NASD Conduct Rule 2830 include any 
successor or replacement FINRA rule to NASD Conduct Rule 2830.
---------------------------------------------------------------------------

    17. Applicants submit that the proposed arrangement will not create 
an

[[Page 35589]]

overly complex fund structure. Applicants note that no Underlying Fund 
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 Underlying Fund to 
purchase shares of other investment companies for short-term cash 
management purposes. To ensure a Fund of Funds is aware of the terms 
and conditions of the requested order, the Fund of Funds will enter 
into an agreement with the Underlying Fund (``FOF Participation 
Agreement''). The FOF Participation Agreement will include an 
acknowledgement from the Fund of Funds that it may rely on the order 
only to invest in the Underlying Funds and not in any other investment 
company.
    18. Applicants also note that an Underlying Fund may choose to 
reject a direct purchase of Underlying Fund Shares in Creation Units by 
a Fund of Funds. To the extent that a Fund of Funds purchases 
Underlying Fund Shares in the secondary market, an Underlying Fund 
would still retain its ability to reject any initial investment by a 
Fund of Funds in excess of the limits of section 12(d)(1)(A) by 
declining to enter into a FOF Participation Agreement with the Fund of 
Funds.

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

    19. Sections 17(a)(1) and (2) of the Act generally prohibit an 
affiliated person of a registered investment company, or an affiliated 
person of such a person, from selling any security to or purchasing any 
security from the company. Section 2(a)(3) of the Act defines 
``affiliated person'' of another person to include (a) any person 
directly or indirectly owning, controlling or holding with power to 
vote 5% or more of the outstanding voting securities of the other 
person, (b) any person 5% or more of whose outstanding voting 
securities are directly or indirectly owned, controlled or held with 
the power to vote by the other person, and (c) any person directly or 
indirectly controlling, controlled by or under common control with the 
other person. Section 2(a)(9) of the Act defines ``control'' as the 
power to exercise a controlling influence over the management or 
policies of a company, and provides that a control relationship will be 
presumed where one person owns more than 25% of a company's voting 
securities. The Funds may be deemed to be controlled by the Adviser or 
an entity controlling, controlled by or under common control with the 
Adviser and hence affiliated persons of each other. In addition, the 
Funds may be deemed to be under common control with any other 
registered investment company (or series thereof) advised by an Adviser 
or an entity controlling, controlled by or under common control with an 
Adviser (an ``Affiliated Fund''). Any investor, including Market 
Makers, owning 5% or holding in excess of 25% of the Trust or such 
Funds, may be deemed affiliated persons of the Trust or such Funds. In 
addition, an investor could own 5% or more, or in excess of 25% of the 
outstanding shares of one or more Affiliated Funds making that investor 
a Second-Tier Affiliate of the Funds.
    20. Applicants request an exemption from sections 17(a)(1) and 
17(a)(2) of the Act pursuant to sections 6(c) and 17(b) of the Act to 
permit persons that are Affiliated Persons of the Funds, 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) 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, to effectuate purchases and redemptions ``in-kind.''
    21. 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 of Creation Units 
will be effected in exactly the same manner for all purchases and 
redemptions, regardless of size or number. There will be no 
discrimination between purchasers or redeemers. Deposit Instruments and 
Redemption Instruments for each Fund will be valued in the identical 
manner as those Portfolio Holdings currently held by such Fund and the 
valuation of the Deposit Instruments and Redemption Instruments will be 
made in an identical manner regardless of the identity of the purchaser 
or redeemer. Applicants do not believe that ``in-kind'' purchases and 
redemptions will result in abusive self-dealing or overreaching, but 
rather assert that such procedures will be implemented consistently 
with each Fund's objectives and with the general purposes of the Act. 
Applicants believe that ``in-kind'' purchases and redemptions will be 
made on terms reasonable to applicants and any affiliated persons 
because they will be valued pursuant to verifiable objective standards. 
The method of valuing Portfolio Holdings held by a Fund is identical to 
that used for calculating ``in-kind'' purchase or redemption values and 
therefore creates no opportunity for affiliated persons or Second-Tier 
Affiliates of applicants to effect a transaction detrimental to the 
other holders of Shares of that Fund. Similarly, applicants submit 
that, by using the same standards for valuing Portfolio Holdings held 
by a Fund as are used for calculating ``in-kind'' redemptions or 
purchases, the Fund will ensure that its NAV will not be adversely 
affected by such securities transactions. Applicants also note that the 
ability to take deposits and make redemptions ``in-kind'' will help 
each Fund to track closely its Underlying Index and therefore aid in 
achieving the Fund's objectives.
    22. Applicants also seek relief under sections 6(c) and 17(b) from 
section 17(a) to permit an Underlying Fund that is an affiliated 
person, or an affiliated person of an affiliated person, of a Fund of 
Funds to sell its Underlying Fund Shares to and redeem its Underlying 
Fund Shares from a Fund of Funds, and to engage in the accompanying in-
kind transactions with the Fund of Funds.\29\ Applicants state that the 
terms of the transactions are fair and reasonable and do not involve 
overreaching. Applicants note that any consideration paid by a Fund of 
Funds for the purchase or redemption of Underlying Fund Shares directly 
from an Underlying Fund will be based on the NAV of the Underlying 
Fund.\30\ Applicants believe that any

[[Page 35590]]

proposed transactions directly between the Underlying Funds and Funds 
of Funds will be consistent with the policies of each Fund of Funds. 
The purchase of Creation Units by a Fund of Funds directly from an 
Underlying Fund will be accomplished in accordance with the investment 
restrictions of any such Fund of Funds and will be consistent with the 
investment policies set forth in the Fund of Funds' registration 
statement. Applicants also state that the proposed transactions are 
consistent with the general purposes of the Act and are appropriate in 
the public interest.
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    \29\ Although applicants believe that most Funds of Funds will 
purchase Underlying Fund Shares in the secondary market and will not 
purchase Creation Units directly from an Underlying Fund, a Fund of 
Funds might seek to transact in Creation Units directly with an 
Underlying Fund that is an affiliated person of a Fund of Funds. To 
the extent that purchases and sales of Underlying Fund Shares occur 
in the secondary market and not through principal transactions 
directly between a Fund of Funds and an Underlying Fund, relief from 
section 17(a) would not be necessary. However, the requested relief 
would apply to direct sales of Underlying Fund Shares in Creation 
Units by an Underlying Fund to a Fund of Funds and redemptions of 
those Underlying Fund Shares. Applicants are not seeking relief from 
section 17(a) for, and the requested relief will not apply to, 
transactions where an Underlying Fund could be deemed an affiliated 
person, or an affiliated person of an affiliated person of a Fund of 
Funds because an Adviser or an entity controlling, controlled by or 
under common control with an Adviser provides investment advisory 
services to that Fund of Funds.
    \30\ Applicants acknowledge that the receipt of compensation by 
(a) an affiliated person of a Fund of Funds, or an affiliated person 
of such person, for the purchase by the Fund of Funds of Underlying 
Fund Shares of an Underlying Fund or (b) an affiliated person of an 
Underlying Fund, or an affiliated person of such person, for the 
sale by the Underlying Fund of its Underlying Fund Shares to a Fund 
of Funds, may be prohibited by section 17(e)(1) of the Act. The FOF 
Participation Agreement also will include this acknowledgment.
---------------------------------------------------------------------------

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. The requested relief to permit ETF operations will expire on the 
effective date of any Commission rule under the Act that provides 
relief permitting the operation of index-based ETFs.
    2. As long as a Fund operates in reliance on the requested order, 
Shares of such Fund will be listed on an Exchange.
    3. Neither the Trust nor any Fund will be advertised or marketed as 
an open-end investment company or a mutual fund. Any advertising 
material that describes the purchase or sale of Creation Units or 
refers to redeemability will prominently disclose that Shares are not 
individually redeemable and that owners of Shares may acquire those 
Shares from the Fund and tender those Shares for redemption to a Fund 
in Creation Units only.
    4. The Web site, which is and will be publicly accessible at no 
charge, will contain, on a per Share basis for each Fund, the prior 
Business Day's NAV and the market closing price or the midpoint of the 
bid/ask spread at the time of the calculation of such NAV (``Bid/Ask 
Price''), and a calculation of the premium or discount of the market 
closing price or Bid/Ask Price against such NAV.
    5. Each Self-Indexing Fund, Long/Short Fund and 130/30 Fund will 
post on the Web site on each Business Day, before commencement of 
trading of Shares on the Exchange, the Fund's Portfolio Holdings.
    6. No Adviser or any Sub-Adviser, directly or indirectly, will 
cause any Authorized Participant (or any investor on whose behalf an 
Authorized Participant may transact with the Fund) to acquire any 
Deposit Instrument for a Fund through a transaction in which the Fund 
could not engage directly.

B. Section 12(d)(1) Relief

    1. The members of a Fund of Funds' Advisory Group will not control 
(individually or in the aggregate) an Underlying Fund within the 
meaning of section 2(a)(9) of the Act. The members of a Fund of Funds' 
Sub-Advisory Group will not control (individually or in the aggregate) 
an Underlying 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 
an Underlying Fund, the Fund of Funds' Advisory Group or the Fund of 
Funds' Sub-Advisory Group, each in the aggregate, becomes a holder of 
more than 25 percent of the outstanding voting securities of an 
Underlying Fund, it will vote its Underlying Fund Shares of the 
Underlying Fund in the same proportion as the vote of all other holders 
of the Underlying Fund's Shares. This condition does not apply to the 
Fund of Funds' Sub-Advisory Group with respect to an Underlying Fund 
for which the Fund of Funds' Sub-Adviser or a person controlling, 
controlled by or under common control with the Fund of Funds' Sub-
Adviser acts as the investment adviser within the meaning of section 
2(a)(20)(A) of the Act.
    2. No Fund of Funds or Fund of Funds Affiliate will cause any 
existing or potential investment by the Fund of Funds in an Underlying 
Fund to influence the terms of any services or transactions between the 
Fund of Funds or Fund of Funds Affiliate and the Underlying Fund or an 
Underlying Fund Affiliate.
    3. The board of directors or trustees of an Investing Management 
Company, including a majority of the disinterested directors or 
trustees, will adopt procedures reasonably designed to ensure that the 
Fund of Funds Adviser and Fund of Funds Sub-Adviser are conducting the 
investment program of the Investing Management Company without taking 
into account any consideration received by the Investing Management 
Company or a Fund of Funds Affiliate from an Underlying Fund or 
Underlying Fund Affiliate in connection with any services or 
transactions.
    4. Once an investment by a Fund of Funds in Underlying Fund Shares 
exceeds the limits in section 12(d)(1)(A)(i) of the Act, the Board of 
the Underlying Fund, including a majority of the disinterested 
directors or trustees, will determine that any consideration paid by 
the Underlying Fund to the Fund of Funds or a Fund of Funds Affiliate 
in connection with any services or transactions: (i) Is fair and 
reasonable in relation to the nature and quality of the services and 
benefits received by the Underlying Fund; (ii) is within the range of 
consideration that the Underlying 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 an Underlying Fund and its investment 
adviser(s), or any person controlling, controlled by or under common 
control with such investment adviser(s).
    5. The Fund of Funds Adviser, or trustee or Sponsor of an Investing 
Trust, as applicable, will waive fees otherwise payable to it by the 
Fund of Funds in an amount at least equal to any compensation 
(including fees received pursuant to any plan adopted by an Underlying 
Fund under rule 12b-l under the Act) received from an Underlying Fund 
by the Fund of Funds Adviser, or trustee or Sponsor of the Investing 
Trust, or an affiliated person of the Fund of Funds Adviser, or trustee 
or Sponsor of the Investing Trust, other than any advisory fees paid to 
the Fund of Funds Adviser, trustee or Sponsor of an Investing Trust, or 
its affiliated person by the Underlying Fund, in connection with the 
investment by the Fund of Funds in the Underlying Fund. Any Fund of 
Funds Sub-Adviser will waive fees otherwise payable to the Fund of 
Funds Sub-Adviser, directly or indirectly, by the Investing Management 
Company in an amount at least equal to any compensation received from 
an Underlying Fund by the Fund of Funds Sub-Adviser, or an affiliated 
person of the Fund of Funds Sub-Adviser, other than any advisory fees 
paid to the Fund of Funds Sub-Adviser or its affiliated person by the 
Underlying Fund, in connection with the investment by the Investing 
Management Company in the Underlying Fund made at the direction of the 
Fund of Funds Sub-Adviser. In the event that the Fund of Funds Sub-
Adviser waives fees, the benefit of the waiver will be passed through 
to the Investing Management Company.
    6. No Fund of Funds or Fund of Funds Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to an 
Underlying Fund) will cause an Underlying Fund to purchase a security 
in any Affiliated Underwriting.
    7. The Board of an Underlying Fund, including a majority of the 
disinterested directors or trustees, will adopt

[[Page 35591]]

procedures reasonably designed to monitor any purchases of securities 
by the Underlying Fund in an Affiliated Underwriting, once an 
investment by a Fund of Funds in the securities of the Underlying 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 of 
the Underlying Fund will review these purchases periodically, but no 
less frequently than annually, to determine whether the purchases were 
influenced by the investment by the Fund of Funds in the Underlying 
Fund. The Board of the Underlying Fund will consider, among other 
things: (i) Whether the purchases were consistent with the investment 
objectives and policies of the Underlying 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 Underlying 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 of the Underlying Fund.
    8. Each Underlying Fund will maintain and preserve permanently in 
an easily accessible place a written copy of the procedures described 
in the preceding condition, and any modifications to such procedures, 
and will maintain and preserve for a period of not less than six years 
from the end of the fiscal year in which any purchase in an Affiliated 
Underwriting occurred, the first two years in an easily accessible 
place, a written record of each purchase of securities in Affiliated 
Underwritings once an investment by a Fund of Funds in the securities 
of the Underlying 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 
determinations of the Board of the Underlying Fund were made.
    9. Before investing in an Underlying Fund in excess of the limit in 
section 12(d)(1)(A), a Fund of Funds and the Trust will execute a FOF 
Participation Agreement 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 
Underlying Fund Shares in excess of the limit in section 
12(d)(1)(A)(i), a Fund of Funds will notify the Underlying Fund of the 
investment. At such time, the Fund of Funds will also transmit to the 
Underlying Fund a list of the names of each Fund of Funds Affiliate and 
Underwriting Affiliate. The Fund of Funds will notify the Underlying 
Fund of any changes to the list of the names as soon as reasonably 
practicable after a change occurs. The Underlying Fund and the Fund of 
Funds 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 advisory 
contract are based on services provided that will be in addition to, 
rather than duplicative of, the services provided under the advisory 
contract(s) of any Underlying Fund in which the Investing Management 
Company may invest. These findings and their basis will be fully 
recorded in the minute books of the appropriate Investing Management 
Company.
    11. Any sales charges and/or service fees charged with respect to 
shares of a Fund of Funds will not exceed the limits applicable to a 
fund of funds as set forth in NASD Conduct Rule 2830.
    12. No Underlying Fund will acquire securities of an investment 
company or company relying on section 3(c)(1) or 3(c)(7) of the Act in 
excess of the limits contained in section 12(d)(1)(A) of the Act, 
except to the extent the Underlying Fund acquires securities of another 
investment company pursuant to exemptive relief from the Commission 
permitting the Underlying Fund to acquire securities of one or more 
investment companies for short term cash management purposes.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-14534 Filed 6-20-14; 8:45 am]
BILLING CODE 8011-01-P


