81 FR 8573 - Innovator Management LLC, et al.; Notice of Application

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 33 (February 19, 2016)

Page Range		8573-8581
FR Document		2016-03397
Federal Register, Volume 81 Issue 33 (Friday, February 19, 2016)
[Federal Register Volume 81, Number 33 (Friday, February 19, 2016)]
[Notices]
[Pages 8573-8581]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-03397]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 31996; File No. 812-14532]


Innovator Management LLC, et al.; Notice of Application

February 12, 2016.
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 be effected 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 open-end investment company to 
deposit securities into, and receive securities from, such investment 
company 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 beyond the limits of section 
12(d)(1)(A) and (B) of the Act.

Applicants:  Innovator Management LLC (the ``Innovator''), Academy 
Funds Trust (the ``Trust''), and Quasar Distributors, LLC (the 
``Distributor'').

Filing Dates:  The application was filed on August 12, 2015, and 
amended on December 3, 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 March 8, 2016, 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: 
Innovator and the Trust, 325 Chestnut Street, Suite 512, Philadelphia, 
PA 19106; Distributor, 615 East Michigan Street, Milwaukee, WI 53202.

FOR FURTHER INFORMATION CONTACT: Parisa Haghshenas, Senior Counsel at 
(202) 551-6723, or Holly L. Hunter-Ceci, Branch Chief, at (202) 551-
6825 (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. The Trust 
is registered under the Act as an open-end management investment 
company.
    2. Innovator is registered with the Commission as an investment 
adviser under the Investment Advisers Act of 1940 (the ``Advisers 
Act'') and will be the investment adviser to the Initial Funds (as 
described in Appendix A of the application). Any other Adviser (defined 
below) will also be registered as an investment adviser under the 
Advisers Act. Each 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 subject to 
registration under the Advisers Act.
    3. Quasar is, and each distributor for a Fund will be, a broker-
dealer registered under the Securities Exchange Act of 1934, as amended 
(``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 Funds and 
any future series of the Trust, and any other open-end management 
investment company or series thereof, that may be created in the future 
that operate as exchange-traded funds (``ETFs'') and that track a 
specified index comprised of domestic and/or foreign equity securities 
and/or domestic and/or foreign fixed income securities (``Fixed Income 
Funds'') (``Future Funds'' and together with the Initial Funds, 
``Funds''). Each Fund will (a) be advised by Innovator or an entity 
controlling, controlled by, or under common control with Innovator 
(each, an ``Adviser'') and

[[Page 8574]]

(b) comply with the terms and conditions of the application.\1\
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    \1\ Applicants represent that all existing entities that intend 
to rely on the requested order have been named as applicants, and 
that any other existing or future entity that subsequently relies on 
the order will comply with the terms and conditions of the order. 
Applicants acknowledge that a Fund of Funds (as defined below) may 
rely on the order only to invest in Funds and not in any other 
registered investment company.
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    5. Each Fund will hold certain securities, assets and other 
positions (``Portfolio Holdings'') selected to correspond generally to 
the performance of its Underlying Index. Certain of the Funds will be 
based on Underlying Indexes which will be comprised of equity and/or 
fixed income securities issued by one or more of the following 
categories of issuers: (i) domestic issuers and (ii) non-domestic 
issuers meeting the requirements for trading in U.S. markets. Other 
Funds will be based on Underlying Indexes that will be comprised of 
foreign and domestic or solely foreign equity and/or fixed income 
securities (``Foreign Funds'').
    6. Applicants represent that each Fund will invest at least 80% of 
its assets, exclusive of collateral held from securities lending, in 
the component securities of its respective Underlying Index 
(``Component Securities''), or in the case of Fixed Income Funds, in 
the Component Securities of its respective Underlying Index and TBA 
Transactions \2\ representing Component Securities. Funds that track 
Foreign Indexes are referred to as ``Foreign Funds,'' and may include 
Component Securities and depositary receipts representing foreign 
securities such as American Depositary Receipts (``ADRs'') and Global 
Depositary Receipts (``GDRs'')(``Depository Receipts'') representing 
such Component Securities (or, in the case of Foreign Funds tracking 
Underlying Indexes for which Depositary Receipts are themselves 
Component Securities, underlying stocks in respect of such Depositary 
Receipts).\3\ A Fund may also engage in short sales in accordance with 
its investment objective.
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    \2\ A ``to-be-announced transaction'' or ``TBA Transaction'' is 
a method of trading mortgage-backed securities. In a TBA 
Transaction, the buyer and seller agree upon general trade 
parameters such as agency, settlement date, par amount and price. 
The actual pools delivered generally are determined two days prior 
to settlement date.
    \3\ The Funds may invest in Depositary Receipts representing 
foreign securities in which they seek to invest. Depositary Receipts 
are typically issued by a financial institution (a ``depositary 
bank'') and evidence ownership interests in a security or a pool of 
securities that have been deposited with the depositary bank. 
Applicants represent that 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, and that no 
affiliated person of a Fund, the Adviser or any Sub-Adviser will 
serve as the depositary bank for any Depositary Receipts held by a 
Fund.
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    7. The Trust may issue Funds that seek to track Underlying Indexes 
constructed using 130/30 investment strategies (``130/30 Funds'') or 
other long/short investment strategies (``Long/Short Funds''). Each 
Long/Short Fund will establish (i) exposures equal to approximately 
100% of the long positions specified by the Long/Short Index \4\ and 
(ii) exposures equal to approximately 100% of the short positions 
specified by the Long/Short Index. Each 130/30 Fund will include 
strategies that: (i) Establish long positions in securities so that 
total long exposure represents approximately 130% of a Fund's net 
assets; and (ii) simultaneously establish short positions in other 
securities so that total short exposure represents approximately 30% of 
such Fund's net assets. At the end of each Business Day (defined 
below), the applicable Adviser for each Long/Short Fund and 130/30 Fund 
will provide full portfolio transparency on the Fund's Web site (``Web 
site'') by making available the identities and quantities of the 
Portfolio Holdings, including short positions and financial instruments 
that will form the basis for the Fund's calculation of NAV. In 
addition, with respect to each Self-Indexing Fund (defined below), the 
Web site will contain, each day that that NYSE, the relevant Exchange 
on which the Shares are listed (``Listing Exchange'') and the Trust are 
open for business and includes any day that a Fund is required to be 
open under section 22(e) of the Act (a ``Business Day''), before the 
commencement of trading of Shares on the Exchange (defined below),\5\ 
the identities and quantities of the portfolio securities and other 
assets held by each Self-Indexing Fund that will form the basis for the 
Self-Indexing Fund's calculation of NAV at the end of the Business Day. 
The information provided on the Web site will be formatted to be 
reader-friendly.
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    \4\ Underlying Indexes that include both long and short 
positions in securities are referred to as ``Long/Short Indexes.''
    \5\ Under accounting procedures followed by each Fund, trades 
made on the prior Business Day (``T'') will be booked and reflected 
in NAV on the current Business Day (T+1). Accordingly, the Funds 
will be able to disclose at the beginning of the Business Day the 
portfolio that will form the basis for the NAV calculation at the 
end of the Business Day.
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    8. A Fund will utilize either a replication or representative 
sampling strategy to track its Underlying Index. A Fund using a 
replication strategy will invest in the Component Securities in its 
Underlying Index in the same approximate proportions as in such 
Underlying Index. A Fund using a representative sampling strategy will 
hold some, but not necessarily all of the Component Securities in its 
Underlying Index. Applicants state that a 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 the returns of each Fund will have an annual 
tracking error of less than 5% relative to its Underlying Index.
    9. Each Fund will be entitled to use its Underlying Index pursuant 
to either a licensing agreement with the entity that compiles, creates, 
sponsors or maintains an Underlying Index (each, an ``Index Provider'') 
or a sub-licensing arrangement with the applicable Adviser, which has 
or will have a licensing agreement with such Index Provider.\6\ A 
``Self-Indexing Fund'' is a Fund for which an Affiliated Person, or a 
Second-Tier Affiliate, of the Trust or a Fund, of the Advisers, 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'').\7\ 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 an Adviser, of any 
Sub-Adviser to or promoter of a Fund, or of the Distributor.
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    \6\ The licenses for the Self-Indexing Funds will specifically 
state that the Affiliated Index Provider (or in case of a sub-
licensing agreement, the Adviser) must provide the use of the 
Affiliated Indexes and related intellectual property at no cost to 
the Trust and the Self-Indexing Funds.
    \7\ 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 (collectively referred to herein as 
``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 index. Consistent with the relief requested from 
section 17(a), the Affiliated Accounts will not engage in Creation 
Unit transactions with a Fund.

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[[Page 8575]]

    10. Applicants recognize that Self-Indexing Funds could raise 
concerns regarding the potential ability of an affiliated person 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 person who may have access to or 
knowledge of changes to an Underlying Index's composition methodology 
or the constituent securities in an Underlying Index prior to the time 
that information is publicly disseminated.
    11. Applicants propose that each Business Day, each Self-Indexing 
Fund will post on its Web site, before commencement of trading of 
Shares on the Exchange, the identities and quantities of the Portfolio 
Holdings held by the Fund that will form the basis for the Fund's 
calculation of NAV at the end of the Business Day. Applicants believe 
that the disclosure of Portfolio Holdings would be unlikely to lead to 
``front-running'' (where other persons would trade ahead of the Fund 
and the investors assembling the Deposit Instruments (as defined below) 
for purchases of Creation Units) any more than is the case with the 
ETFs now trading. Similarly, Applicants assert that the frequent 
disclosures of Portfolio Holdings would not lead to ``free riding'' 
(where other persons mirror the Fund's investment strategies without 
paying the Fund's advisory fees) any more than such disclosures cause 
this problem in connection with the ETFs now trading.
    12. Applicants do not believe the potential for conflicts of 
interest raised by an Adviser's use of the Underlying Indexes in 
connection with the management of the Self-Indexing Funds and the 
Affiliated Accounts will be substantially different from the potential 
conflicts presented by an adviser managing two or more registered 
funds. Applicants contend that 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.\8\
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    \8\ In this regard, applicants cite 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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    13. Each 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 
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, Innovator 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 Innovator or an associated person (``Inside Information 
Policy''). Any other Adviser and/or Sub-Adviser will be required to 
adopt and maintain a similar Inside Information Policy. In accordance 
with the Code of Ethics \9\ and Inside Information Policy of each 
Adviser and Sub-Adviser, personnel of those entities with knowledge 
about the composition of the Portfolio Deposit \10\ 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. If the requested order is 
granted and the Adviser is required to prepare a Part 2 of its Form 
ADV, the Adviser will include under Item 10.C of Part 2 of its Form ADV 
a discussion of its relationship to any Affiliated Index Provider and 
any material conflicts of interest resulting therefrom, regardless of 
whether the Affiliated Index Provider is a type of affiliate specified 
in Item 10.
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    \9\ Applicants represent that each 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'').
    \10\ 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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    14. To the extent the Self-Indexing Funds transact with an 
Affiliated Person of an 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, an 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 an 
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.
    15. 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'').\11\ 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) \12\ except: (a) In the 
case of bonds, for minor differences when it is impossible to break up 
bonds beyond certain minimum sizes needed for transfer and settlement; 
(b) for minor differences when rounding is necessary to eliminate 
fractional shares or lots that

[[Page 8576]]

are not tradeable round lots; \13\ (c) TBA Transactions, short 
positions, derivatives and other positions that cannot be transferred 
in kind \14\ will be excluded from the Deposit Instruments and the 
Redemption Instruments; \15\ (d) to the extent the Fund determines, on 
a given Business Day, to use a representative sampling of the Fund's 
portfolio; \16\ 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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    \11\ Applicants acknowledge that 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''). Applicants further 
acknowledge that 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.
    \12\ The portfolio used for this purpose will be the same 
portfolio used to calculate the Fund's NAV for that Business Day.
    \13\ A tradeable round lot for a security will be the standard 
unit of trading in that particular type of security in its primary 
market.
    \14\ This includes instruments that can be transferred in kind 
only with the consent of the original counterparty to the extent the 
Fund does not intend to seek such consents.
    \15\ 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).
    \16\ 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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    16. 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, as 
described above; (b) if, on a given Business Day, the Fund announces 
before the open of trading that all purchases, all redemptions or all 
purchases and redemptions on that day will be made entirely in cash; 
(c) if, upon receiving a purchase or redemption order from an 
Authorized Participant, the Fund determines to require the purchase or 
redemption, as applicable, to be made entirely in cash;\17\ (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.\18\
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    \17\ 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.
    \18\ 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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    17. Creation Units for Funds 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 for Future Funds 
will be a minimum of $1 million and will fall in the range of $1 
million to $10 million, and that the initial trading price per 
individual Share of each Fund will fall in the range of $10 to $100. 
All orders to purchase Shares of a Fund in 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 
National Securities Clearing Corporation (``NSCC''), a clearing agency 
registered with the Commission, or (2) a participant in The Depository 
Trust Company (``DTC'') (``DTC Participant''), which, in either case, 
has signed a ``Participant Agreement'' with the Distributor. The 
Distributor will be responsible for transmitting the orders to the 
Funds and will furnish to those placing such orders confirmation that 
the orders have been accepted, but applicants state that the 
Distributor may reject any order which is not submitted in proper form.
    18. 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 or other major market data provider will disseminate, every 15 
seconds during regular Exchange trading hours, through the facilities 
of the Consolidated Tape Association or other widely disseminated 
means, 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.
    19. Transaction expenses, including operational processing and 
brokerage costs, will be incurred by a Fund when investors purchase or 
redeem Creation Units in-kind and such costs have the potential to 
dilute the interests of the Fund's existing shareholders. Each Fund 
will impose purchase or redemption transaction fees (``Transaction 
Fees'') in connection with effecting such purchases or redemptions of 
Creation Units. In all cases, such Transaction Fees will be limited in 
accordance with requirements of the Commission applicable to management 
investment companies offering redeemable securities. Since the 
Transaction Fees are intended to defray the transaction expenses as 
well as to prevent possible shareholder dilution resulting from the 
purchase or redemption of Creation Units, the Transaction Fees will be 
borne only by such purchasers or redeemers.\19\ The Distributor will be 
responsible for delivering the Fund's prospectus to those persons 
purchasing Shares in Creation Units and for maintaining records of both 
the orders placed with it and the confirmations of acceptance furnished 
by it. In addition, the Distributor will maintain a record of the 
instructions given to the applicable Fund to implement the delivery of 
its Shares.
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    \19\ 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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[[Page 8577]]

    20. 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 market makers (each, a ``Market 
Maker'') and maintain a market for Shares trading on the Exchange. The 
price of Shares trading on an Exchange will be based on a current bid/
offer market. Transactions involving the sale of Shares on an Exchange 
will be subject to customary brokerage commissions and charges.
    21. Applicants expect that purchasers of Creation Units will 
include, among others, 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.\20\ 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 to ensure that 
Shares will not trade at a material discount or premium in relation to 
their NAV.
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    \20\ Shares will be registered in book-entry form only. DTC or 
its nominee will be the record or registered owner of all 
outstanding Shares. Beneficial ownership of Shares will be shown on 
the records of DTC or the DTC Participants.
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    22. Shares are not individually redeemable; 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 through the 
applicable Fund, an investor must accumulate enough Shares to 
constitute a Creation Unit. Redemption requests must be placed by or 
through an Authorized Participant. A redeeming investor will pay a 
Transaction Fee, imposed in the same amount and manner as a Transaction 
Fee payable in connection with purchases of Creation Units.
    23. Although the Trust will be classified and registered under the 
Act as an open-end management investment company, the Funds will not be 
advertised or marketed or otherwise ``held out'' as a traditional open-
end investment companies or a ``mutual funds.'' 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 
shareholders.

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. 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 each Fund to register as 
an open-end management investment company and issue individual Shares 
that are redeemable in Creation Units only. Applicants state that 
investors may purchase Shares in Creation Units and redeem Creation 
Units from each Fund. Applicants further state that because Creation 
Units may always be purchased and redeemed at NAV, the price of 
Creation Units on the secondary market and the price of the individual 
shares of a Creation Unit, taken together, should not vary materially 
from the NAV of a Creation Unit.

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 occurring on any Exchange 
will be effected at negotiated prices, not on the basis of NAV next 
calculated after receipt of any sale order. The Shares will trade on 
and away from the Listing Exchange at all times on the basis of current 
bid/offer prices. Thus, purchases and sales of Shares of each Fund 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 intended 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 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 believe that the first two purposes would not seem to 
be relevant issues for secondary trading by dealers in Shares of the 
Fund. Applicants state that (a) secondary market trading in Shares do 
not directly involve a Fund's assets and will not result in dilution 
for

[[Page 8578]]

owners of such 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 ensure that Shares will not trade 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 delivery cycles in local markets for the underlying 
foreign securities held by a Foreign Fund. Applicants have been advised 
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 
fourteen (14) calendar days. Accordingly applicants hereby request 
relief under section 6(c) from the requirement imposed by section 22(e) 
to allow Foreign Funds holding Redemption Instruments, which require a 
delivery process in excess of seven calendar days, may provide payment 
or satisfaction of redemptions within not more than the maximum number 
of calendar days required for such payment or satisfaction in the 
principal local foreign market(s) where transactions in the Portfolio 
Holdings of each such Foreign Fund customarily clear and settle, but in 
all cases no later than fourteen calendar days following the tender of 
a Creation Unit.\21\
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    \21\ 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 fourteen calendar days would not be inconsistent with the spirit 
and intent of section 22(e). Applicants suggest that a redemption 
payment occurring within fourteen calendar days following a redemption 
request would adequately afford investor protection.
    9. Applicants are not seeking relief from section 22(e) with 
respect to Foreign Funds that do not effect creations and redemptions 
of Creation Units in-kind.

Section 12(d)(1)

    10. Section 12(d)(1)(A) of the Act prohibits a registered 
investment company from acquiring securities of an investment company 
if such securities represent more than 3% of the total outstanding 
voting stock of the acquired company, more than 5% of the total assets 
of the acquiring company, or, together with the securities of any other 
investment companies, more than 10% of the total assets of the 
acquiring company. Section 12(d)(1)(B) of the Act prohibits a 
registered open-end investment company, its principal underwriter and 
any other broker-dealer from knowingly selling the investment company's 
shares to another investment company if the sale will cause the 
acquiring company to own more than 3% of the acquired company's voting 
stock, or if the sale will cause more than 10% of the acquired 
company's voting stock to be owned by investment companies generally.
    11. Applicants request an exemption to permit registered management 
investment companies and unit investment trusts (``UITs'') that are not 
advised or sponsored by the Adviser and 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) 
and (B) of the Act; and the Funds, and any principal underwriter for 
the Funds, and/or any broker-dealer 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 have 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 such as through the threat of large scale redemptions of the 
acquired fund's shares, layering of fees and expenses and unnecessary 
complexity. 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.\22\ 
To limit the control that a Fund of Funds may have over a Fund, 
applicants propose a condition limiting the ability of 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 limitation 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'').
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    \22\ 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.
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    15. Applicants propose other conditions to limit the potential for

[[Page 8579]]

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 duplication or 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 be required to find that the advisory fees charged 
under the contract are based on services provided that will be in 
addition to, rather than duplicative of, services provided under the 
advisory contract of any Fund in which the Investing Management Company 
may invest. In addition, under condition B.5., a Fund of Funds Adviser, 
or a Fund of Funds' trustee or Sponsor, as applicable, will waive fees 
otherwise payable to it by the Fund of Funds in an amount at least 
equal to any compensation (including fees received pursuant to any plan 
adopted by a Fund under rule 12b-1 under the Act) received from 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 
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.\23\
---------------------------------------------------------------------------

    \23\ 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 will 
acquire securities of any investment company or company relying on 
section 3(c)(1) or 3(c)(7) of the Act in excess of the limits contained 
in section 12(d)(1)(A) of the Act, except to the extent permitted by 
exemptive relief from the Commission permitting the Fund to purchase 
shares of other investment companies for short-term cash management 
purposes. 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 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 purchases of Shares made 
in reliance on the requested order by declining to enter into a FOF 
Participation Agreement prior to any investment by a Fund of Funds in 
excess of the limits of section 12(d)(1)(A).

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

    19. Sections 17(a)(1) and 17(a)(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 an 
Adviser and hence affiliated persons of each other. In addition, the 
Funds may be deemed to be under common control with any other 
registered investment company (or series thereof) advised by an Adviser 
or an entity controlling, controlled by or under common control with an 
Adviser (an ``Affiliated Fund''). To the extent that there are twenty 
or fewer holders of Creation Units of all of the Funds or of one or 
more particular Funds, some or all of such holders will be at least 5 
percent owners of such Funds, and one or more may hold in excess of 25 
percent of such Funds, as the case may be and would therefore be deemed 
to be affiliated persons of such Funds either under Section 2(a)(3)(A) 
or Section 2(a)(3)(C).
    20. Applicants request an exemption from sections 17(a)(1) and 
17(a)(2) of the Act pursuant to sections 6(c) and 17(b) of the Act to 
permit persons that are Affiliated Persons of the Funds, or Second-Tier 
Affiliates of the Funds, solely by virtue of one or more of the 
following: (a) holding 5% or more, or in excess of 25%, of the 
outstanding Shares of one or more Funds; (b) an affiliation with a 
person with an ownership interest described in (a); or (c) holding 5% 
or more, or more than 25%, of the shares of one or more Affiliated 
Funds, to effectuate purchases and redemptions ``in-kind.''
    21. Applicants assert that no useful purpose would be served by 
prohibiting such affiliated persons from making ``in-kind'' purchases 
or ``in-kind'' redemptions of Shares of a Fund in Creation Units. Both 
the deposit procedures for ``in-kind'' purchases of Creation Units and 
the redemption procedures for ``in-kind'' redemptions of Creation Units 
will be effected in exactly the same manner for all purchases and 
redemptions, regardless of size or number. There will be no 
discrimination between purchasers or redeemers. Deposit Instruments and 
Redemption Instruments for each Fund will be valued in the identical 
manner as those Portfolio Holdings currently held by such Fund and the 
valuation of the Deposit Instruments and Redemption Instruments will be 
made in an identical manner regardless of the identity of the purchaser 
or redeemer. Applicants do not believe that ``in-kind'' purchases and 
redemptions will result in abusive self-dealing or overreaching, but 
rather assert that such procedures

[[Page 8580]]

will be implemented consistently with each Fund's objectives and with 
the general purposes of the Act. Applicants believe that ``in-kind'' 
purchases and redemptions will be made on terms reasonable to 
applicants and any affiliated persons because they will be valued 
pursuant to verifiable objective standards. The method of valuing 
Portfolio Holdings held by a Fund is identical to that used for 
calculating ``in-kind'' purchase or redemption values and therefore 
creates no opportunity for affiliated persons or Second-Tier Affiliates 
of Applicants to effect a transaction detrimental to the other holders 
of Shares of that Fund. Similarly, applicants submit that, by using the 
same standards for valuing Portfolio Holdings held by a Fund as are 
used for calculating ``in-kind'' redemptions or purchases, the Fund 
will ensure that its NAV will not be adversely affected by such 
securities transactions. Applicants also note that the ability to take 
deposits and make redemptions ``in-kind'' will help each Fund to track 
closely its Underlying Index and therefore aid in achieving the Fund's 
objectives.
    22. Applicants also seek relief under sections 6(c) and 17(b) from 
section 17(a) to permit 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.\24\ 
Applicants state that the terms of the proposed arrangement are fair 
and reasonable and do not involve overreaching. Applicants note that 
any consideration paid by the purchase or redemption of Shares directly 
from a Fund will be based on the NAV of the Fund in accordance with 
policies and procedures set forth in the Fund's registration 
statement.\25\ 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 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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    \24\ 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 an Adviser or an entity 
controlling, controlled by or under common control with an Adviser 
provides investment advisory services to that Fund of Funds.
    \25\ 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.
---------------------------------------------------------------------------

Applicants' Conditions

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

A. ETF Relief

    1. The requested relief to permit ETF operations will expire on the 
effective date of any Commission rule under the Act that provides 
relief permitting the operation of index-based ETFs.
    2. As long as a Fund operates in reliance on the requested order, 
the Shares of such Fund will be listed on an Exchange.
    3. A Fund will not 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 the Fund, the prior 
Business Day's NAV and the market closing price or the midpoint of the 
bid/ask spread at the time of the calculation of such NAV (``Bid/Ask 
Price''), and a calculation of the premium or discount of the market 
closing price or Bid/Ask Price against such NAV.
    5. Each Self-Indexing, Long/Short and 130/30 Fund will post on the 
Web site on each Business Day, before commencement of trading of Shares 
on the Exchange, the Fund's Portfolio Holdings.
    6. No Adviser or any Sub-Adviser 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 through a transaction in which the Self-Indexing 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, 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 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 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 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 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 including a majority of the directors or trustees who are 
not ``interested persons'' within the meaning of section 2(a)(19) of 
the Act

[[Page 8581]]

(``non-interested Board members''), will determine that any 
consideration paid by the 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; (ii) is within the range of 
consideration that the Fund would be required to pay to another 
unaffiliated entity in connection with the same services or 
transactions; and (iii) does not involve overreaching on the part of 
any person concerned. This condition does not apply with respect to any 
services or transactions between a Fund, and its investment adviser(s), 
or any person controlling, controlled by or under common control with 
such investment adviser(s).
    5. The 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, under 
rule 12b-l under the Act) received from a 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, in connection with the 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 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 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 to purchase a security in any Affiliated 
Underwriting.
    7. The Board of a Fund, including a majority of the non-interested 
Board members, will adopt procedures reasonably designed to monitor any 
purchases of securities by a 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; (ii) how the performance of 
securities purchased in an Affiliated Underwriting compares to the 
performance of comparable securities purchased during a comparable 
period of time in underwritings other than Affiliated Underwritings or 
to a benchmark such as a comparable market index; and (iii) whether the 
amount of securities purchased by the Fund in Affiliated Underwritings 
and the amount purchased directly from an Underwriting Affiliate have 
changed significantly from prior years. The Board will take any 
appropriate actions based on its review, including, if appropriate, the 
institution of procedures designed to ensure that purchases of 
securities in Affiliated Underwritings are in the best interest of 
shareholders of the Fund.
    8. Each Fund will maintain and preserve permanently in an easily 
accessible place a written copy of the procedures described in the 
preceding condition, and any modifications to such procedures, and will 
maintain and preserve for a period of not less than six years from the 
end of the fiscal year in which any purchase in an Affiliated 
Underwriting occurred, the first two years in an easily accessible 
place, a written record of each purchase of securities in Affiliated 
Underwritings once an investment by 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 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 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 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 (i) 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.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-03397 Filed 2-18-16; 8:45 am]
 BILLING CODE 8011-01-P
Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Notices 8579

undue influence over the Funds, a fund of funds as set forth in NASD and provides that a control relationship
including that no Fund of Funds or Conduct Rule 2830.23 will be presumed where one person
Fund of Funds Affiliate (except to the 17. Applicants submit that the owns more than 25% of a company’s
extent it is acting in its capacity as an proposed arrangement will not create an voting securities. The Funds may be
investment adviser to a Fund) will cause overly complex fund structure. deemed to be controlled by the Adviser
a Fund to purchase a security in an Applicants note that no Fund will or an entity controlling, controlled by or
offering of securities during the acquire securities of any investment under common control with an Adviser
existence of an underwriting or selling company or company relying on section and hence affiliated persons of each
syndicate of which a principal 3(c)(1) or 3(c)(7) of the Act in excess of other. In addition, the Funds may be
the limits contained in section deemed to be under common control
underwriter is an Underwriting Affiliate
12(d)(1)(A) of the Act, except to the with any other registered investment
(‘‘Affiliated Underwriting’’). An
extent permitted by exemptive relief company (or series thereof) advised by
‘‘Underwriting Affiliate’’ is a principal an Adviser or an entity controlling,
from the Commission permitting the
underwriter in any underwriting or Fund to purchase shares of other controlled by or under common control
selling syndicate that is an officer, investment companies for short-term with an Adviser (an ‘‘Affiliated Fund’’).
director, member of an advisory board, cash management purposes. To ensure a To the extent that there are twenty or
Fund of Funds Adviser, Fund of Funds Fund of Funds is aware of the terms and fewer holders of Creation Units of all of
Sub-Adviser, employee or Sponsor of conditions of the requested order, the the Funds or of one or more particular
the Fund of Funds, or a person of which Fund of Funds will enter into an Funds, some or all of such holders will
any such officer, director, member of an agreement with the Fund (‘‘FOF be at least 5 percent owners of such
advisory board, Fund of Funds Adviser Participation Agreement’’). The FOF Funds, and one or more may hold in
or Fund of Funds Sub-Adviser, Participation Agreement will include an excess of 25 percent of such Funds, as
employee or Sponsor is an affiliated acknowledgement from the Fund of the case may be and would therefore be
person (except that any person whose Funds that it may rely on the order only deemed to be affiliated persons of such
relationship to the Fund is covered by to invest in the Funds and not in any Funds either under Section 2(a)(3)(A) or
section 10(f) of the Act is not an other investment company. Section 2(a)(3)(C).
Underwriting Affiliate). 18. Applicants also note that a Fund 20. Applicants request an exemption
may choose to reject a direct purchase from sections 17(a)(1) and 17(a)(2) of the
16. Applicants do not believe that the Act pursuant to sections 6(c) and 17(b)
of Creation Units by a Fund of Funds.
proposed arrangement will involve of the Act to permit persons that are
To the extent that a Fund of Funds
duplication or layering of fees. The purchases Shares in the secondary Affiliated Persons of the Funds, or
board of directors or trustees of any market, a Fund would still retain its Second-Tier Affiliates of the Funds,
Investing Management Company, ability to reject any initial purchases of solely by virtue of one or more of the
including a majority of the directors or Shares made in reliance on the following: (a) holding 5% or more, or in
trustees who are not ‘‘interested requested order by declining to enter excess of 25%, of the outstanding
persons’’ within the meaning of section into a FOF Participation Agreement Shares of one or more Funds; (b) an
2(a)(19) of the Act (‘‘disinterested prior to any investment by a Fund of affiliation with a person with an
directors or trustees’’), will be required Funds in excess of the limits of section ownership interest described in (a); or
to find that the advisory fees charged 12(d)(1)(A). (c) holding 5% or more, or more than
under the contract are based on services 25%, of the shares of one or more
Sections 17(a)(1) and 17(a)(2) of the Act Affiliated Funds, to effectuate purchases
provided that will be in addition to,
rather than duplicative of, services 19. Sections 17(a)(1) and 17(a)(2) of and redemptions ‘‘in-kind.’’
the Act generally prohibit an affiliated 21. Applicants assert that no useful
provided under the advisory contract of
person of a registered investment purpose would be served by prohibiting
any Fund in which the Investing
company, or an affiliated person of such such affiliated persons from making ‘‘in-
Management Company may invest. In kind’’ purchases or ‘‘in-kind’’
addition, under condition B.5., a Fund a person, from selling any security to or
purchasing any security from the redemptions of Shares of a Fund in
of Funds Adviser, or a Fund of Funds’ Creation Units. Both the deposit
company. Section 2(a)(3) of the Act
trustee or Sponsor, as applicable, will procedures for ‘‘in-kind’’ purchases of
defines ‘‘affiliated person’’ of another
waive fees otherwise payable to it by the Creation Units and the redemption
person to include (a) any person directly
Fund of Funds in an amount at least procedures for ‘‘in-kind’’ redemptions of
or indirectly owning, controlling or
equal to any compensation (including holding with power to vote 5% or more Creation Units will be effected in
fees received pursuant to any plan of the outstanding voting securities of exactly the same manner for all
adopted by a Fund under rule 12b–1 the other person, (b) any person 5% or purchases and redemptions, regardless
under the Act) received from a Fund by more of whose outstanding voting of size or number. There will be no
the Fund of Funds Adviser, trustee or securities are directly or indirectly discrimination between purchasers or
Sponsor or an affiliated person of the owned, controlled or held with the redeemers. Deposit Instruments and
Fund of Funds Adviser, trustee or power to vote by the other person, and Redemption Instruments for each Fund
Sponsor, other than any advisory fees (c) any person directly or indirectly will be valued in the identical manner
paid to the Fund of Funds Adviser, controlling, controlled by or under as those Portfolio Holdings currently
held by such Fund and the valuation of
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trustee or Sponsor or its affiliated common control with the other person.
person by a Fund, in connection with Section 2(a)(9) of the Act defines the Deposit Instruments and
the investment by the Fund of Funds in ‘‘control’’ as the power to exercise a Redemption Instruments will be made
controlling influence over the in an identical manner regardless of the
the Fund. Applicants state that any sales
management or policies of a company, identity of the purchaser or redeemer.
charges or service fees charged with
Applicants do not believe that ‘‘in-kind’’
respect to shares of a Fund of Funds purchases and redemptions will result
23 Any references to NASD Conduct Rule 2830
will not exceed the limits applicable to in abusive self-dealing or overreaching,
include any successor or replacement FINRA rule
to NASD Conduct Rule 2830. but rather assert that such procedures

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Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Notices 8581

(‘‘non-interested Board members’’), will purchases of securities by a Fund in an conditions of the order, and agree to
determine that any consideration paid Affiliated Underwriting, once an fulfill their responsibilities under the
by the Fund to the Fund of Funds or a investment by a Fund of Funds in the order. At the time of its investment in
Fund of Funds Affiliate in connection securities of the Fund exceeds the limit Shares of a Fund in excess of the limit
with any services or transactions: (i) Is of section 12(d)(1)(A)(i) of the Act, in section 12(d)(1)(A)(i), a Fund of
fair and reasonable in relation to the including any purchases made directly Funds will notify the Fund of the
nature and quality of the services and from an Underwriting Affiliate. The investment. At such time, the Fund of
benefits received by the Fund; (ii) is Board will review these purchases Funds will also transmit to the Fund a
within the range of consideration that periodically, but no less frequently than list of the names of each Fund of Funds
the Fund would be required to pay to annually, to determine whether the Affiliate and Underwriting Affiliate. The
another unaffiliated entity in connection purchases were influenced by the
Fund of Funds will notify the Fund of
with the same services or transactions; investment by the Fund of Funds in the
any changes to the list of the names as
and (iii) does not involve overreaching Fund. The Board will consider, among
on the part of any person concerned. other things: (i) Whether the purchases soon as reasonably practicable after a
This condition does not apply with were consistent with the investment change occurs. The Fund and the Fund
respect to any services or transactions objectives and policies of the Fund; (ii) of Funds will maintain and preserve a
between a Fund, and its investment how the performance of securities copy of the order, the FOF Participation
adviser(s), or any person controlling, purchased in an Affiliated Underwriting Agreement, and the list with any
controlled by or under common control compares to the performance of updated information for the duration of
with such investment adviser(s). comparable securities purchased during the investment and for a period of not
5. The Fund of Funds Adviser, or a comparable period of time in less than six years thereafter, the first
trustee or Sponsor of an Investing Trust, underwritings other than Affiliated two years in an easily accessible place.
as applicable, will waive fees otherwise Underwritings or to a benchmark such 10. Before approving any advisory
payable to it by the Fund of Funds in as a comparable market index; and (iii) contract under section 15 of the Act, the
an amount at least equal to any whether the amount of securities
board of directors or trustees of each
compensation (including fees received purchased by the Fund in Affiliated
Underwritings and the amount Investing Management Company
pursuant to any plan adopted by a
Fund, under rule 12b-l under the Act) purchased directly from an including a majority of the disinterested
received from a Fund, by the Fund of Underwriting Affiliate have changed directors or trustees, will find that the
Funds Adviser, or trustee or Sponsor of significantly from prior years. The advisory fees charged under such
the Investing Trust, or an affiliated Board will take any appropriate actions contract are based on services provided
person of the Fund of Funds Adviser, or based on its review, including, if that will be in addition to, rather than
trustee or Sponsor of the Investing appropriate, the institution of duplicative of, the services provided
Trust, other than any advisory fees paid procedures designed to ensure that under the advisory contract(s) of any
to the Fund of Funds Adviser, trustee or purchases of securities in Affiliated Fund in which the Investing
Sponsor of an Investing Trust, or its Underwritings are in the best interest of Management Company may invest.
affiliated person by the Fund, in shareholders of the Fund. These findings and their basis will be
connection with the investment by the 8. Each Fund will maintain and fully recorded in the minute books of
Fund of Funds in the Fund. Any Fund preserve permanently in an easily the appropriate Investing Management
of Funds Sub-Adviser will waive fees accessible place a written copy of the Company.
otherwise payable to the Fund of Funds procedures described in the preceding
Sub-Adviser, directly or indirectly, by condition, and any modifications to 11. Any sales charges and/or service
the Investing Management Company in such procedures, and will maintain and fees charged with respect to shares of a
an amount at least equal to any preserve for a period of not less than six Fund of Funds will not exceed the
compensation received from a Fund by years from the end of the fiscal year in limits applicable to a fund of funds as
the Fund of Funds Sub-Adviser, or an which any purchase in an Affiliated set forth in NASD Conduct Rule 2830.
affiliated person of the Fund of Funds Underwriting occurred, the first two 12. No Fund will acquire securities of
Sub-Adviser, other than any advisory years in an easily accessible place, a any other investment company or
fees paid to the Fund of Funds Sub- written record of each purchase of company relying on section 3(c)(1) or
Adviser or its affiliated person by the securities in Affiliated Underwritings 3(c)(7) of the Act in excess of the limits
Fund in connection with the investment once an investment by a Fund of Funds contained in section 12(d)(1)(A) of the
by the Investing Management Company in the securities of the Fund exceeds the Act, except to the extent (i) the Fund
in the Fund made at the direction of the limit of section 12(d)(1)(A)(i) of the Act,
acquires securities of another
Fund of Funds Sub-Adviser. In the setting forth from whom the securities
investment company pursuant to
event that the Fund of Funds Sub- were acquired, the identity of the
exemptive relief from the Commission
Adviser waives fees, the benefit of the underwriting syndicate’s members, the
terms of the purchase, and the permitting the Fund to acquire
waiver will be passed through to the
Investing Management Company. information or materials upon which securities of one or more investment
6. No Fund of Funds or Fund of the Board’s determinations were made. companies for short-term cash
Funds Affiliate (except to the extent it 9. Before investing in a Fund in management purposes.
asabaliauskas on DSK5VPTVN1PROD with NOTICES

is acting in its capacity as an investment excess of the limit in section For the Commission, by the Division of
adviser to a Fund) will cause a Fund to 12(d)(1)(A), a Fund of Funds and the Investment Management, under delegated
purchase a security in any Affiliated Trust will execute a FOF Participation authority.
Underwriting. Agreement stating without limitation Robert W. Errett,
7. The Board of a Fund, including a that their respective boards of directors Deputy Secretary.
majority of the non-interested Board or trustees and their investment
[FR Doc. 2016–03397 Filed 2–18–16; 8:45 am]
members, will adopt procedures advisers, or trustee and Sponsor, as
applicable, understand the terms and BILLING CODE 8011–01–P
reasonably designed to monitor any

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Document Created: 2018-02-02 14:32:09
Document Modified: 2018-02-02 14:32:09
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
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.
Dates		The application was filed on August 12, 2015, and amended on December 3, 2015.
Contact		Parisa Haghshenas, Senior Counsel at (202) 551-6723, or Holly L. Hunter-Ceci, Branch Chief, at (202) 551- 6825 (Division of Investment Management, Chief Counsel's Office).
FR Citation		81 FR 8573