[Federal Register Volume 81, Number 43 (Friday, March 4, 2016)]
[Notices]
[Pages 11624-11634]
[FR Doc No: 2016-04794]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 32014; File No. 812-14481]

Charles Schwab Investment Management, Inc., et al.; Notice of
Application

February 29, 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:  Summary of Application: Applicants request an order that
would permit (a) series of certain open-end management investment
companies that track the performance of an index provided by an
affiliated person 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: Charles Schwab Investment Management, Inc. (``CSIM'' or
``Current Adviser''), Schwab Strategic Trust (``Trust''), and SEI
Investments Distribution Co. (``SEI'' or ``Distributor'').

DATES: Filing Dates: The application was filed on June 5, 2015 and
amended on September 4, 2015 and December 24, 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 24, 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: Secretary, Securities and Exchange Commission, 100 F Street
NE., Washington, DC 20549-1090; Applicants: CSIM and Trust, 211Main
Street, SF211-05-491, San Francisco, CA 94105; SEI, 1 Freedom Valley
Drive, Oaks, PA 19456.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at
(202) 551-6817, or Daniele Marchesani, Branch Chief, at<PHONE_NUMBER>
(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<PHONE_NUMBER>.

Applicants' Representations

    1. The Trust, a Delaware statutory trust, is registered under the
Act as an open-end management investment company with multiple series.
    2. The Current Adviser is registered as an investment adviser under
the Investment Advisers Act of 1940 (the ``Advisers Act'') and will be
the investment adviser to the Self-Indexing 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 Self-Indexing Funds (each, a ``Sub-Adviser''). Any Sub-
Adviser will either be registered under the Advisers Act or will not be
subject to registration thereunder.
    3. The Trust will enter into a distribution agreement with one or
more distributors, each a broker-dealer (``Broker'') registered under
the Securities Exchange Act of 1934 (the ``Exchange Act''), who will
act as distributor and principal underwriter of one or more of the
Self-Indexing Funds (each, a ``Distributor''). The Distributor of any
Self-Indexing 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 Self-Indexing
Fund's Adviser and/or Sub-Advisers. No Distributor will be affiliated
with any Exchange (defined below).
    4. Applicants request that the order apply to the initial series of
the Trust described in the application (``Initial Self-Indexing
Fund''), as well as any additional series of the Trust and other open-
end management investment companies, or series thereof, that may be
created in the future (``Future Self-Indexing Funds''), each of which
will operate as an exchange-traded fund (``ETF'') and will track a
specified equity and/or a specified fixed income securities index
(each, an ``Underlying Index''). Any Future Self-Indexing Fund will (a)
be advised by the Current Adviser or an entity controlling, controlled
by, or under common control with the Current Adviser (each, an
``Adviser'') and (b) comply with the terms and conditions of the
application. The Initial Self-Indexing Fund and Future Self-Indexing
Funds, together, are the ``Self-Indexing Funds.'' \1\
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    \1\ All existing entities that intend to rely on the requested
order have been named as applicants. Any other existing or future
entity that subsequently relies on the order will comply with the
terms and conditions of the order. A Fund of Funds (as defined
below) may rely on the order only to invest in Self-Indexing 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 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.\2\ 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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    \2\ 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 Self-Indexing Fund, or its respective Master Fund, will
hold certain securities (``Portfolio Securities'') selected to
correspond generally to the performance of its Underlying Index. Each
Underlying Index will be comprised solely of domestic and/or foreign
equity and/or fixed income securities. Each Self-Indexing Fund will
track one of the following types of Underlying Indexes: (i) An index
made up of domestic equity securities and/or domestic fixed income
securities, (ii) an index made up of foreign equity securities and/or
foreign fixed income securities (such Funds, ``International Funds''),
or (iii) an index made up of foreign and domestic equity securities
and/or foreign and domestic fixed income securities (such Funds,
``Global Funds'').
    7. Applicants represent that each Self-Indexing 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,\3\ and in the case of International and Global Funds,
Component Securities and Depositary Receipts \4\ representing Component
Securities. Each Self-Indexing Fund, or its respective Master Fund, may
also invest up to 20% of its assets in securities and other instruments
not included in its Underlying Index but which the Adviser and/or Sub-
Adviser believes will help the Self-Indexing Fund, or its respective
Master Fund, track its Underlying Index, including but not limited to
certain index futures, options, options on futures, options on index
futures, swap contracts or other derivatives, cash and cash
equivalents, and other investment companies. A Self-Indexing Fund may
also engage in short sales in accordance with its investment objective.
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    \3\ 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.
    \4\ Depositary receipts representing foreign securities
(``Depositary Receipts'') include American Depositary Receipts and
Global Depositary Receipts. The Self-Indexing 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 Self-Indexing 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 Self-Indexing Fund, the
Adviser or any Sub-Adviser will serve as the depositary bank for any
Depositary Receipts held by a Self-Indexing Fund.
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    8. The Trust may offer Self-Indexing 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 130/30 Fund will include strategies that: (i)
Establish long positions in securities so that total long exposure
represents approximately 130% of the Self-Indexing Fund's net assets;
and (ii) simultaneously establish short positions in other securities
so that total short exposure represents approximately 30% of such Self-
Indexing Fund's net assets. Each Long/Short Fund will obtain exposures
equal to the long and short positions specified by the Long/Short
Index.\5\
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    \5\ Underlying Indexes that include both long and short
positions in securities are referred to as ``Long/Short Indexes.''
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    9. A Self-Indexing Fund, or its respective Master Fund, will
utilize either a replication or representative

sampling strategy to track its Underlying Index. A Self-Indexing 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 Self-Indexing
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 Self-
Indexing 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 Self-Indexing Fund, or its respective
Master Fund, will have an annual tracking error relative to the
performance of its Underlying Index of less than 5%.
    10. An Affiliated Person, or a Second-Tier Affiliate, of the Trust
or a Self-Indexing Fund, of the Adviser, of any Sub-Adviser to or
promoter of a Self-Indexing Fund, or of the Distributor (each, an
``Affiliated Index Provider'') \6\ will create a proprietary, rules-
based methodology to create Underlying Indexes.\7\ The Affiliated Index
Provider will create, compile, sponsor or maintain the Underlying
Indexes. Each Self-Indexing Fund will be entitled to use its Underlying
Index pursuant to a licensing agreement with the Affiliated Index
Provider.\8\
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    \6\ The applicants currently expect that the Adviser will serve
as the Affiliated Index Provider for the Self-Indexing Funds. In the
event that the Adviser serves as the Affiliated Index Provider for a
Self-Indexing Fund, the term ``Affiliated Index Provider,'' with
respect to that Self-Indexing Fund, will refer to the employees of
the Adviser that are responsible for creating, compiling and
maintaining the relevant Underlying Index.
    \7\ The Underlying Indexes may be made available to registered
investment companies, as well as separately managed accounts of
institutional investors and privately offered funds that are not
deemed to be ``investment companies'' in reliance on section 3(c)(1)
or 3(c)(7) of the Act for which the Adviser acts as adviser or sub-
adviser (``Affiliated Accounts'') as well as other such registered
investment companies, separately managed accounts and privately
offered funds for which it does not act either as adviser or sub-
adviser (``Unaffiliated Accounts''). The Affiliated Accounts and the
Unaffiliated Accounts, like the Self-Indexing Funds, would seek to
track the performance of one or more Underlying Index(es) by
investing in the constituents of such Underlying Indexes or a
representative sample of such constituents of the Underlying Index.
Consistent with the relief requested from section 17(a), the
Affiliated Accounts will not engage in Creation Unit transactions
with a Self-Indexing Fund.
    \8\ The licenses for the Self-Indexing Funds will specifically
state that the Affiliated Index Provider must provide the use of the
Underlying Indexes and related intellectual property at no cost to
the Trust and the Self-Indexing Funds.
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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'').\9\
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    \9\ See, e.g., In the Matter of WisdomTree Investments Inc., et
al., Investment Company Act Release Nos. 27324 (May 18, 2006)
(notice) and 27391 (June 12, 2006) (order); In the Matter of IndexIQ
ETF Trust, et al., Investment Company Act Release Nos. 28638 (Feb.
27, 2009) (notice) and 28653 (March 20, 2009) (order); and Van Eck
Associates Corporation, et al., Investment Company Act Release Nos.
29455 (Oct. 1, 2010) (notice) and 29490 (Oct. 26, 2010) (order).
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    12. Instead of adopting the same or similar Policies and
Procedures, applicants propose that each day that a Self-Indexing Fund,
the NYSE and the national securities exchange (as defined in section
2(a)(26) of the Act) (an ``Exchange'')) on which the Self-Indexing
Fund's Shares are primarily listed (``Listing Exchange'') are open for
business, including any day that a Self-Indexing Fund is required to be
open under section 22(e) of the Act (a ``Business Day''), each Self-
Indexing Fund will post on its publicly available Web site (``Web
site''),\10\ before commencement of trading of Shares on the Listing
Exchange, the identities and quantities of the portfolio securities,
assets, and other positions held by the Self-Indexing Fund (``Portfolio
Holdings'') that will form the basis for the Self-Indexing Fund's
calculation of its NAV at the end of the Business Day.\11\ Applicants
believe that requiring Self-Indexing Funds, or their respective Master
Funds, to maintain full portfolio transparency will provide an
effective alternative mechanism for addressing any such potential
conflicts of interest.
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    \10\ The information provided on the Web site will be formatted
to be reader-friendly.
    \11\ Under accounting procedures followed by each Self-Indexing
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 Self-Indexing Funds will be able to disclose at the
beginning of each Business Day the portfolio that will form the
basis for the NAV calculation at the end of that Business Day.
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    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.\12\ 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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    \12\ 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.\13\
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    \13\ 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 and Code of Ethics.\14\ In accordance with the Code
of Ethics and Inside Information Policy of the Adviser and Sub-
Advisers, personnel of those entities with knowledge about the
composition of the Portfolio Deposit \15\ 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, no Affiliated Index Provider will provide any
information relating to changes to an Underlying Index's methodology
for the inclusion or exclusion of component securities, or methodology
for the calculation or the return of component securities, in advance
of a public announcement of such changes by such Affiliated Index
Provider. The Adviser will also include under Item 10.C. of Part 2 of
its Form ADV a discussion of its relationship to any Affiliated Index
Provider and any material conflicts of interest resulting therefrom,
regardless of whether the Affiliated Index Provider is a type of
affiliate specified in Item 10.
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    \14\ 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'').
    \15\ 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 to be fully transparent in lieu of
Policies and Procedures from the Prior Self-Indexing Orders discussed
above.
    18. The Shares of each Self-Indexing 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'').\16\ 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 Self-Indexing 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 Self-Indexing Fund's portfolio (including cash
positions) \17\ 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; \18\ (c) TBA Transactions, short positions,
derivatives and other positions that cannot be transferred in kind \19\
will be excluded from the Deposit Instruments and the Redemption
Instruments; \20\(d) to the extent the Self-Indexing Fund determines,
on a given Business Day, to use a representative sampling of the Self-
Indexing Fund's portfolio; \21\ or (e) for temporary periods, to effect
changes in the Self-Indexing 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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    \16\ The Self-Indexing 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 Self-Indexing Funds will comply with
the conditions of rule 144A.
    \17\ The portfolio used for this purpose will be the same
portfolio used to calculate the Self-Indexing Fund's NAV for the
Business Day.
    \18\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
    \19\ This includes instruments that can be transferred in kind
only with the consent of the original counterparty to the extent the
Self-Indexing Fund does not intend to seek such consents.
    \20\ 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 (defined below).
    \21\ A Self-Indexing 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 Self-Indexing Fund's
portfolio; (ii) consists entirely of instruments that are already
included in the Self-Indexing Fund's portfolio; and (iii) is the
same for all Authorized Participants (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 Self-Indexing 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 Self-Indexing Fund determines to require the purchase
or redemption, as applicable, to be made entirely in cash; \22\ (d) if,
on a given Business Day, the Self-Indexing 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 International and
Global 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 Self-Indexing 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 an International Fund or Global Fund
holding non-U.S. investments would be subject to unfavorable income tax
treatment if the holder receives redemption proceeds in kind.\23\
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    \22\ In determining whether a particular Self-Indexing 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 Self-Indexing 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 Self-Indexing Funds from a tax perspective. In
contrast, cash redemptions typically require selling portfolio
holdings, which may result in adverse tax consequences for the
remaining Self-Indexing Fund shareholders that would not occur with
an in-kind redemption. As a result, tax consideration may warrant
in-kind redemptions.
    \23\ 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 $15
million. All orders to purchase Creation Units must be placed with the
Distributor by or through an ``Authorized Participant'' which is either
(1) a ``Participating Party,'' i.e., a broker-dealer or other
participant in the Continuous Net Settlement System of the NSCC, a
clearing agency registered with the Commission, or (2) a participant in
The Depository Trust Company (``DTC'') (``DTC Participant''), which, in
either case, has signed a participant agreement with the Distributor.
The Distributor will be responsible for transmitting the orders to the
Self-Indexing 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 Self-Indexing 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 Self-Indexing Fund stated on a per
individual Share basis representing the sum of (i) the estimated Cash
Amount and (ii) the current value of the Portfolio Securities and other
assets of the Self-Indexing Fund.
    22. Transaction expenses, including operational processing and
brokerage costs, will be incurred by a Self-Indexing Fund when
investors purchase or redeem Creation Units in-kind and such costs have
the potential to dilute the interests of the Self-Indexing Fund's
existing shareholders. Each Self-Indexing Fund may (but is not required
to) 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.\24\ 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.\25\ The Distributor will be responsible for
delivering the Self-Indexing Fund's prospectus to those persons
acquiring Shares in Creation Units and for maintaining records of both
the orders placed with it and the confirmations of acceptance furnished
by it. In addition, the Distributor will maintain a record of the
instructions given to the applicable Fund to implement the delivery of
its Shares.
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    \24\ 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.
    \25\ Where a Self-Indexing Fund permits an in-kind purchaser (or
redeeming investor) to substitute (or receive) cash-in-lieu of
depositing one or more of the requisite Deposit Instruments (or
receiving one or more Portfolio Securities), the purchaser (or
redeeming investor) may be assessed a higher Transaction Fee to
cover the cost of purchasing such Deposit Instruments (or selling
such Portfolio Securities).
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    23. Shares of each Self-Indexing 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.\26\ 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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    \26\ 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 Self-Indexing Fund, or tender
such Shares for redemption to the Self-Indexing 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 Self-Indexing Fund will be advertised
or marketed or otherwise held out as a traditional open-end investment
company or a ``mutual fund.'' Instead, each such Self-Indexing 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 Self-Indexing Fund or tender such Shares for redemption to the
Self-Indexing Fund in Creation Units only. The Self-Indexing 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. 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 Self-Indexing Funds
to register as open-end management investment companies and issue
Shares that are redeemable in Creation Units only.\27\ Applicants state
that investors may purchase Shares in Creation Units and redeem
Creation Units from each Self-Indexing 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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    \27\ 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.
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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 Self-
Indexing 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 Self-Indexing 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 International and Global Funds
will be contingent not only on the settlement cycle of the United
States market, but also on current delivery cycles in local markets for
underlying foreign Portfolio Securities held by an International Fund
or Global 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.\28\ Accordingly, with respect to
International and Global Funds only, applicants hereby request relief
under section 6(c) from the requirement imposed by section 22(e) to
allow International and Global Funds to pay redemption proceeds within
fifteen calendar days following the tender of Creation Units for
redemption.\29\
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    \28\ Certain countries in which a Self-Indexing Fund may invest
have historically had settlement periods of up to fifteen (15)
calendar days.
    \29\ 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 an International Fund or
Global 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 International and Global Funds that do not effect creations
and redemptions of Creation Units in-kind.\30\
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    \30\ 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 Adviser, and not part of the same ``group
of investment companies,'' as defined in section 12(d)(1)(G)(ii) of the
Act as the Self-Indexing 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 Self-Indexing Funds, and any principal underwriter for
the Self-Indexing 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 Self-
Indexing Fund.\31\ To limit the control that a Fund of Funds may have
over a Self-Indexing 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 Self-Indexing 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'').
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    \31\ 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
``Self-Indexing Fund Affiliate'' is an investment adviser, promoter,
or principal underwriter of a Self-Indexing 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 Self-Indexing 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 Self-Indexing Fund) will
cause a Self-Indexing 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 Self-Indexing 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 Self-Indexing 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 Self-Indexing Fund, or its respective Master Fund, under
rule 12b-1 under the Act) received from a Self-Indexing 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 Self-Indexing Fund, in connection with the
investment by the Fund of Funds in the Self-Indexing 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.\32\
---------------------------------------------------------------------------

    \32\ 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 Self-Indexing
Fund, or 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 Self-Indexing Fund, or its respective Master
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 Self-Indexing 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 Self-Indexing Funds and not in any
other investment company.
    18. Applicants also note that a Self-Indexing 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 Self-Indexing 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 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 Self-Indexing 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 Self-Indexing Funds may be deemed to be under common
control with any other registered investment company (or series
thereof) advised by an Adviser or an entity controlling, controlled by
or under common control with an Adviser (an ``Affiliated Fund''). Any
investor, including Market Makers, owning 5% or holding in excess of
25% of the Trust or such Self-Indexing Funds, may be deemed affiliated
persons of the Trust or such Self-Indexing 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 Self-Indexing 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 Self-Indexing Funds,
or Second-Tier Affiliates of the Self-Indexing 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 Self-Indexing 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 Self-Indexing 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 Self-Indexing
Fund will be valued in the identical manner as those Portfolio
Securities currently held by such Self-Indexing 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 Self-Indexing 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 Securities held by a Self-Indexing 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 Self-Indexing Fund. Similarly,
applicants submit that, by using the same standards for valuing
Portfolio Securities held by a Self-Indexing Fund as are used for
calculating ``in-kind'' redemptions or purchases, the Self-Indexing
Fund, or its respective Master 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 Self-Indexing Fund, or its respective Master fund, to
track closely its Underlying Index and therefore aid in achieving the
Self-Indexing Fund's objectives.
    23. Applicants also seek relief under sections 6(c) and 17(b) from
section 17(a) to permit a Self-Indexing Fund that is an Affiliated
Person, or a Second-Tier Affiliate, of a Fund of Funds to sell its
Shares to and redeem its Shares from a Fund of Funds, and to engage in
any accompanying in-kind transactions with the Fund of Funds.\33\
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 Self-Indexing Fund will be based on the NAV of
the Self-Indexing Fund.\34\ Applicants believe that any proposed
transactions directly between the Self-Indexing 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 Self-
Indexing 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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    \33\ Although applicants believe that most Funds of Funds will
purchase Shares in the secondary market and will not purchase
Creation Units directly from a Self-Indexing Fund, a Fund of Funds
might seek to transact in Creation Units directly with a Self-
Indexing 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 Self-Indexing 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 Self-Indexing 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 Self-Indexing 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.
    \34\ 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
Self-Indexing Fund or (b) an affiliated person of a Self-Indexing
Fund, or an affiliated person of such person, for the sale by the
Self-Indexing 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) 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 Master-Feeder 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 Self-Indexing Fund operates in reliance on the
requested order, the Shares of such Self-Indexing Fund will be listed
on an Exchange.
    3. Neither the Trust nor any Self-Indexing 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 Self-Indexing Fund and tender those Shares for
redemption to a Self-Indexing 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 Self-Indexing Fund,
the prior Business Day's NAV and the market closing price or the
midpoint of the bid/ask spread at the time of the calculation of such
NAV (``Bid/Ask Price''), and a calculation of the premium or discount
of the market closing price or Bid/Ask Price against such NAV.
    5. Each Self-Indexing Fund will post on the Web site on each
Business Day, before commencement of trading of Shares on the Exchange,
the identities and quantities of the Self-Indexing Fund's, or its
respective Master Fund's, Portfolio Holdings.
    6. No Adviser or any Sub-Adviser, directly or indirectly, will
cause any Authorized Participant (or any investor on whose behalf an
Authorized Participant may transact with the 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 Self-Indexing 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 Self-Indexing 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 Self-Indexing 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 Self-
Indexing Fund, it will vote its Shares of the Self-Indexing Fund in the
same proportion as the vote of all other holders of the Self-Indexing
Fund's Shares. This condition does not apply to the Fund of Funds' Sub-
Advisory Group with respect to a Self-Indexing 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 Self-
Indexing Fund to influence the terms of any services or transactions
between the Fund of Funds or Fund of Funds Affiliate and the Self-
Indexing Fund, or its respective Master Fund, or a Self-Indexing 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 Self-Indexing Fund, or its
respective Master Fund, or Self-Indexing Fund Affiliate in connection
with any services or transactions.
    4. Once an investment by a Fund of Funds in the securities of a
Self-Indexing Fund exceeds the limits in section 12(d)(1)(A)(i) of the
Act, the Board of the Self-Indexing 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 Self-Indexing 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 Self-Indexing Fund, or its respective Master Fund; (ii)
is within the range of consideration that the Self-Indexing 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 Self-
Indexing 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 Self-
Indexing Fund, or its respective Master Fund, under rule 12b-l under
the Act) received from a Self-Indexing 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 Self-Indexing Fund, or
its respective Master Fund, in connection with the investment by the
Fund of Funds in the Self-Indexing 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 Self-Indexing
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 Self-Indexing Fund, or its respective Master
Fund, in connection with the investment by the Investing Management
Company in the Self-Indexing 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 Self-
Indexing Fund) will cause a Self-Indexing Fund, or its respective
Master Fund, to purchase a security in any Affiliated Underwriting.
    7. The Board of a Self-Indexing 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 a Self-Indexing Fund, or its respective Master Fund, in
an Affiliated Underwriting, once an investment by a Fund of Funds in
the securities of the Self-Indexing 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 Self-Indexing Fund. The Board will consider, among other
things: (i) Whether the purchases were consistent with the investment
objectives and policies of the Self-Indexing 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 Self-Indexing 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 Self-
Indexing Fund.
    8. Each Self-Indexing 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 Self-
Indexing 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 Self-Indexing 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 Self-Indexing Fund in excess of the limit in section
12(d)(1)(A)(i), a Fund of Funds will notify the Self-Indexing Fund of
the investment. At such time, the Fund of Funds will also transmit to
the Self-Indexing Fund a list of the names of each Fund of Funds
Affiliate and Underwriting Affiliate. The Fund of Funds will notify the
Self-Indexing Fund of any changes to the list of the names as soon as
reasonably practicable after a change occurs. The Self-Indexing 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 Self-Indexing 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 Self-Indexing Fund, or its respective Master 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 Self-Indexing Fund, or its respective Master Fund, acquires
securities of another investment company pursuant to exemptive relief
from the Commission permitting the Self-Indexing Fund, or its
respective Master Fund, to acquire securities of one or more investment
companies for short-term cash management purposes or (ii) the Self-
Indexing 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.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-04794 Filed 3-3-16; 8:45 am]
BILLING CODE 8011-01-P