
[Federal Register Volume 80, Number 84 (Friday, May 1, 2015)]
[Notices]
[Pages 24989-24998]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-10176]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 31579; File No. 812-14443]


Highland Funds I, et al.; Notice of Application

April 27, 2015.
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 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; (e) certain registered management 
investment companies and unit investment trusts outside of the same 
group of investment companies as the series to acquire Shares; and (f) 
certain series to perform creations and redemptions of Creation Units 
in-kind in a master-feeder structure.

Applicants: Highland Funds I (the ``Trust''), Highland Capital 
Management Fund Advisors, L.P. (the ``Initial Adviser''), and SEI 
Investments Distribution Co. (the ``Distributor'').

Filing Dates: The application was filed on April 17, 2015, and amended 
on April 23, 2015 and April 27, 2015.

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 May 22, 2015, and should be accompanied by proof of 
service on applicants, in the form of an affidavit, or for lawyers, a 
certificate of service. Pursuant to Rule 0-5 under the Act, hearing 
requests should state the nature of the writer's interest, any facts 
bearing upon the desirability of a hearing on the matter, 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:  The Commission: Secretary, U.S. Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-1090; Applicants: 
The Trust and the Initial Adviser, 200 Crescent Court, Suite 700, 
Dallas, TX 75201; the Distributor, One Freedom Valley Drive, Oaks, PA 
19456.

FOR FURTHER INFORMATION CONTACT:  Mark N. Zaruba, Senior Counsel at 
(202) 551-6878, 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 organized as a Delaware statutory trust and is 
registered under the Act as an open-end management investment company 
with multiple series.
    2. The Initial Adviser is registered as 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. Each Trust will enter into a distribution agreement with the 
Distributor. The distributor for the Initial Funds (defined below) will 
be SEI Investments Distribution Co. The Distributor is 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 that will rely on the requested 
order (``Initial Funds''), 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 that includes both long and short positions or uses a 
130/30 investment strategy and is comprised of domestic or foreign 
equity and/or fixed income securities (each, an ``Underlying 
Index'').\1\ Any Future Fund will (a) be advised by the Initial 
Advisers or an entity controlling, controlled by, or under common 
control with the Initial Advisers (each, an ``Adviser'') and (b) comply 
with the terms and conditions of the application. The Initial Funds and 
Future Funds, together, are the ``Funds.'' \2\
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    \1\ Certain of the applicants received a prior order with 
respect to the offering of index-based exchange-traded funds. In the 
Matter of Highland Capital Management, L.P., et al., Investment 
Company Act Release Nos. 29890 (Dec. 19, 2011) (notice) and 29918 
(Jan. 17, 2012) (order) (the ``Prior Order''). The Prior Order does 
not apply to Long/Short Funds and 130/30 Funds (each as defined 
herein), and the order requested herein by applicants will only 
cover Long/Short Funds and 130/30 Funds.
    \2\ 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. Applicants state that a Fund may operate as a feeder fund in a 
master-feeder structure (``Feeder Fund''). Applicants request that the 
order permit a Feeder Fund to acquire shares of another registered 
investment company in the same group of investment companies having 
substantially the

[[Page 24990]]

same investment objectives as the Feeder Fund (``Master Fund'') beyond 
the limitations in section 12(d)(1)(A) of the Act and permit the Master 
Fund, and any principal underwriter for the Master Fund, to sell shares 
of the Master Fund to the Feeder Fund beyond the limitations in section 
12(d)(1)(B) of the Act (``Master-Feeder Relief''). Applicants may 
structure certain Feeder Funds to generate economies of scale and incur 
lower overhead costs.\3\ There would be no ability by Fund shareholders 
to exchange Shares of Feeder Funds for shares of another feeder series 
of the Master Fund.
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    \3\ Operating in a master-feeder structure could also impose 
costs on a Feeder Fund and reduce its tax efficiency. The Feeder 
Fund's Board will consider any such potential disadvantages against 
the benefits of economies of scale and other benefits of operating 
within a master-feeder structure. In a master-feeder structure, the 
Master Fund--rather than the Feeder Fund--would generally invest its 
portfolio in compliance with the requested order.
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    6. Each Fund, or its respective Master 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 of the Funds will be based 
on Underlying Indexes that will be comprised solely 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 that will be comprised solely 
of foreign and domestic, or solely foreign, equity and/or fixed income 
securities (``Foreign Funds'').
    7. Applicants represent that each Fund, or its respective Master 
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,\4\ 
and in the case of Foreign Funds, Component Securities and Depositary 
Receipts \5\ representing Component Securities. Each Fund, or its 
respective Master 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 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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    \4\ 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.
    \5\ Depositary receipts representing foreign securities 
(``Depositary Receipts'') include American Depositary Receipts and 
Global Depositary Receipts. The Funds, or their respective Master 
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, or its respective Master 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, or its respective Master Fund.
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    8. Funds will 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 \6\ 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, the Adviser for each Fund will provide full 
portfolio transparency on the Fund's publicly available Web site (``Web 
site'') by making available the Fund's, or its respective Master 
Fund's, Portfolio Holdings before the commencement of trading of Shares 
on the Listing Exchange (defined below).\7\ The information provided on 
the Web site will be formatted to be reader-friendly.
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    \6\ Underlying Indexes that include both long and short 
positions in securities are referred to as ``Long/Short Indexes.''
    \7\ 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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    9. A Fund, or its respective Master Fund, will utilize either a 
replication or representative sampling strategy to track its Underlying 
Index. A Fund, or its respective Master 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, or its respective Master 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, or 
its respective Master Fund, 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%.
    10. 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 applicable Adviser, 
which will have a licensing agreement with such Index Provider.\8\ 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'') 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'').\9\ 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

[[Page 24991]]

Sub-Adviser to or promoter of a Fund, or of the Distributor.
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    \8\ 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.
    \9\ 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 
subadviser (``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 subadviser (``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 Union transactions with a Fund.
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    11. 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'').\10\
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    \10\ 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); Van Eck 
Associates Corporation, et al., et al., Investment Company Act 
Release Nos. 29455 (Oct. 1, 2010) (notice) and 29490 (Oct. 26, 2010) 
(order); and In the Matter of Guggenheim Funds Investment Advisors, 
LLC, et al., Investment Company Act Release Nos. 30560 (June 14, 
2013) (notice) and 30598 (July 10, 2013) (order).
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    12. 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 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, and their 
respective Master Funds, to maintain full portfolio transparency will 
provide an effective alternative mechanism for addressing any such 
potential conflicts of interest.
    13. 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.\11\ 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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    \11\ See, e.g., In the Matter of Huntington Asset Advisors, 
Inc., et al., Investment Company Act Release Nos. 30032 (April 10, 
2012) (notice) and 30061 (May 8, 2012) (order); In the Matter of 
Russell Investment Management Co., et al., Investment Company Act 
Release Nos. 29655 (April 20, 2011) (notice) and 29671 (May 16, 
2011) (order); In the Matter of Eaton Vance Management, et al., 
Investment Company Act Release Nos. 29591 (March 11, 2011) (notice) 
and 29620 (March 30, 2011) (order); and In the Matter of iShares 
Trust, et al., Investment Company Act Release Nos. 29543 (Dec. 27, 
2010) (notice) and 29571 (Jan. 24, 2011) (order).
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    14. 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, 
their respective Master 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.\12\
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    \12\ 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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    15. The Adviser and any Sub-Adviser has adopted or will adopt, 
pursuant to Rule 206(4)-7 under the Advisers Act, 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, 
their respective Master 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 \13\ and 
Inside Information Policy of the Adviser and Sub-Advisers, personnel of 
those entities with knowledge about the composition of the Portfolio 
Deposit \14\ 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 or 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

[[Page 24992]]

of whether the Affiliated Index Provider is a type of affiliate 
specified in Item 10.
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    \13\ 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'').
    \14\ 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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    16. To the extent the Self-Indexing Funds or their respective 
Master 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.
    17. In light of the foregoing, Applicants believe it is appropriate 
to allow the Self-Indexing Funds and their respective Master Funds to 
be fully transparent in lieu of Policies and Procedures from the Prior 
Self-Indexing Orders discussed above.
    18. 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'').\15\ 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) \16\ 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; \17\ (c) 
TBA Transactions, short positions, derivatives and other positions that 
cannot be transferred in kind \18\ will be excluded from the Deposit 
Instruments and the Redemption Instruments; \19\ (d) to the extent the 
Fund determines, on a given Business Day, to use a representative 
sampling of the Fund's portfolio; \20\ 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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    \15\ 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.
    \16\ The portfolio used for this purpose will be the same 
portfolio used to calculate the Fund's NAV for the Business Day.
    \17\ A tradeable round lot for a security will be the standard 
unit of trading in that particular type of security in its primary 
market.
    \18\ 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.
    \19\ 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).
    \20\ 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 (as 
defined below) on a given Business Day.
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    19. 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; \21\ (d) if, on a given 
Business Day, the Fund requires all Authorized Participants purchasing 
or redeeming Shares on that day to deposit or receive (as applicable) 
cash in lieu of some or all of the Deposit Instruments or Redemption 
Instruments, respectively, solely because: (i) Such instruments are not 
eligible for transfer through either the NSCC 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.\22\
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    \21\ 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.
    \22\ 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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    20. 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 $1 million to $10 
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

[[Page 24993]]

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.
    21. 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.
    22. 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. With respect to Feeder Funds, the Transaction Fee would 
be paid indirectly to the Master Fund.\23\ 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.\24\ 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.
---------------------------------------------------------------------------

    \23\ Applicants are not requesting relief from section 18 of the 
Act. Accordingly, a Master Fund may require a Transaction Fee 
payment to cover expenses related to purchases or redemptions of the 
Master Fund's shares by a Feeder Fund only if it requires the same 
payment for equivalent purchases or redemptions by any other feeder 
fund. Thus, for example, a Master Fund may require payment of a 
Transaction Fee by a Feeder Fund for transactions for 20,000 or more 
shares so long as it requires payment of the same Transaction Fee by 
all feeder funds for transactions involving 20,000 or more shares.
    \24\ 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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    23. 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.
    24. 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.\25\ 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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    \25\ 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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    25. 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.
    26. 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 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.

[[Page 24994]]

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.\26\ 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.
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    \26\ The Master Funds will not require relief from sections 
2(a)(32) and 5(a)(1) because the Master Funds will issue 
individually redeemable securities.
---------------------------------------------------------------------------

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 the 
underlying foreign 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.\27\ 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.\28\
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    \27\ Certain countries in which a Fund may invest have 
historically had settlement periods of up to fifteen (15) calendar 
days.
    \28\ 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.\29\
---------------------------------------------------------------------------

    \29\ In addition, the requested exemption from section 22(e) 
would only apply to in-kind redemptions by the Feeder Funds and 
would not apply to in-kind redemptions by other feeder funds.
---------------------------------------------------------------------------

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 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 Advisers and are not part of the same 
``group of investment companies,'' as defined in section 
12(d)(1)(G)(ii) of the Act as the Funds (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''), to acquire Shares beyond the limits of section 12(d)(1)(A) 
of the Act; and the Funds, and any principal underwriter

[[Page 24995]]

for the Funds, and/or any Broker registered under the Exchange Act, to 
sell Shares to Funds of Funds beyond the limits of section 12(d)(1)(B) 
of the Act.
    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 a Fund.\30\ 
To limit the control that a Fund of Funds may have over a 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) a 
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'').
---------------------------------------------------------------------------

    \30\ 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. A 
``Fund Affiliate'' is an investment adviser, promoter, or principal 
underwriter of a Fund and any person controlling, controlled by or 
under common control with any of these entities.
---------------------------------------------------------------------------

    15. Applicants propose other conditions to limit the potential for 
undue influence over the 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 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, 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 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 Fund, or its respective Master 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, or its respective 
Master Fund, under rule 12b-1 under the Act) received from a 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 a Fund, in connection with the investment by 
the Fund of Funds in the 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.\31\
---------------------------------------------------------------------------

    \31\ 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 overly complex fund structure. Applicants note that no Fund, nor its 
respective Master 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 Fund, or its respective Master Fund, to purchase shares 
of other investment companies for short-term cash management purposes 
or pursuant to the Master-Feeder Relief. 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 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 Funds and not in any other investment company.
    18. Applicants also note that a Fund may choose to reject a direct 
purchase of Shares in Creation Units by a Fund of Funds. To the extent 
that a Fund of Funds purchases Shares in the secondary market, a 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.
    19. Applicants also are seeking the Master-Feeder Relief to permit 
the Feeder Funds to perform creations and redemptions of Shares in-kind 
in a master-feeder structure. Applicants assert that this structure is 
substantially identical to traditional master-feeder structures 
permitted pursuant to the exception provided in section 12(d)(1)(E) of 
the Act. Section 12(d)(1)(E) provides that the percentage limitations 
of section 12(d)(1)(A) and (B) shall not apply to a security issued by 
an investment company (in this case, the shares of the applicable 
Master Fund) if, among other things, that security is the only 
investment security held by the investing investment company (in this 
case, the Feeder

[[Page 24996]]

Fund). Applicants believe the proposed master-feeder structure complies 
with section 12(d)(1)(E) because each Feeder Fund will hold only 
investment securities issued by its corresponding Master Fund; however, 
the Feeder Funds may receive securities other than securities of its 
corresponding Master Fund if a Feeder Fund accepts an in-kind creation. 
To the extent that a Feeder Fund may be deemed to be holding both 
shares of the Master Fund and other securities, applicants request 
relief from section 12(d)(1)(A) and (B). The Feeder Funds would operate 
in compliance with all other provisions of section 12(d)(1)(E).

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

    20. 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 the 
Adviser or an entity controlling, controlled by or under common control 
with the 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.
    21. 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.''
    22. 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.
    23. Applicants also seek relief under sections 6(c) and 17(b) from 
section 17(a) to permit a Fund that is an affiliated person, or an 
affiliated person of an affiliated person, of a Fund of Funds to sell 
its Shares to and redeem its Shares from a Fund of Funds, and to engage 
in the accompanying in-kind transactions with the Fund of Funds.\32\ 
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 
Shares directly from a Fund will be based on the NAV of the Fund.\33\ 
Applicants believe that any proposed transactions directly between the 
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 a 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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    \32\ Although applicants believe that most Funds of Funds will 
purchase Shares in the secondary market and will not purchase 
Creation Units directly from a Fund, a Fund of Funds might seek to 
transact in Creation Units directly with a Fund that is an 
affiliated person of a Fund of Funds. To the extent that purchases 
and sales of Shares occur in the secondary market and not through 
principal transactions directly between a Fund of Funds 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 a Fund of Funds and redemptions of those Shares. 
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 a Fund of Funds because the Adviser or an 
entity controlling, controlled by or under common control with the 
Adviser provides investment advisory services to that Fund of Funds.
    \33\ 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 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 a Fund of 
Funds, may be prohibited by section 17(e)(1) of the Act. The FOF 
Participation Agreement also will include this acknowledgment.
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    24. To the extent that a Fund operates in a master-feeder 
structure, applicants also request relief permitting the Feeder Funds 
to engage in in-kind creations and redemptions with the applicable 
Master Fund. Applicants state that the customary section 17(a)(1) and 
17(a)(2)

[[Page 24997]]

relief would not be sufficient to permit such transactions because the 
Feeder Funds and the applicable Master Fund could also be affiliated by 
virtue of having the same investment adviser. However, applicants 
believe that in-kind creations and redemptions between a Feeder Fund 
and a Master Fund advised by the same investment adviser do not involve 
``overreaching'' by an affiliated person. Such transactions will occur 
only at the Feeder Fund's proportionate share of the Master Fund's net 
assets, and the distributed securities will be valued in the same 
manner as they are valued for the purposes of calculating the 
applicable Master Fund's NAV. Further, all such transactions will be 
effected with respect to pre-determined securities and on the same 
terms with respect to all investors. Finally, such transaction would 
only occur as a result of, and to effectuate, a creation or redemption 
transaction between the Feeder Fund and a third-party investor. 
Applicants believe that the terms of the proposed transactions are 
reasonable and fair and do not involve overreaching on the part of any 
person concerned, the proposed transactions are consistent with the 
policy of each Fund and will be consistent with the investment 
objectives and policies of each Fund of Funds, and the proposed 
transactions are consistent with the general purposes 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. ETF Relief

    1. The requested relief, other than the section 12(d)(1) Relief and 
the section 17 relief related to a master-feeder structure, 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 Fund will post on the Web site on each Business Day, before 
commencement of trading of Shares on the Exchange, the Fund's, or its 
respective Master Fund's, Portfolio Holdings.
    6. Neither the Adviser nor any Sub-Adviser to a Self-Indexing Fund, 
directly or indirectly, will cause any Authorized Participant (or any 
investor on whose behalf an Authorized Participant may transact with 
the Self-Indexing Fund) to acquire any Deposit Instrument for a Self-
Indexing Fund, or its respective Master Fund, through a transaction in 
which the Self-Indexing Fund, or its respective Master 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) a Fund, or its respective Master 
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) a Fund, or its respective Master 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 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 a Fund, it will vote its Shares of the Fund in the 
same proportion as the vote of all other holders of the Fund's Shares. 
This condition does not apply to the Fund of Funds' Sub-Advisory Group 
with respect to a Fund, or its respective Master 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 a Fund to 
influence the terms of any services or transactions between the Fund of 
Funds or Fund of Funds Affiliate and the Fund, or its respective Master 
Fund, or a Fund Affiliate.
    3. The board of directors or trustees of an Investing Management 
Company, including a majority of the disinterested directors or 
trustees, will adopt procedures reasonably designed to 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 a Fund, or its respective 
Master Fund, or Fund Affiliate in connection with any services or 
transactions.
    4. Once an investment by a Fund of Funds in the securities of a 
Fund exceeds the limits in section 12(d)(1)(A)(i) of the Act, the Board 
of the Fund, or its respective Master Fund, including a majority of the 
directors or trustees who are not ``interested persons'' within the 
meaning of section 2(a)(19) of the Act (``non-interested Board 
members''), will determine that any consideration paid by the Fund, or 
its respective Master 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 Fund, or its respective Master 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, or its respective Master 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 a Fund, or its 
respective Master Fund, under rule 12b-l under the Act) received from a 
Fund, or its respective Master 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 Fund, or its respective Master Fund, in connection with the

[[Page 24998]]

investment by the Fund of Funds in the 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 a Fund, or 
its respective Master 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 Fund, or its respective Master Fund, in connection with 
the investment by the Investing Management Company in the 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 a Fund) 
will cause a Fund, or its respective Master Fund, to purchase a 
security in any Affiliated Underwriting.
    7. The Board of a Fund, or its respective Master Fund, including a 
majority of the non-interested Board members, will adopt procedures 
reasonably designed to monitor any purchases of securities by the Fund, 
or its respective Master Fund, in an Affiliated Underwriting, once an 
investment by a Fund of Funds in the securities of the Fund exceeds the 
limit of section 12(d)(1)(A)(i) of the Act, including any purchases 
made directly from an Underwriting Affiliate. The Board will review 
these purchases periodically, but no less frequently than annually, to 
determine whether the purchases were influenced by the investment by 
the Fund of Funds in the Fund. The Board will consider, among other 
things: (i) Whether the purchases were consistent with the investment 
objectives and policies of the Fund, or its respective Master 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, or its respective Master 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 Fund.
    8. Each Fund, or its respective Master 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 Fund exceeds the limit of 
section 12(d)(1)(A)(i) of the Act, setting forth from whom the 
securities were acquired, the identity of the underwriting syndicate's 
members, the terms of the purchase, and the information or materials 
upon which the Board's determinations were made.
    9. Before investing in a Fund in excess of the limit in section 
12(d)(1)(A), a Fund of Funds and the applicable 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 
Shares of a Fund in excess of the limit in section 12(d)(1)(A)(i), a 
Fund of Funds will notify the Fund of the investment. At such time, the 
Fund of Funds will also transmit to the Fund a list of the names of 
each Fund of Funds Affiliate and Underwriting Affiliate. The Fund of 
Funds 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 
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 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, or its respective Master 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 Fund, or its respective Master 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 (i) the Fund, or its 
respective Master Fund, acquires securities of another investment 
company pursuant to exemptive relief from the Commission permitting the 
Fund, or its respective Master Fund, to acquire securities of one or 
more investment companies for short-term cash management purposes or 
(ii) the Fund acquires securities of the Master Fund pursuant to the 
Master-Feeder Relief.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Brent J. Fields,
Secretary.
[FR Doc. 2015-10176 Filed 4-30-15; 8:45 am]
BILLING CODE 8011-01-P


