
[Federal Register Volume 79, Number 178 (Monday, September 15, 2014)]
[Notices]
[Pages 55026-55033]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-21889]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 31246; 812-14322]


Validea Capital Management, LLC, et al.; Notice of Application

September 9, 2014.
AGENCY: Securities and Exchange Commission (the ``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, and under sections 6(c) and 17(b) of the Act for an 
exemption from sections 17(a)(1) and (2) of the Act, and under section 
12(d)(1)(J) for an exemption from sections 12(d)(1)(A) and (B) of the 
Act.

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

DATES: Filing Dates: The application was filed on June 16, 2014, and 
amended on September 8, 2014.
    Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders

[[Page 55027]]

a hearing. Interested persons may request a hearing by writing to the 
Commission's Secretary and serving applicants with a copy of the 
request, personally or by mail. Hearing requests should be received by 
the Commission by 5:30 p.m. on October 6, 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. Applicants: Validea Capital 
Management, LLC, 363 Ridgewood Road, West Hartford, CT 06107; ETF 
Series Solutions and Quasar Distributors, LLC, 615 East Michigan 
Street, 4th Floor, Milwaukee, WI 53202.

FOR FURTHER INFORMATION CONTACT: David J. Marcinkus, Senior Counsel, at 
(202) 551-6882 or David P. Bartels, 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 registered as an open-end management investment 
company under the Act and is organized as a Delaware statutory trust. 
The Trust will offer Funds (as defined below), each of which will have 
distinct investment strategies and will attempt to achieve its 
investment objective by utilizing an active management strategy.
    2. Validea, a Connecticut limited liability company, is, and any 
other Adviser will be, registered as an investment adviser under the 
Investment Advisers Act of 1940 (the ``Advisers Act''). An Adviser will 
be investment adviser to each Fund and may enter into subadvisory 
agreements with one or more affiliated or unaffiliated investment sub-
advisers to a Fund (each, a ``Sub-Adviser''). Any Sub-Adviser will be 
registered or not subject to registration under the Advisers Act. 
Quasar, a Delaware limited liability company, is, and any other 
Distributor will be, registered as a broker-dealer (``Broker'') under 
the Securities Exchange Act of 1934 (the ``Exchange Act'').\1\ A 
Distributor will serve as the principal underwriter and distributor for 
each of the Funds.
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    \1\ For purposes of the requested order, the term 
``Distributor'' shall include any other entity that acts as the 
distributor and principal underwriter of the Creation Units of 
Shares of the Funds in the future and complies with the terms and 
conditions of the application.
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    3. Applicants request that the order apply to future series of the 
Trust, including the Initial Fund, or of any other open-end investment 
company that may be created in the future that, in each case, (a) is an 
actively managed exchange-traded fund (``ETF''), (b) is advised by 
Validea or an entity controlling, controlled by, or under common 
control with Validea (each such entity or any successor entity thereto, 
an ``Adviser'') \2\ and (c) complies with the terms and conditions of 
the application (individually a ``Fund,'' and collectively, the 
``Funds'').\3\
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    \2\ For the purposes of the requested order, ``successor'' is 
limited to an entity that would result from a reorganization into 
another jurisdiction or a change in the type of business 
organization.
    \3\ All entities that currently intend to rely on the order are 
named as applicants. Any entity that relies on the order in the 
future will comply with the terms and conditions of the application.
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    4. The Funds may invest in equity securities or fixed income 
securities traded in the U.S. or non-U.S. markets. Funds that invest in 
equity securities or fixed income securities traded in the U.S. or non-
U.S. markets are ``Global Funds.'' Funds that invest solely in foreign 
equity securities or foreign fixed income securities are ``Foreign 
Funds.'' The Funds may also invest in ``Depositary Receipts'' \4\ and 
may engage in TBA Transactions (defined below). Applicants further 
state that, in order to implement each Fund's investment strategy, the 
Adviser and/or Sub-Advisers of a Fund may review and change the 
securities, or instruments, or other assets or positions held by the 
Fund (``Portfolio Positions'') daily.\5\
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    \4\ 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. 
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 persons of 
applicants or any Sub-Adviser will serve as the Depositary for any 
Depositary Receipts held by a Fund.
    \5\ If a Fund invests in derivatives, then (a) the Fund's board 
of trustees or directors (for any entity, the ``Board'') will 
periodically review and approve the Fund's use of derivatives and 
how the Fund's investment adviser assesses and manages risk with 
respect to the Fund's use of derivatives and (b) the Fund's 
disclosure of its use of derivatives in its offering documents and 
periodic reports will be consistent with relevant Commission and 
staff guidance.
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    5. Applicants also request that any exemption under section 
12(d)(1)(J) of the Act from sections 12(d)(1)(A) and (B) apply to: (i) 
Any Fund; (ii) any Acquiring Fund (as defined below); and (iii) any 
Brokers selling Shares of a Fund to an Acquiring Fund or any principal 
underwriter of a Fund. A management investment company or unit 
investment trust registered under the Act that is not part of the same 
``group of investment companies'' as the Fund within the meaning of 
section 12(d)(1)(G)(ii) of the Act and that acquires Shares of a Fund 
in excess of the limits of Section 12(d)(1)(A) of the Act is referred 
to as an ``Acquiring Management Company'' or an ``Acquiring Trust,'' 
respectively, and the Acquiring Management Companies and Acquiring 
Trusts are referred to collectively as ``Acquiring Funds.'' \6\
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    \6\ An Acquiring Fund may rely on the order only to invest in a 
Fund and not in any other registered investment company.
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    6. A Creation Unit will consist of at least 25,000 Shares and 
applicants expect that the trading price of a Share will range from $20 
to $100. All orders to purchase Creation Units must be placed with the 
Distributor by or through an ``Authorized Participant,'' which is 
either (a) a Broker or other participant in the Continuous Net 
Settlement System of the National Securities Clearing Corporation 
(``NSCC,'' and such process the ``NSCC Process''), or (b) a participant 
in the Depository Trust Company (``DTC,'' such participant ``DTC 
Participant'' and such process the ``DTC Process''), which, in either 
case, has executed an agreement with the Distributor with respect to 
the purchase and redemption of Creation Units.
    7. In order to keep costs low and permit each Fund to be as fully 
invested as possible, 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'').\7\ On 
any given Business

[[Page 55028]]

Day \8\ the names and quantities of the instruments that constitute the 
Deposit Instruments and the names and quantities of the instruments 
that constitute the Redemption Instruments will be identical, and these 
instruments may be referred to, in the case of either a purchase or a 
redemption, as the ``Creation Basket.'' In addition, the Creation 
Basket will correspond pro rata to the positions in a Fund's portfolio 
(including cash positions),\9\ 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; \10\ or (c) TBA 
Transactions,\11\ short positions and other positions that cannot be 
transferred in kind \12\ will be excluded from the Creation Basket.\13\ 
If there is a difference between the 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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    \7\ 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.
    \8\ Each Fund will sell and redeem Creation Units on any day 
that the Trust is open, including as required by section 22(e) of 
the Act (each, a ``Business Day'').
    \9\ The portfolio used for this purpose will be the same 
portfolio used to calculate the Fund's net asset value (``NAV'') for 
that Business Day.
    \10\ A tradeable round lot for a security will be the standard 
unit of trading in that particular type of security in its primary 
market.
    \11\ 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.
    \12\ 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.
    \13\ 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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    8. 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 
Process or DTC Process; or (ii) in the case of Global Funds and Foreign 
Funds, such instruments are not eligible for trading due to local 
trading restrictions, local restrictions on securities transfers or 
other similar circumstances; or (e) if a Fund permits an Authorized 
Participant to deposit or receive (as applicable) cash in lieu of some 
or all of the Deposit Instruments or Redemption Instruments, 
respectively, solely because: (i) Such instruments are, in the case of 
the purchase of a Creation Unit, not available in sufficient quantity; 
(ii) such instruments are not eligible for trading by an Authorized 
Participant or the investor on whose behalf the Authorized Participant 
is acting; or (iii) a holder of Shares of a Global Fund or Foreign Fund 
would be subject to unfavorable income tax treatment if the holder 
receives redemption proceeds in kind.\14\
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    \14\ 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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    9. Each Business Day, before the open of trading on a national 
securities exchange, as defined in section 2(a)(26) of the Act (a 
``Listing Market''), on which Shares are listed and traded, 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 Listing Market will disseminate, every 15 seconds 
throughout the regular trading hours, through the facilities of the 
Consolidated Tape Associate, an estimated NAV, which is an amount per 
Share representing the current value of the Portfolio Positions that 
were publicly disclosed prior to the commencement of trading in Shares 
on the Listing Market.
    10. Each Fund will recoup the settlement costs charged by NSCC and 
DTC by imposing a fee (the ``Transaction Fee'') on investors purchasing 
or redeeming Creation Units. Where a Fund permits an in-kind purchaser 
or redeemer to deposit or receive cash in lieu of one or more Deposit 
or Redemption Instruments, the purchaser or redeemer may be assessed a 
higher Transaction Fee to offset the cost of buying or selling those 
particular Deposit or Redemption Instruments. In all cases, such 
Transaction Fees will be limited in accordance with requirements of the 
Commission applicable to management investment companies offering 
redeemable securities. All orders to purchase Creation Units must be 
placed with the Distributor by or through an Authorized Participant and 
the Distributor will transmit such orders to the Funds. The Distributor 
will be responsible for maintaining records of both the orders placed 
with it and the confirmations of acceptance furnished by it.
    11. Purchasers of Shares in Creation Units may hold such Shares or 
may sell such Shares into the secondary market. Shares will be listed 
and traded at negotiated prices on a Listing Market and it is expected 
that the relevant Listing Market will designate one or more member 
firms to maintain a market for the Shares.\15\ The price of Shares 
trading on a Listing Market will be based on a current bid-offer in the 
secondary market. Purchases and sales of Shares in the secondary market 
will not involve a Fund and will be subject to customary brokerage 
commissions and charges.
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    \15\ If Shares are listed on The NASDAQ Stock Market LLC 
(``Nasdaq'') or a similar electronic Listing Market (including NYSE 
Arca, Inc.), one or more member firms of that Listing Market will 
act as market maker (a ``Market Maker'') and maintain a market for 
Shares trading on that Listing Market. On Nasdaq, no particular 
Market Maker would be contractually obligated to make a market in 
Shares. However, the listing requirements on Nasdaq stipulate that 
at least two Market Makers must be registered in Shares to maintain 
a listing. Registered Market Makers are required to make a 
continuous two-sided market or subject themselves to regulatory 
sanctions. No Market Maker will be an affiliated person, or an 
affiliated person of an affiliated person, of the Funds, except 
within the meaning of section 2(a)(3)(A) or (C) of the Act due 
solely to ownership of Shares.
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    12. Applicants expect that purchasers of Creation Units will 
include institutional investors and arbitrageurs. Applicants expect 
that secondary market purchasers of Shares will include both 
institutional and retail investors.\16\ Applicants believe that the 
structure and operation of the Funds

[[Page 55029]]

will be designed to enable efficient arbitrage and, thereby, minimize 
the probability that Shares will trade at a material premium or 
discount to a Fund's NAV.
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    \16\ Shares will be registered in book-entry form only. DTC or 
its nominee will be the 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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    13. 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.
    14. Neither a Trust nor any Fund will be advertised or marketed or 
otherwise held out as a traditional open-end investment company or 
mutual fund. Instead, each Fund will be marketed as an ``actively-
managed exchange-traded fund.'' All marketing materials that describe 
the features or method of obtaining, buying, or selling Creation Units, 
or Shares traded on a Listing Market, or refer to redeemability, will 
prominently disclose that Shares are not individually redeemable and 
that the owners of Shares may acquire those Shares from a Fund or 
tender those Shares for redemption to the Fund in Creation Units only.
    15. Each Fund's Web site (``Web site''), which will be publicly 
available prior to the offering of Shares, will include the Fund's 
prospectus (``Prospectus''), statement of additional information 
(``SAI''), and summary prospectus, if used. The Web site will contain, 
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 calculation of such NAV (``Bid/Ask Price''), and a calculation of 
the premium or discount of the market closing price or the Bid/Ask 
Price against such NAV. On each Business Day, prior to the commencement 
of trading in Shares on a Listing Market, each Fund shall post on the 
Web site the identities and quantities of the Portfolio Positions held 
by the Fund that will form the basis for the calculation of the NAV at 
the end of that Business Day.\17\
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    \17\ Under accounting procedures followed by the 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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Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act 
granting an exemption from sections 2(a)(32), 5(a)(1), 22(d) and 22(e) 
of the Act and rule 22c-1 under the Act; and under sections 6(c) and 
17(b) of the Act granting an exemption from sections 17(a)(1) and (2) 
of the Act, and under section 12(d)(1)(J) for an exemption from 
sections 12(d)(1)(A) and (B) of the Act.
    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 provision of section 12(d)(1) if the exemption 
is consistent with the public interest and the protection of investors.

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

    3. Section 5(a)(1) of the Act defines an ``open-end company'' as a 
management investment company that is offering for sale or has 
outstanding any redeemable security of which it is the issuer. Section 
2(a)(32) of the Act defines a redeemable security as any security, 
other than short-term paper, under the terms of which the holder, upon 
its presentation to the issuer, is entitled to receive approximately a 
proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Shares will not be individually redeemable, 
applicants request an order that would permit the Trust to register as 
an open-end management investment company and issue Shares that are 
redeemable in Creation Units only. Applicants state that investors may 
purchase Shares in Creation Units from each Fund and that Creation 
Units will always be redeemable in accordance with the provisions of 
the Act. Applicants further state that because the market price of 
Shares 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 state 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) to prevent dilution caused by 
certain riskless-trading schemes by principal underwriters and contract 
dealers, (b) to prevent unjust discrimination or preferential treatment 
among buyers and (c) to ensure an orderly distribution system of shares 
by contract dealers by eliminating price competition from non-contract 
dealers who could offer investors shares at less than the published 
sales price and who could pay investors a little more than the 
published redemption price.
    6. Applicants assert that the protections intended to be afforded 
by Section 22(d) and rule 22c-1 are adequately addressed by the 
proposed methods for creating, redeeming and pricing Creation Units and 
pricing and trading Shares. 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 but do 
not occur as a result of unjust or discriminatory manipulation. 
Finally, applicants assert that competitive forces in the marketplace 
should ensure that the margin between NAV and the price for

[[Page 55030]]

the Shares in the secondary market remains narrow.

Section 22(e) of the Act

    7. Section 22(e) of the Act generally prohibits a registered 
investment company from suspending the right of redemption or 
postponing the date of payment of redemption proceeds for more than 
seven days after the tender of a security for redemption. Applicants 
observe that the settlement of redemptions of Creation Units of the 
Foreign and 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 for underlying foreign Portfolio Positions 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 fifteen (15) calendar days. 
Applicants therefore request relief from section 22(e) in order to 
provide payment or satisfaction of redemptions within a longer number 
of calendar days as required for such payment or satisfaction in the 
principal local markets where transactions in the Portfolio Positions 
of each Foreign and Global Fund customarily clear and settle, but in 
all cases no later than fifteen (15) days following the tender of a 
Creation Unit.\18\
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    \18\ Applicants acknowledge that no relief obtained from the 
requirements of Section 22(e) of the Act will affect any obligations 
that it may otherwise have under Rule 15c6-1 under the Exchange Act. 
Rule 15c6-1 requires that most securities transactions be settled 
within three business days of the trade date.
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    8. Applicants state that section 22(e) was designed to prevent 
unreasonable, undisclosed or unforeseen delays in the actual payment of 
redemption proceeds. Applicants assert that the protections intended to 
be afforded by Section 22(e) are adequately addressed by the proposed 
method and securities delivery cycles for redeeming Creation Units. 
Applicants state that allowing redemption payments for Creation Units 
of a Fund to be made within a maximum of fifteen (15) calendar days 
\19\ would not be inconsistent with the spirit and intent of section 
22(e). Applicants represent that each Fund's Prospectus and/or SAI will 
identify those instances in a given year where, due to local holidays, 
more than seven calendar days, up to a maximum of fifteen (15) calendar 
days, will be needed to deliver redemption proceeds and will list such 
holidays. Applicants are not seeking relief from section 22(e) with 
respect to Foreign and Global Funds that do not effect redemptions in-
kind.
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    \19\ Certain countries in which a Fund may invest have 
historically had settlement periods of up to 15 calendar days.
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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 Acquiring 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 Acquiring 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 
concerns regarding the potential for undue influence. To limit the 
control that an Acquiring Fund may have over a Fund, applicants propose 
a condition prohibiting the adviser of an Acquiring Management Company 
(``Acquiring Fund Advisor''), sponsor of an Acquiring Trust 
(``Sponsor''), any person controlling, controlled by, or under common 
control with the Acquiring 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 
Acquiring Fund Advisor, the Sponsor, or any person controlling, 
controlled by, or under common control with the Acquiring Fund Advisor 
or Sponsor (``Acquiring Fund's Advisory Group'') from controlling 
(individually or in the aggregate) a Fund within the meaning of section 
2(a)(9) of the Act. The same prohibition would apply to any sub-adviser 
to an Acquiring Fund (``Acquiring Fund Sub-Advisor''), any person 
controlling, controlled by or under common control with the Acquiring 
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 Acquiring Fund Sub-Advisor or any person controlling, controlled by 
or under common control with the Acquiring Fund Sub-Advisor 
(``Acquiring Fund's Sub-Advisory Group'').
    12. Applicants propose a condition to ensure that no Acquiring Fund 
or Acquiring Fund Affiliate \20\ (except to the extent it is acting in 
its capacity as an investment adviser to a Fund) will cause a Fund to 
purchase a security in an offering of securities during the existence 
of an underwriting or selling syndicate of which a principal 
underwriter is an Underwriting Affiliate (``Affiliated Underwriting''). 
An ``Underwriting Affiliate'' is a principal underwriter in any 
underwriting or selling syndicate that is an officer, director, member 
of an advisory board, Acquiring Fund Advisor, Acquiring Fund Sub-
Advisor, employee or Sponsor of the Acquiring Fund, or a person of 
which any such officer, director, member of an advisory board, 
Acquiring Fund Advisor, Acquiring 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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    \20\ An ``Acquiring Fund Affiliate'' is any Acquiring Fund 
Advisor, Acquiring Fund Sub-Advisor, Sponsor, promoter and principal 
underwriter of an Acquiring 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 any Acquiring 
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 (for any Board, the ``Independent 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 Acquiring Management

[[Page 55031]]

Company may invest. Applicants also state that any sales charges and/or 
service fees charged with respect to shares of an Acquiring Fund will 
not exceed the limits applicable to a fund of funds as set forth in 
NASD Conduct Rule 2830.\21\
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    \21\ 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 Acquiring Fund is aware of the terms and 
conditions of the requested order, the Acquiring Funds must enter into 
an agreement with the respective Funds (``Acquiring Fund Agreement''). 
The Acquiring Fund Agreement will include an acknowledgement from the 
Acquiring Fund that it may rely on the order only to invest in a Fund 
and not in any other investment company.

Section 17(a) 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 person (``Second Tier Affiliates''), 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 the fund and provides that a 
control relationship will be presumed where one person owns more than 
25% of another person'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 the Adviser or an entity controlling, controlled by 
or under common control with the Adviser (an ``Affiliated Fund'').
    17. Applicants request an exemption under sections 6(c) and 17(b) 
of the Act from sections 17(a)(1) and 17(a)(2) of the Act to permit in-
kind purchases and redemptions of Creation Units from the Funds 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 more than 25%, of the Shares of a Trust 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. Applicants also request 
an exemption in order to permit each Fund to sell Shares to and redeem 
Shares from, and engage in the in-kind transactions that would 
accompany such sales and redemptions with, any Acquiring Fund of which 
the Fund is an affiliated person or Second-Tier Affiliate.\22\
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    \22\ Applicants anticipate that most Acquiring Funds will 
purchase Shares in the secondary market and will not purchase or 
redeem 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 Acquiring Fund 
and a Fund, relief from section 17(a) would not be necessary. 
However, the requested relief would apply to direct sales of Shares 
in Creation Units by a Fund to an Acquiring Fund and redemptions of 
those Shares in Creation Units. The requested relief is intended to 
cover transactions that would accompany such sales and redemptions. 
Applicants are not seeking relief from section 17(a) for, and the 
requested relief will not apply to, transactions where a Fund could 
be deemed an affiliated person, or an affiliated person of an 
affiliated person of an Acquiring Fund because an investment adviser 
to the Funds is also an investment adviser to that Acquiring Fund.
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    18. Applicants assert that no useful purpose would be served by 
prohibiting such affiliated persons or Second Tier Affiliates from 
making in-kind purchases or in-kind redemptions of Shares of a Fund in 
Creation Units. Both the deposit procedures for in-kind purchases of 
Creation Units and the redemption procedures for in-kind redemptions 
will be 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 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 of the 
Fund.
    20. Applicants also submit that the sale of Shares to and 
redemption of Shares from an Acquiring Fund satisfies 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.\23\ The 
Acquiring Fund Agreement will require any Acquiring 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 investment policies set forth in its registration statement.
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    \23\ Applicants acknowledge that the receipt of compensation by 
(a) an affiliated person of an Acquiring Fund, or an affiliated 
person of such person, for the purchase by the Acquiring Fund of 
Shares of a Fund or (b) an affiliated person of a Fund, or an 
affiliated person of such person, for the sale by the Fund of its 
Shares to an Acquiring Fund, may be prohibited by section 17(e)(1) 
of the Act. The Acquiring Fund Agreement also will include this 
acknowledgment.
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    21. Applicants believe that: (a) With respect to the relief 
requested pursuant to section 17(b), the proposed transactions are fair 
and reasonable, and do not involve overreaching on the part of any 
person concerned, the proposed transactions are consistent with the 
policy of each Fund and, where applicable, Acquiring Fund, and the 
proposed transactions are consistent with the general purposes of the 
Act; and (b) with respect to the relief requested pursuant to section 
6(c), the requested exemption for the proposed transactions is 
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.

Applicants' Conditions

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

A. Actively-Managed Exchange-Traded Fund Relief

    1. Neither the Trust nor any Fund will be advertised or marketed as 
an open-end investment company or mutual fund. Any advertising material 
that describes the purchase or sale of Creation Units or refers to 
redeemability will prominently disclose that the Shares are not 
individually redeemable and that owners of the Shares may acquire those 
Shares from the Fund and tender those Shares for redemption to the Fund 
in Creation Units only.
    2. The Web site, which is and will be publicly accessible at no 
charge, will

[[Page 55032]]

contain, on a per Share basis for each Fund, the prior Business Day's 
NAV and the market closing price or the Bid/Ask Price, and a 
calculation of the premium or discount of the market closing price or 
Bid/Ask Price against such NAV.
    3. As long as a Fund operates in reliance on the requested order, 
its Shares will be listed on a Listing Market.
    4. On each Business Day, before commencement of trading in Shares 
on a Fund's Listing Market, the Fund will disclose on the Web site the 
identities and quantities of the Portfolio Positions held by the Fund 
that will form the basis for the Fund's calculation of NAV at the end 
of the Business Day.
    5. The Adviser or any Sub-Advisers, 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 a Fund through a transaction in which the Fund 
could not engage directly.
    6. The requested relief to permit ETF operations will expire on the 
effective date of any Commission rule under the Act that provides 
relief permitting the operation of actively-managed exchange-traded 
funds.

B. Section 12(d)(1) Relief

    7. The members of an Acquiring Fund's Advisory Group will not 
control (individually or in the aggregate) a Fund within the meaning of 
section 2(a)(9) of the Act. The members of an Acquiring Fund's Sub-
Advisory Group will not control (individually or in the aggregate) a 
Fund within the meaning of section 2(a)(9) of the Act. If, as a result 
of a decrease in the outstanding voting securities of a Fund, the 
Acquiring Fund's Advisory Group or the Acquiring Fund's Sub-Advisory 
Group, each in the aggregate, becomes a holder of more than 25 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 
that Fund's Shares. This condition does not apply to the Acquiring 
Fund's Sub-Advisory Group with respect to a Fund for which the 
Acquiring Fund Sub-Advisor or a person controlling, controlled by, or 
under common control with the Acquiring Fund Sub-Advisor acts as the 
investment adviser within the meaning of section 2(a)(20)(A) of the 
Act.
    8. No Acquiring Fund or Acquiring Fund Affiliate will cause any 
existing or potential investment by the Acquiring Fund in a Fund to 
influence the terms of any services or transactions between the 
Acquiring Fund or an Acquiring Fund Affiliate and the Fund or a Fund 
Affiliate.
    9. The Board of an Acquiring Management Company, including a 
majority of the Independent Trustees, will adopt procedures reasonably 
designed to ensure that the Acquiring Fund Advisor and any Acquiring 
Fund Sub-Advisor are conducting the investment program of the Acquiring 
Management Company without taking into account any consideration 
received by the Acquiring Management Company or an Acquiring Fund 
Affiliate from a Fund or a Fund Affiliate in connection with any 
services or transactions.
    10. Once an investment by an Acquiring Fund in the Shares of a Fund 
exceeds the limits in section l2(d)(1)(A)(i) of the Act, the Board of 
the Fund, including a majority of the Independent Trustees, will 
determine that any consideration paid by the Fund to an Acquiring Fund 
or an Acquiring 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).
    11. No Acquiring Fund or Acquiring Fund Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to a Fund) 
will cause the Fund to purchase a security in any Affiliated 
Underwriting.
    12. The Board of a Fund, including a majority of the Independent 
Trustees, will adopt procedures reasonably designed to monitor any 
purchases of securities by the Fund in an Affiliated Underwriting, once 
an investment by an Acquiring Fund in the securities of the Fund 
exceeds the limit of section 12(d)(1)(A)(i) of the Act, including any 
purchases made directly from an Underwriting Affiliate. The Board of 
the Fund will review these purchases periodically, but no less 
frequently than annually, to determine whether the purchases were 
influenced by the investment by the Acquiring Fund in the Fund. The 
Board of the Fund 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 of the Fund 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 Fund.
    13. Each Fund will maintain and preserve permanently in an easily 
accessible place a written copy of the procedures described in the 
preceding condition, and any modifications to such procedures, and will 
maintain and preserve for a period of not less than six years from the 
end of the fiscal year in which any purchase in an Affiliated 
Underwriting occurred, the first two years in an easily accessible 
place, a written record of each purchase of securities in Affiliated 
Underwritings, once an investment by an Acquiring Fund in the 
securities of the Fund exceeds the limit of section 12(d)(1)(A)(i) of 
the Act, setting forth from whom the securities were acquired, the 
identity of the underwriting syndicate's members, the terms of the 
purchase, and the information or materials upon which the 
determinations of the Board of the Fund were made.
    14. Before investing in Shares of a Fund in excess of the limits in 
section 12(d)(1)(A), each Acquiring Fund and the Fund will execute an 
Acquiring Fund Agreement stating, without limitation, that their Boards 
and their investment adviser(s), or their Sponsors or trustees 
(``Trustee''), as applicable, understand the terms and conditions of 
the requested order, and agree to fulfill their responsibilities under 
the requested order. At the time of its investment in Shares of a Fund 
in excess of the limit in section 12(d)(1)(A)(i), an Acquiring Fund 
will notify the Fund of the investment. At such time, the Acquiring 
Fund will also transmit to the Fund a list of the names of each 
Acquiring Fund Affiliate and Underwriting Affiliate. The Acquiring Fund 
will notify the Fund of any changes to the list of the names as soon as 
reasonably practicable after a change occurs. The Fund and the 
Acquiring Fund will maintain and preserve a copy

[[Page 55033]]

of the requested order, the Acquiring Fund Agreement, and the list with 
any updated information for the duration of the investment and for a 
period of not less than six years thereafter, the first two years in an 
easily accessible place.
    15. The Acquiring Fund Advisor, Trustee or Sponsor, as applicable, 
will waive fees otherwise payable to it by the Acquiring Fund in an 
amount at least equal to any compensation (including fees received 
pursuant to any plan adopted under rule 12b-l under the Act) received 
from the Fund by the Acquiring Fund Advisor, Trustee or Sponsor, or an 
affiliated person of the Acquiring Fund Advisor, Trustee or Sponsor, 
other than any advisory fees paid to the Acquiring Fund Advisor, 
Trustee or Sponsor, or its affiliated person by the Fund in connection 
with the investment by the Acquiring Fund in the Fund. Any Acquiring 
Fund Sub-Advisor will waive fees otherwise payable to the Acquiring 
Fund Sub-Advisor, directly or indirectly, by the Acquiring Management 
Company in an amount at least equal to any compensation received from a 
Fund by the Acquiring Fund Sub-Advisor, or an affiliated person of the 
Acquiring Fund Sub-Advisor, other than any advisory fees paid to the 
Acquiring Fund Sub-Advisor or its affiliated person by the Fund in 
connection with any investment by the Acquiring Management Company in 
the Fund made at the direction of the Acquiring Fund Sub-Advisor. In 
the event that the Acquiring Fund Sub-Advisor waives fees, the benefit 
of the waiver will be passed through to the Acquiring Management 
Company.
    16. Any sales charges and/or service fees charged with respect to 
shares of an Acquiring Fund will not exceed the limits applicable to a 
fund of funds as set forth in NASD Conduct Rule 2830.
    17. No Fund will acquire securities of any other 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 Fund acquires securities of another investment company 
pursuant to exemptive relief from the Commission permitting the Fund to 
acquire securities of one or more investment companies for short-term 
cash management purposes.
    18. Before approving any advisory contract under section 15 of the 
Act, the Board of each Acquiring Management Company, including a 
majority of the Independent Trustees, will find that the advisory fees 
charged under such advisory contract are based on services provided 
that will be in addition to, rather than duplicative of, the services 
provided under the advisory contract(s) of any Fund in which the 
Acquiring Management Company may invest. These findings and their basis 
will be recorded fully in the minute books of the appropriate Acquiring 
Management Company.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-21889 Filed 9-12-14; 8:45 am]
BILLING CODE 8011-01-P


