[Federal Register Volume 84, Number 120 (Friday, June 21, 2019)]
[Notices]
[Pages 29270-29273]
[FR Doc No: 2019-13116]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86120; File No. SR-BX-2019-019]

Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend the
Exchange's Credits at Equity 7, Section 118(a)

June 17, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 4, 2019, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I, II, and III, below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to amend the Exchange's credits at Equity 7,
Section 118(a), as described further below.
    The text of the proposed rule change is available on the Exchange's
website at http://nasdaqbx.cchwallstreet.com/, at the principal office
of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange operates on the ``taker-maker'' model, whereby it pays
credits to members that take liquidity and

charges fees to members that provide liquidity. Under Equity 7, Section
118(a), the Exchange describes the charges and credits applied for the
use of the order execution and routing services of the Exchange System
by members for all securities priced at $1 or more per share that it
trades. As described below, the Exchange is amending the qualification
criteria of a credit provided to members for entering Orders that
access liquidity in the BX System.
Description of the Change
    The purpose of the proposed rule change is to reduce the
qualification criteria required to receive a credit for entering an
Order in a Tape A or C security that accesses liquidity in the BX
System. Specifically, the Exchange currently provides a credit of
$0.0015 per share executed for Tape A and C securities for an Order
that accesses liquidity (excluding orders with Midpoint pegging and
excluding orders that receive price improvement and execute against an
order with a Non-displayed price) entered by a member that accesses
liquidity equal to or exceeding 0.070% of total Consolidated Volume
during month. The Exchange is proposing to decrease the Consolidated
Volume requirement from 0.070% to 0.065%.\3\
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    \3\ The Exchange calculates Consolidated Volume on a monthly
basis to determine qualification for the credit. Because the
Exchange is filing this on the second trading day of the month of
June 2019, it will apply qualification for the tier based on 0.070%
of total Consolidated Volume for the single trading day during which
this proposed change was not in effect. The Exchange will apply the
proposed 0.065% criteria for the remaining trading days during the
month. As a consequence, qualification for the credit will be
determined by a weighted combination of the two levels of
Consolidated Volume based on the number of trading days the
particular requirement is in effect.
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Applicability to and Impact on Participants \4\
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    \4\ On May 21, 2019, the SEC Division of Trading and Markets
(the ``Division'') issued fee filing guidance titled ``Staff
Guidance on SRO Rule Filings Relating to Fees'' (``Guidance'').
Within the Guidance, the Division noted, among other things, that
the purpose discussion should address ``how the fee may apply
differently (e.g., additional cost vs. additional discount) to
different types of market participants (e.g., market makers,
institutional brokers, retail brokers, vendors, etc.) and different
sizes of market participants.'' See Guidance (available at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees). The Guidance
also suggests that the purpose discussion should include numerical
examples. Where possible, the Exchange is including numerical
examples. In addition, the Exchange is providing data to the
Commission in support of its arguments herein. The Guidance covers
all aspects of a fee filing, which the Exchange has addressed
throughout this filing.
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    The proposed reduction in the qualification criteria is not
targeted at or expected to be limited in its applicability to a
specific segment(s) of market participants nor will it apply
differently to different types of market participants. Non-members
cannot qualify for the credit.\5\ The proposed change will lower the
threshold required to achieve a better remove rate and therefore will
make it more achievable for more members.\6\ Consequently, the proposed
change will not negatively impact members that do not qualify because
their credit opportunities will remain unchanged. Moreover, the
proposed fee is a reduction in costs for members that access quotes on
the Exchange, because in the absence of the proposed change members
would receive a lower rebate, resulting in a higher cost for
transacting on the Exchange. Based on April 2019 volumes, the existing
tier represents a minimum of 4.387 million shares removed. Based on
past experience administering similar pricing proposals, the Exchange
estimates that multiple members of various types would be reasonably
positioned to meet the amended tier.
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    \5\ Id.
    \6\ As substantiated by data provided to the Commission.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\7\ in general, and furthers the objectives of Sections
6(b)(4) and 6(b)(5) of the Act,\8\ in particular, in that it provides
for the equitable allocation of reasonable dues, fees and other charges
among members and issuers and other persons using any facility, and is
not designed to permit unfair discrimination between customers,
issuers, brokers, or dealers. The proposal is also consistent with
Section 11A of the Act relating to the establishment of the national
market system for securities. Moreover, the Exchange believes that its
proposal complies with Commission guidance on SRO fee filings that the
Commission Staff issued on May 21, 2019.\9\
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(4) and (5).
    \9\ See Guidance, supra note 4. Although the Exchange believes
that this filing complies with the Guidance, the Exchange does not
concede that the standards set forth in the Guidance are consistent
with the Exchange Act and reserves its right to challenge those
standards through administrative and judicial review, as
appropriate.
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The Proposal Is Reasonable
    The Exchange's proposed reduction to the qualification requirement
is reasonable in several respects. As a threshold matter, the Exchange
is subject to significant competitive forces in the market for equity
securities transaction services that constrain its pricing
determinations in that market. The fact that this market is competitive
has long been recognized by the courts. In NetCoalition v. Securities
and Exchange Commission, the D.C. Circuit stated as follows: ``[n]o one
disputes that competition for order flow is `fierce.' . . . As the SEC
explained, `[i]n the U.S. national market system, buyers and sellers of
securities, and the broker-dealers that act as their order-routing
agents, have a wide range of choices of where to route orders for
execution'; [and] `no exchange can afford to take its market share
percentages for granted' because `no exchange possesses a monopoly,
regulatory or otherwise, in the execution of order flow from broker
dealers' . . . .'' \10\
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    \10\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010)
(quoting Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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    Numerous indicia demonstrate the competitive nature of this market.
For example, clear substitutes to the Exchange exist in the market for
equity security transaction services. The Exchange is only one of
several equity venues to which market participants may direct their
order flow, and it represents a small percentage of the overall market.
It is also only one of several taker-maker exchanges. Competing equity
exchanges offer similar tiered pricing structures to that of the
Exchange, including schedules of rebates and fees that apply based upon
members achieving certain volume thresholds. These competing pricing
schedules, moreover, are presently comparable to if not more generous
than those that the Exchange provides.\11\
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    \11\ The Exchange notes that NYSE National and CBOE EDGA offer
higher rebates for their members accessing liquidity on their
exchanges. CBOE EDGA provides a standard rebate for liquidity
removers of $0.0024 per share executed (or higher if a member
qualifies for a volume tier), and NYSE National has a range from a
fee of $0.0005 per share executed to a rebate of $0.0020 per share
executed. In addition, CBOE BYX offers a similar pricing schedule to
Nasdaq BX.
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    Within this environment, market participants can freely and often
do shift their order flow among the Exchange and competing venues in
response to changes in their respective pricing schedules.\12\
Separately, the Exchange has provided the SEC staff multiple examples
of instances where pricing

changes by BX and other exchanges have resulted in shifts in exchange
market share.
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    \12\ The Exchange perceives no regulatory, structural, or cost
impediments to market participants shifting order flow away from it.
See Guidance, supra note 4. In particular, the Exchange notes that
these examples of shifts in liquidity and market share, along with
many others, have occurred within the context of market
participants' existing duties of Best Execution and obligations
under the Order Protection Rule under Regulation NMS.
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    Within the foregoing context, the proposal represents a reasonable
attempt by the Exchange to increase its liquidity and market share
relative to its competitors. The Exchange also believes that the
particular adjustment that it proposes to its volume qualification
criteria for the $0.0015 per share executed credit is a reasonable
attempt to achieve this end because this credit tier is particularly
important to the Exchange's customers. That is, this credit is one for
which several Exchange members presently qualify and whose orders
comprise substantial remove volume on the Exchange. It is also a credit
tier that has been endangered by the recent decline in the Exchange's
market share insofar as this decline has made it more difficult for
members to achieve and maintain its total Consolidated Volume
requirement. Finally, the Exchange believes that adjusting the
qualification criteria for this particular credit will not only help
ensure that qualifying members will continue to qualify for the credit,
but it also will render the credit readily achievable for a broader
group of members. The Exchange estimates that the proposal will provide
multiple members with a reasonable opportunity to meet the adjusted
tier.
The Proposal Is an Equitable Allocation of Credits
    The Exchange believes its proposal allocates its rebates fairly
among its market participants. The Exchange is not proposing to adjust
the amount of the credit, which will remain at the $0.0015 per share
executed level that the Commission has already approved. By proposing
to lower the criteria to qualify for the credit, the Exchange intends
to help ensure that those members that currently qualify for it will
continue to do so even as the Exchange's market share has declined. It
also intends to broaden the base of members who can qualify for it.
Finally, the Exchange intends that its proposal will help to stem or
reverse the loss in market share that the Exchange is experiencing.
    The Exchange intends for the proposal to improve market quality for
all members on the Exchange and by extension attract more liquidity to
the market, improving market wide quality and price discovery. The
proposal neither targets nor will it have a disparate impact on any
particular category of market participant, and in fact, will allow more
market participants to take advantage of the existing credit. The
Exchange calibrated the proposal to impact a broad swath of members
whose orders comprise substantial remove volume so that it would have a
significant effect. The Exchange expects that the proposal will enable
the multitude of members that currently qualify for the credit tier to
continue to do so. Additionally, based on May 2019 volume, the Exchange
estimates that the proposal will provide multiple members with a
reasonable opportunity to meet the adjusted tier. As to those members
that do not presently qualify for the credit tier, and will not qualify
for the adjusted tier, the proposal will not adversely impact their
existing pricing or their ability to qualify for other credit tiers.
The Proposed Fee Is Not Unfairly Discriminatory
    The Exchange believes that the proposal is not unfairly
discriminatory. As an initial matter, the Exchange believes that
nothing about its volume-based tiered pricing model is inherently
unfair; instead, it is a rational pricing model that is well-
established and ubiquitous in today's economy among firms in various
industries--from co-branded credit cards to grocery stores to cellular
telephone data plans--that use it to reward the loyalty of their best
customers that provide high levels of business activity and incent
other customers to increase the extent of their business activity. It
is also a pricing model that the Exchange and its competitors have long
employed with the assent of the Commission. It is fair because it
incentivizes customer activity that increases liquidity, enhances price
discovery, and improves the overall quality of the equity markets.
    Furthermore, the Exchange's proposal to adjust the qualification
criteria for the $0.0015 per share executed credit tier is not unfairly
discriminatory. The Exchange intends for the proposal to improve market
quality for all members on the Exchange and by extension attract more
liquidity to the market, improving market wide quality and price
discovery. The proposal neither targets nor will it have a disparate
impact on any particular category of market participant. Instead, the
Exchange calibrated the proposal to impact a broad swath of members
whose orders comprise substantial remove volume so that it would have a
significant effect. The Exchange expects that the proposal will enable
the multitude of existing members that currently qualify for the credit
tier to continue to do so. Additionally, based on May 2019 volume, the
Exchange estimates that the proposal will provide multiple members with
a reasonable opportunity to meet the adjusted tier. As to those members
that do not presently qualify for the credit tier, and will not qualify
for the adjusted tier (although they might in the future as their
business grows), the proposal will not adversely impact their existing
pricing or their ability to qualify for other credit tiers.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
Intramarket Competition
    Addressing whether the proposed change could place certain market
participants at a relative disadvantage compared to other market
participants, the Exchange does not believe that members that do not
have the capacity to provide the level of Consolidated Volume required
by the proposal are disadvantaged. As noted above, all members benefit
from the removal of liquidity by those that choose to meet the tier
qualification criteria. Members may grow their businesses so that they
have the capacity to receive the credit. Moreover, members are free to
trade on other venues to the extent they believe that the fees assessed
and credits provided are not attractive. As one can observe by looking
at any market share chart, price competition between exchanges is
fierce, with liquidity and market share moving freely between exchanges
in reaction to fee and credit changes. The Exchange notes that the tier
structure is consistent with broker-dealer fee practices as well as the
other industries, as described above.
Intermarket Competition
    Addressing whether the proposed fee could impose a burden on
competition on other SROs that is not necessary or appropriate, the
Exchange believes that the proposed change to the qualification
criteria for the credit for accessing liquidity of Tape A and C does
not impose a burden on competition because the Exchange's execution
services are completely voluntary and subject to extensive competition
both from the other 12 live exchanges and from off-exchange venues,
which include 32 alternative trading systems. The Exchange notes that
it operates in a highly competitive market in which market participants
can readily favor competing venues if they deem fee levels at a
particular venue to be excessive, or rebate opportunities

available at other venues to be more favorable. In such an environment,
the Exchange must continually adjust its fees to remain competitive
with other exchanges and with alternative trading systems that have
been exempted from compliance with the statutory standards applicable
to exchanges. Because competitors are free to modify their own fees in
response, and because market participants may readily adjust their
order routing practices, the Exchange believes that the degree to which
fee changes in this market may impose any burden on competition is
extremely limited.
    The proposed reduced criteria is reflective of this competition
because, as a threshold issue, the Exchange is a relatively small
market so its ability to burden intermarket competition is limited. In
this regard, even the largest U.S. equities exchange by volume only has
17-18% market share, which in most markets could hardly be categorized
as having enough market power to burden competition. Moreover, as noted
above, price competition between exchanges is fierce, with liquidity
and market share moving freely between exchanges in reaction to fee and
credit changes. This is in addition to free flow of order flow to and
among off-exchange venues which comprised more than 38% of industry
volume for the month of April 2019.
    In sum, if the changes proposed herein are unattractive to market
participants, it is likely that the Exchange will lose market share as
a result. Accordingly, the Exchange does not believe that the proposed
changes will impair the ability of members or competing order execution
venues to maintain their competitive standing in the financial markets.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act.\13\
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    \13\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-BX-2019-019 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-BX-2019-019. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-BX-2019-019 and should be submitted on
or before July 12, 2019.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Acting Secretary.
[FR Doc. 2019-13116 Filed 6-20-19; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 76, Number 220 (Tuesday, November 15, 2011)]
[Notices]
[Page 70720]
[FR Doc No: 2011-29407]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Project No. 14228-000]

Natural Currents Energy Services, LLC; Notice of Preliminary
Permit Application Accepted for Filing and Soliciting Comments, Motions
To Intervene, and Competing Applications

    On July 15, 2011, Natural Currents Energy Services, LLC filed an
application, pursuant to section 4(f) of the Federal Power Act,
proposing to study the feasibility of the Avalon Tidal Energy Project,
which would be located on the Ingram Thoroughfare in Cape May County,
New Jersey. The proposed project would not use a dam or impoundment.
The sole purpose of a preliminary permit, if issued, is to grant the
permit holder priority to file a license application during the permit
term. A preliminary permit does not authorize the permit holder to
perform any land-disturbing activities or otherwise enter upon lands or
waters owned by others without the owners' express permission.
    The proposed project would consist of: (1) Installation of 10 to 30
NC Sea Dragon or Red Hawk tidal turbines at a rated capacity of 100
kilowatts, (2) an estimated 700 meters in length of additional
transmission infrastructure, and (3) appurtenant facilities. The
project is estimated to have an annual minimum generation of 3,504,000
kilowatt-hours with the installation of 10 units.
    Applicant Contact: Mr. Roger Bason, Natural Currents Energy
Services, LLC, 24 Roxanne Boulevard, Highland, New York 12561, (845)
691-4009.
    FERC Contact: Woohee Choi<PHONE_NUMBER>.
    Deadline for filing comments, motions to intervene, competing
applications (without notices of intent), or notices of intent to file
competing applications: 60 days from the issuance of this notice.
Competing applications and notices of intent must meet the requirements
of 18 CFR 4.36. Comments, motions to intervene, notices of intent, and
competing applications may be filed electronically via the Internet.
See 18 CFR 385.2001(a)(1)(iii) and the instructions on the Commission's
Web site http://www.ferc.gov/docs-filing/efiling.asp. Commenters can
submit brief comments up to 6,000 characters, without prior
registration, using the eComment system at http://www.ferc.gov/docs-filing/ecomment.asp. You must include your name and contact information
at the end of your comments.
    For assistance, please contact FERC Online Support at
<EMAIL_ADDRESS>or toll free at 1-(866) 208-3676, or for
TTY,<PHONE_NUMBER>. Although the Commission strongly encourages
electronic filing, documents may also be paper-filed. To paper-file,
mail an original and seven copies to: Kimberly D. Bose, Secretary,
Federal Energy Regulatory Commission, 888 First Street NE., Washington,
DC 20426.
    More information about this project, including a copy of the
application, can be viewed or printed on the ``eLibrary'' link of the
Commission's Web site at http://www.ferc.gov/docs-filing/elibrary.asp.
Enter the docket number (P-14228-000) in the docket number field to
access the document. For assistance, contact FERC Online Support.

    Dated: November 8, 2011.
Kimberly D. Bose,
Secretary.
[FR Doc. 2011-29407 Filed 11-14-11; 8:45 am]
BILLING CODE 6717-01-P


[Federal Register Volume 84, Number 224 (Wednesday, November 20, 2019)]
[Notices]
[Pages 64140-64147]
[FR Doc No: 2019-25070]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 33683; 812-14364]

Fidelity Beach Street Trust, et al.; Notice of Application

November 14, 2019.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for exemptive relief.

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Summary of Application:  Applicants request an order under section 6(c)
of the Investment Company Act of 1940 (``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) of the Act for an exemption from sections
12(d)(1)(A) and 12(d)(1)(B) of the Act. If granted, the requested order
would permit registered open-end investment companies that are
exchange-traded funds (``ETFs'') and are actively managed to operate
without being subject to a daily portfolio transparency condition.

Applicants:  Fidelity Management & Research Company and FMR Co., Inc.
(collectively, ``FMR''); Fidelity Beach Street Trust (the ``Trust'');
and Fidelity Distributors Corporation.

Filing Dates: The application was filed on September 26, 2014, and
amended on January 26, 2018, May 18, 2018, August 8, 2018, April 30,
2019, June 7, 2019, July 16, 2019, October 15, 2019, October 22, 2019
and November 8, 2019.

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 December 9, 2019, 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: Fidelity Beach Street Trust,
Fidelity Management & Research Company, FMR Co., Inc., and Fidelity
Distributors Corporation, 245 Summer Street, Boston, Massachusetts
02210.

FOR FURTHER INFORMATION CONTACT: Bradley Gude, Senior Counsel; Andrea
Ottomanelli Magovern, 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 website 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>.

I. Introduction

    1. Applicants seek to introduce a novel type of actively-managed
ETF that would not be required to disclose its portfolio holdings on a
daily basis (each, a ``Fund''). Due to their characteristics, ETFs
(including those proposed by Applicants) are only permitted to operate
in reliance on Commission exemptive relief from certain provisions

of the Act and rules thereunder.\1\ Accordingly, Applicants seek 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
thereunder; under sections 6(c) and 17(b) of the Act granting 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 (B)
of the Act. The requested order would permit: (a) The Funds 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 Funds to pay redemption proceeds, under certain circumstances,
more than seven days after the tender of Shares for redemption; (d)
certain affiliated persons of a Fund to deposit securities into, and
receive securities from, the Fund 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 Funds (``Investing Funds'') to
acquire Shares of the Funds.
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    \1\ The Commission first granted exemptive relief to operate
ETFs in the early 1990s when the first index-based ETFs were
developed. See SPDR Trust Series I, Investment Company Act Release
Nos. 18959 (Sept. 17, 1992) (notice) and 19055 (Oct. 26, 1992)
(order). See generally Exchange Traded Funds, Investment Company Act
Release No. 33646 (Sept. 25, 2019) (``ETF Rule Adopting Release''),
at section I. The Commission has also granted ETFs exemptive relief
from Sections 12(d)(1)(A) and (B) of the Act. See generally Fund of
Funds Arrangements, Investment Company Act Release No. 33329 (Dec.
19, 2018).
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    2. Section 6(c) allows the Commission to exempt any person,
security, or transaction, or any class thereof, only ``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].''
As discussed below, the Commission believes that the Funds meet the
standard for exemptive relief under section 6(c) of the Act.\2\
Accordingly, the Commission intends to grant the requested relief.
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    \2\ See infra section IV for a discussion of all the relief
requested by Applicants, including relief under sections 17(b) and
12(d)(1)(J) of the Act.
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II. Background

A. Open-End Investment Companies and Net Asset Value

    3. The Act defines an investment company as an ``issuer'' of ``any
security'' which ``is or holds itself out as being engaged primarily .
. . in the business of investing . . . in securities.'' \3\ Shares in
an investment company represent proportionate interests in its
investment portfolio, and their value fluctuates in relation to the
changes in the value of that portfolio.
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    \3\ 15 U.S.C. 80a-3(a); 80a-3(a)(1).
---------------------------------------------------------------------------

    4. The most common form of investment company, the ``open-end''
investment company or mutual fund, is required by law to redeem its
securities on demand at a price approximating the securities'
proportionate share of the fund's NAV at the time of redemption.\4\
These funds also continuously issue and sell new shares, thereby
replenishing their investment capital.
---------------------------------------------------------------------------

    \4\ See section 22(d) and rule 22c-1; see also infra section
IV.A (discussing section 22(d) and rule 22c-1).
---------------------------------------------------------------------------

    5. Because open-end investment companies are required by law to
redeem their shares based on investors' demands, shares of the funds
have historically not traded on exchanges or in other secondary
markets.\5\
---------------------------------------------------------------------------

    \5\ This stems from section 22(d) of the Act, which in effect
fixes the prices at which redeemable securities, including open-end
shares, are sold. The result is a system that precludes dealers from
making a secondary market in open-end shares.
---------------------------------------------------------------------------

B. Exemptions Under the Act for Actively Managed ETFs

    6. ETFs, including those proposed by Applicants, are a type of
open-end fund. But unlike traditional open-end funds, ETFs are made
available to investors primarily through secondary market transactions
on exchanges.
    7. In order for this to take place, ETFs require various exemptions
from the provisions of the Act and the rules thereunder. Critically, in
granting such exemptions to date, the Commission has required that a
mechanism exist to ensure that ETF shares would trade at a price that
is at or close to the NAV per share of the ETF.\6\
---------------------------------------------------------------------------

    \6\ This has been a required representation in all ETF orders
since the Commission issued the first order. See supra note 1.
---------------------------------------------------------------------------

    8. Such a mechanism is essential for ETFs to operate because ETFs
do not sell or redeem their individual shares at NAV per share as
required by the Act. Instead, large broker-dealers that have
contractual arrangements with an ETF (each, an ``Authorized
Participant'') purchase and redeem ETF shares directly from the ETF,
but only in large blocks called ``creation units.'' Traditionally, an
Authorized Participant that purchases a creation unit of ETF shares
first deposits with the ETF a ``basket'' of securities and other assets
(e.g., cash) identified by the ETF that day, and then receives the
creation unit of ETF shares in return for those assets. The basket is
generally representative of the ETF's portfolio and is equal in value
to the aggregate NAV of ETF shares in the creation unit. After
purchasing a creation unit, the Authorized Participant may sell the
component ETF shares in secondary market transactions. Investors then
purchase individual shares in the secondary market. The redemption
process is the reverse of the purchase process: the Authorized
Participant acquires a creation unit of ETF shares and redeems it for a
basket of securities and other assets.
    9. The combination of the creation and redemption process with the
secondary market trading in ETF shares provides arbitrage opportunities
that are designed to help keep the market price of ETF shares at or
close to the NAV per share of the ETF.\7\ For example, if ETF shares
begin trading on national securities exchanges at a ``discount'' (a
price below the estimated intraday NAV per share of the ETF), an
Authorized Participant can purchase ETF shares in secondary market
transactions and, after accumulating enough shares to comprise a
creation unit, redeem them from the ETF in exchange for the more
valuable securities and other assets in the ETF's redemption basket. In
addition to purchasing ETF shares, Authorized Participants also are
likely to hedge their intraday risk. Thus, for example, when ETF shares
are trading at a discount to the estimated intraday NAV per share of
the ETF, an Authorized Participant may also simultaneously short the
securities in the ETF's redemption basket. At the end of the day, the
Authorized Participant will return the creation unit of ETF shares to
the ETF in exchange for the ETF's basket assets, and use such assets to
cover its short positions. Those purchases reduce the supply of ETF
shares in the market, and thus tend to drive up the market price of the
shares to a level closer to the NAV per share of the ETF.\8\
---------------------------------------------------------------------------

    \7\ See Investment Company Institute, 2019 Investment Company
Fact Book (2019), at 88-89; ETF Rule Adopting Release, supra note 1,
at note 31 and accompanying text.
    \8\ The Authorized Participant's purchase of the ETF shares in
the secondary market, combined with the sale of the redemption
basket securities, may also create upward pressure on the price of
ETF shares and/or downward pressure on the price of redemption
basket securities, driving the market price of ETF shares and the
value of the ETF's portfolio holdings closer together.
---------------------------------------------------------------------------

    10. Conversely, if the market price for ETF shares reflects a
``premium'' (a price above the estimated intraday NAV per share of the
ETF), an Authorized Participant can deposit a basket of securities and
other assets in exchange for the more valuable creation unit of ETF
shares, and then sell the individual

shares in the market to realize its profit.\9\ An Authorized
Participant also is likely to hedge its intraday risk when ETF shares
are trading at a premium. Thus, for example, when the shares of an ETF
are trading at a premium, an Authorized Participant may buy the
securities in the ETF's purchase basket in the secondary market and
sell short the ETF shares. At the end of the day, the Authorized
Participant will deposit the basket assets in exchange for a creation
unit of ETF shares, which it will then use to cover its short
positions. The Authorized Participant will receive a profit from having
paid less for the ETF shares than it received for the assets in the
purchase basket. These transactions would increase the supply of ETF
shares in the secondary market, and thus tend to drive down the price
of ETF shares to a level closer to the NAV per share of the ETF.
---------------------------------------------------------------------------

    \9\ The Authorized Participant's purchase of the basket assets,
combined with the sale of ETF shares, may also create downward
pressure on the price of ETF shares, upward pressure on the price of
purchase basket securities, or both, bringing the market price of
ETF shares and the value of the ETF's portfolio holdings closer
together.
---------------------------------------------------------------------------

    11. Market participants can also engage in arbitrage activity
without using the creation or redemption processes described above. For
example, if a market participant believes that an ETF is overvalued
relative to its underlying or reference assets (i.e., trading at a
premium), the market participant may sell ETF shares short and buy the
underlying or reference assets, wait for the trading prices to move
toward parity, and then close out the positions in both the ETF shares
and the underlying or reference assets to realize a profit from the
relative movement of their trading prices. Similarly, a market
participant could buy ETF shares and sell the underlying or reference
assets short in an attempt to profit when an ETF's shares are trading
at a discount to the ETF's underlying or reference assets. As discussed
above, this type of trading of an ETF's shares and the ETF's underlying
or reference assets may bring the prices of the ETF's shares and its
portfolio assets closer together through market pressure.
    12. In assessing whether to grant exemptive relief to actively
managed ETFs in the past, the Commission has required a mechanism that
would keep the market prices of ETF shares at or close to the NAV per
share of the ETF.\10\ This close tie between market price and NAV per
share of the ETF is the foundation for why the prices at which retail
investors buy and sell ETF shares are similar to the prices at which
Authorized Participants are able to buy and redeem shares directly from
the ETF at NAV. In granting relief from section 22(d) of the Act and
rule 22c-1 under the Act, the Commission relies on this close tie
between what retail investors pay and what Authorized Participants pay
to make the finding that the ETF's shareholders are being treated
equitably when buying and selling shares.\11\
---------------------------------------------------------------------------

    \10\ Until recently, the Commission only approved a mechanism
dependent on daily portfolio transparency. See generally ETF Rule
Adopting Release, supra note 1, at section II.C.4. Last May, the
Commission issued an order granting relief to actively managed ETFs
that, like the Funds, do not disclose their complete portfolio
holdings on a daily basis. See Precidian ETFs Trust, et al.,
Investment Company Act Release No. 33440 (Apr. 8, 2019) (the
``Precidian Notice'') and 33477 (May 20, 2019) (the ``Precidian
Order''). Applicants' proposed arbitrage mechanism differs from that
in the Precidian Order.
    \11\ See supra note 4 and accompanying text.
---------------------------------------------------------------------------

III. The Application

A. The Applicants

    13. The Trust is organized as a business trust under the laws of
the Commonwealth of Massachusetts and is registered with the Commission
as an open-end management investment company. Fidelity Management &
Research Company or FMR Co., Inc., each a Massachusetts corporation
registered as an investment adviser under the Investment Advisers Act
of 1940 (``Advisers Act''), would serve as the investment adviser to
the initial Funds. Fidelity Distributors Corporation, a Massachusetts
corporation, is a registered broker-dealer under the Securities
Exchange Act of 1934, as amended (``Exchange Act''), and will act as
distributor and principal underwriter of the Funds.

B. Applicants' Proposal

    14. Applicants seek exemptive relief under section 6(c) to allow
them to introduce actively-managed Funds that would not disclose their
portfolio holdings on a daily basis.\12\ Applicants maintain that
operating the Funds as fully-transparent actively-managed ETFs would
make the Funds susceptible to ``front running'' and ``free riding'' by
other investors and/or managers, which can harm, and result in
substantial costs to, the Funds and their shareholders.\13\
---------------------------------------------------------------------------

    \12\ Applicants request that the order apply to series of the
Trust identified and described in the application as well as to
additional series of the Trust and any other open-end management
investment company or series thereof that seek to rely on the relief
requested in the application, each of which will operate as an
actively-managed ETF. Any Fund will: (a) Be advised by Fidelity
Management & Research Company, FMR Co., Inc., or an entity
controlling, controlled by, or under common control with Fidelity
Management & Research Company or FMR Co., Inc. (each such entity and
any successor thereto is included in the term ``Adviser''); and (b)
comply with the terms and conditions of the application. The Adviser
may retain one or more sub-advisers (each a ``Sub-Adviser'') for the
Funds. Any Sub-Adviser will be registered under the Advisers Act.
For purposes of the requested order, the term ``successor'' is
limited to an entity that results from a reorganization into another
jurisdiction or a change in the type of business organization.
    \13\ See application at 15 and 30.
---------------------------------------------------------------------------

    15. Applicants believe that the Funds would allow investors to
access active investment strategies offered by certain investment
advisers that are currently only available via mutual funds, while also
taking advantage of the traditional benefits of ETFs (e.g., lower fund
costs, tax efficiencies and intraday liquidity).
    16. Applicants state that the relief in the application is similar
to the relief granted in exemptive orders issued to existing actively
managed ETFs, except for certain differences permitting the Funds to
operate on a non-transparent basis.\14\ These material differences are
discussed below.
---------------------------------------------------------------------------

    \14\ Cf. Precidian Order supra note 10.
---------------------------------------------------------------------------

    a. Tracking Basket. Each day a Fund would publish a basket of
securities and cash that, while different from the Fund's portfolio, is
designed to closely track its daily performance (the ``Tracking
Basket'').\15\ In addition, every day the Fund would disclose the
percentage weight overlap between the holdings of the prior business
day's Tracking Basket compared to the holdings of the Fund that formed
the basis for the Fund's calculation of NAV at the end of the prior
business day (the ``Tracking Basket Weight Overlap''). Such number
would help market participants evaluate the risk that the performance
of the Tracking Basket may deviate from the performance of the
portfolio holdings of a Fund.
---------------------------------------------------------------------------

    \15\ The Funds would, at a minimum, provide the quarterly
portfolio disclosures required for mutual funds. See rule 30b1-9
under the Act and Form N-PORT.
---------------------------------------------------------------------------

    Applicants state that the Tracking Basket would serve as a pricing
and hedging tool for market participants to identify and take advantage
of arbitrage opportunities. Because the Tracking Basket would be
designed to closely track the daily performance of the Fund's holdings,
the Tracking Basket would serve to estimate the value of those
holdings. For the same reason, trading the Tracking Basket would allow
market participants to get exposure to the performance of the Fund's
holdings, so that a Fund's Tracking Basket could serve to hedge a
position in the Fund's Shares. Further, the Tracking Basket would serve
as the creation/redemption

basket when Authorized Participants exchange creation units with the
Fund.
    Also in order to facilitate arbitrage, each Fund's portfolio and
Tracking Basket will only include certain securities that trade on an
exchange contemporaneously with the Fund's Shares.\16\ Because the
securities would be exchange traded, market participants would be able
to accurately price and readily trade the securities in the Tracking
Basket for purposes of assessing the intraday value of the Fund's
portfolio holdings and to hedge their positions in the Fund's
shares.\17\
---------------------------------------------------------------------------

    \16\ Each Fund may invest only in ETFs, Exchange-traded notes,
Exchange-traded common stocks, common stocks listed on a foreign
exchange that trade on such exchange contemporaneously with the
Shares, Exchange-traded preferred stocks, Exchange-traded American
depositary receipts, Exchange-traded real estate investment trusts,
Exchange-traded commodity pools, Exchange-traded metals trusts,
Exchange-traded currency trusts, and exchange-traded futures that
trade contemporaneously with the Shares, as well as cash and cash
equivalents. For purposes of the application, exchange-traded
futures are U.S. listed futures contracts where the futures
contract's reference asset is an asset that the Fund could invest in
directly, or in the case of an index future, is based on an index of
a type of asset that the Fund could invest in directly. All futures
contracts that a Fund may invest in will be traded on a U.S. futures
exchange. For these purposes, an ``Exchange'' is a national
securities exchange as defined in section 2(a)(26) of the Act. No
Fund will invest in a ``penny stock'' as defined in Exchange Act
Rule 3a51-1, borrow for investment purposes, hold short positions,
or purchase any security that is illiquid at the time of purchase.
The Tracking Basket will be subject to the same limitations.
    \17\ A Fund's Tracking Basket may include ``Representative
ETFs,'' which would be U.S. exchange-traded ETFs selected for
inclusion in the Tracking Basket such that, when aggregated with the
other Tracking Basket components, the Tracking Basket corresponds to
the Fund's overall holdings exposures. As such, a Fund may receive
Representative ETFs in the basket of securities it exchanges for a
creation unit of its shares. On account of this use of
Representative ETFs, Applicants are asking for a minor modification
of a standard condition of the Commission's fund of funds relief.
See infra note 37.
---------------------------------------------------------------------------

    b. Arbitrage Transactions in the Funds. Applicants state that,
given the correlation between a Fund's Tracking Basket and its
portfolio holdings, the Tracking Basket would serve as a pricing signal
to identify arbitrage opportunities when its value and the secondary
market price of the Shares diverge. If Shares began trading at a
discount to the Tracking Basket, an authorized participant could
purchase the Shares in secondary market transactions and, after
accumulating enough Shares to comprise a creation unit, redeem them
from the Fund in exchange for a redemption basket reflecting the NAV
per share of the Fund's portfolio holdings.\18\ The purchases of Shares
would reduce the supply of Shares in the market, and thus tend to drive
up the Shares' market price closer to the Fund's NAV.\19\
Alternatively, if Shares are trading at a premium, the transactions in
the arbitrage process are reversed.
---------------------------------------------------------------------------

    \18\ In addition to purchasing Shares, an authorized participant
also would likely hedge its intraday risk by shorting the securities
in the Tracking Basket (the same as in the redemption basket) in an
amount corresponding to its long position in Shares. After the
authorized participant returns a creation unit to the Fund in
exchange for a redemption basket, the authorized participant can use
the basket securities to cover its short positions. Cf. supra note
8.
    \19\ The purchase of the Shares in the secondary market,
combined with the sale of the redemption basket securities, may also
drive the market price of Shares and the value of the Fund's
portfolio holdings closer together. See supra note 8.
---------------------------------------------------------------------------

    Applicants further state that, like with traditional ETFs, market
participants also can engage in arbitrage without using the creation or
redemption processes.\20\ For example, if a Fund is trading at a
premium to the Tracking Basket, the market participant may sell Shares
short and take a long position in the Tracking Basket securities, wait
for the trading prices to move toward parity, and then close out the
positions in both the Shares and the securities, to realize a profit
from the relative movement of their trading prices. Similarly, a market
participant could buy Shares and take a short position in the Tracking
Basket securities in an attempt to profit when Shares are trading at a
discount to the Tracking Basket.
---------------------------------------------------------------------------

    \20\ See supra paragraph 11.
---------------------------------------------------------------------------

    c. Protective conditions. Applicants have agreed to comply with
certain conditions in addition to those included in prior ETF exemptive
orders.\21\ First, the Funds will provide certain public disclosures to
explain to investors how they differ from traditional ETFs and inform
investors that the Funds' bid-ask spreads and premiums/discounts may be
larger than those for traditional ETFs due to the lack of transparency,
thus making trading in the Funds' Shares more expensive. The Funds will
also disclose that market participants may attempt to reverse engineer
a Fund's trading strategy, which, if successful, could increase
opportunities for trading practices that may disadvantage the Fund and
its shareholders.\22\ Each Fund will include a legend (the ``Legend'')
in a prominent location on the outside cover page of its prospectus, as
well as on its website and any marketing materials, that will highlight
for investors the differences between the Funds and fully transparent
actively managed ETFs and the above costs and risk.\23\ Unless
otherwise requested by the staff of the Commission, the Legend will
read as follows:
---------------------------------------------------------------------------

    \21\ These are substantially the same as conditions included in
the Precidian Order. See Precidian Notice supra note 10, at
paragraph 17(d).
    \22\ See application at 24.
    \23\ See application at 23-25; 53.

    This ETF is different from traditional ETFs.
    Traditional ETFs tell the public what assets they hold each day.
This ETF will not. This may create additional risks for your
investment. For example:
     You may have to pay more money to trade the ETF's
shares. This ETF will provide less information to traders, who tend
to charge more for trades when they have less information.
     The price you pay to buy ETF shares on an exchange may
not match the value of the ETF's portfolio. The same is true when
you sell shares. These price differences may be greater for this ETF
compared to other ETFs because it provides less information to
traders.
     These additional risks may be even greater in bad or
uncertain market conditions.
     The ETF will publish on its website each day a
``Tracking Basket'' designed to help trading in shares of the ETF.
While the Tracking Basket includes some of the ETF's holdings, it is
not the ETF's actual portfolio.
    The differences between this ETF and other ETFs may also have
advantages. By keeping certain information about the ETF secret,
this ETF may face less risk that other traders can predict or copy
its investment strategy. This may improve the ETF's performance. If
other traders are able to copy or predict the ETF's investment
strategy, however, this may hurt the ETF's performance.
    For additional information regarding the unique attributes and
risks of the ETF, see section [ ] below.

    17. Second, Applicants will comply with the requirements of
Regulation Fair Disclosure (``Reg. FD'') as if it applied to them, thus
prohibiting the Fund's selective disclosure of any material nonpublic
information.\24\ Because the Funds will not publicly disclose their
portfolio holdings daily, the selective disclosure of material
nonpublic information, including information other than portfolio
information, would be more likely to provide an unfair

advantage to the recipient than in other ETFs.
---------------------------------------------------------------------------

    \24\ See 17 CFR 243. ETFs are not otherwise subject to Reg. FD.
The federal securities laws and an investment adviser's fiduciary
duties permit the disclosure of an ETF's nonpublic portfolio
information to selected third parties only when the ETF has
legitimate business purposes for doing so and the recipients are
subject to a duty of confidentiality, including a duty not to trade
on the nonpublic information. See Exchange Traded Funds, Investment
Company Act Release No. 33140 (Jun. 28, 2018), at text accompanying
notes 225-226 (proposing rule 6c-11 and discussing Reg. FD). Reg.
FD's Rule 100(b)(2)(iii) exempts from Reg. FD certain communications
made in connection with a securities offering registered under the
Securities Act. Applicants would not rely on this exemption; as the
Funds will be continuously offered, this exemption would likely make
the condition requiring Applicants to comply with Reg. FD
meaningless.
---------------------------------------------------------------------------

    18. Third, the Funds and their Adviser will take remedial actions
as necessary if the Funds do not function as anticipated. For the first
three years after launch, a Fund will establish certain thresholds for
its level of Tracking Error,\25\ premiums/discounts, and spreads, so
that, upon the Fund's crossing a threshold, the Adviser will promptly
call a meeting of the Fund's board of directors, or a designated
committee thereof,\26\ and will present the board or committee with
recommendations for appropriate remedial measures.\27\ The board or
committee would then consider the continuing viability of the Fund,
whether shareholders are being harmed, and what, if any, action would
be appropriate.\28\ In addition, Applicants have agreed to provide to
Commission staff on a periodic basis certain metrics and other such
information as the staff may request in order to facilitate the staff's
ongoing monitoring of the Funds.\29\
---------------------------------------------------------------------------

    \25\ ``Tracking Error'' is the standard deviation over the past
three months of the daily proxy spread (i.e., the difference, in
percentage terms, between the Tracking Basket's per share NAV and
that of the Fund at the end of the trading day).
    \26\ The requirement to call a meeting of the board or committee
promptly after reaching a threshold will be met if the Adviser makes
the required communications, and the board or committee undertakes
the considerations specified in the application, during the
applicable time period but in advance of the threshold actually
being reached.
    \27\ See application at 25-26. For the first three years after
launch of a Fund, its board or committee would promptly meet (1) if
the Tracking Error exceeds 1%; or (2) if, for 30 or more days in any
quarter or 15 days in a row (a) the absolute difference between
either the market closing price or Bid/Ask Price, on one hand, and
NAV, on the other, exceeds 2%, or (b) the bid/ask spread exceeds 2%.
A Fund may adopt additional or lower (i.e., less than 1% for the
Tracking Error or less than 2% for the others) thresholds to the
extent deemed appropriate and approved by the Fund's board or a
designated committee thereof.
    \28\ For at least three years after launch of each Fund, the
Board will also undertake these considerations on an annual basis,
regardless of whether the Fund's preset thresholds have been
crossed. Potential actions may include, but are not limited to,
changing lead market makers, listing the Fund on a different
exchange, changing the size of creation units, modifications to the
Tracking Basket process, changing the Fund's investment objective or
strategy, and liquidating the Fund. See application at 25.
    \29\ See application at 54, condition 7.
---------------------------------------------------------------------------

IV. Requested Exemptive Relief

    19. 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 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) of the Act for an exemption from sections
12(d)(1)(A) and (B) of the Act.
    20. Applicants' request for relief is novel only under section
22(d) and rule 22c-1 due to the proposed alternative arbitrage
mechanism. In all other respects, Applicants are seeking relief that
the Commission has previously granted to existing ETFs. As discussed
above, the requested relief would be available to any open-end
investment company that is an actively-managed ETF operating in
compliance with the terms and conditions of the order and that is
advised by an Adviser.\30\
---------------------------------------------------------------------------

    \30\ Applicants request that the terms and conditions of the
requested order apply to other registered open-end management
investment companies or series thereof not advised by the Adviser
(``Licensed Funds''). Applicants anticipate that the Adviser or an
affiliate thereof would enter into license agreements with the
registered investment advisers advising the Licensed Funds (together
with the Licensed Funds, the ``Future Applicants''). Applicants
further expect that Future Applicants would apply for a separate
exemptive order that incorporates by reference all the terms and
conditions of the requested order and any amendments thereto. See
application at 2. See also Precidian Notice supra note 10, at note
41 and in re Eaton Vance Management, et al., File No. 812-14139,
Fourth Amendment, filed Sept. 25, 2014; Investment Company Act Rel.
No. 31333 (Nov. 6, 2014) (notice), Investment Company Act Rel. No.
31361 (Dec. 2, 2014) (order). See also, e.g., in re American Beacon
Nextshares Trust, et al., File No. 812-14417, First Amendment, filed
Feb. 23, 2015; Investment Company Act Rel. No. 31498 (Mar. 6, 2015)
(notice); Investment Company Act Rel. No. 31542 (Apr. 1, 2015)
(order).
---------------------------------------------------------------------------

    21. 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 provisions 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 purposes of the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may exempt any person, security, or
transaction, or any class or classes of persons, securities or
transactions, from any provision of section 12(d)(1) if the exemption
is consistent with the public interest and the protection of investors.

A. Novel Relief Under Section 22(d) and Rule 22c-1

    22. Section 22(d) of the Act, among other things, prohibits a
dealer from selling a redeemable security that is currently being
offered to the public by or through a principal underwriter other than
at a current public offering price described in the fund's prospectus.
Rule 22c-1 under the Act requires open-end funds, their principal
underwriters, and dealers in fund shares (and certain others) to sell
and redeem fund shares at a price based on the current NAV next
computed after receipt of an order to buy or redeem.
    23. Together, section 22(d) and rule 22c-1 are designed to: (i)
Prevent dilution caused by certain riskless trading practices of
principal underwriters and dealers; (ii) prevent unjust discrimination
or preferential treatment among investors purchasing and redeeming fund
shares; and (iii) preserve an orderly distribution of investment
company shares.\31\
---------------------------------------------------------------------------

    \31\ See ETF Rule Adopting Release, supra note 1, at text
accompanying note 116.
---------------------------------------------------------------------------

    24. Applicants believe that none of these concerns will be raised
by permitting Shares to trade in the secondary market at negotiated
prices. Applicants state that secondary market trading in Shares does
not involve the Funds as parties and cannot result in dilution of an
investment in Shares, and to the extent different prices for Shares
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 state that the proposed
distribution system will be orderly because anyone will be able to sell
or acquire Shares on an exchange and arbitrage activity should ensure
that secondary market transactions occur at prices at or close to the
Fund's NAV.
    25. In considering relief from section 22(d) and rule 22c-1 for
ETFs, the Commission has focused on whether the ETFs' arbitrage
mechanism addresses the concerns underlying those provisions. The
Commission believes that the alternative arbitrage mechanism proposed
by Applicants can work in an efficient manner to maintain a Fund's
secondary market prices close to its NAV.\32\ The Commission
recognizes, however, that the lack of full transparency may cause the
Funds to trade with spreads and premiums/discounts that are larger than
those of

comparable, fully transparent ETFs.\33\ Nonetheless, as long as
arbitrage continues to keep the Fund's secondary market price and NAV
close, and does so efficiently so that spreads remain narrow, the
Commission believes that investors would benefit from the opportunity
to invest in active strategies through a vehicle that offers the
traditional benefits of ETFs.\34\
---------------------------------------------------------------------------

    \32\ See supra paragraph 16(b).
    \33\ The performance of a Fund's Tracking Basket and portfolio
holdings may deviate to some extent, which would make market
participants' estimates of the profitability of their arbitrage
transactions less precise. To account for this possibility, market
participants would likely require wider spreads to trade Shares.
    \34\ Investors will have the information necessary to compare
the costs associated with investing in the Funds with the costs of
investing in other ETFs and mutual funds. See Item 3 of Form N-1A;
condition 2. Cf. ETF Rule Adopting Release, supra note 1, at text
following note 119 (noting that for fully transparent ETFs, ``under
certain circumstances, including during periods of market stress,
the arbitrage mechanism may work less effectively for a period of
time,'' but that ``on balance, . . . investors are more likely to
weigh the potential benefits of ETFs (e.g., low cost and intraday
trading) against any potential for market price deviations when
deciding whether to utilize ETFs.'' Cf. Precidian Notice supra note
10, at 19-20.
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B. Other Relief

    26. The additional exemptive relief Applicants seek is relief
routinely granted to ETFs, and does not raise novel issues on account
of the lack of daily portfolio transparency.
    27. Sections 5(a)(1) and 2(a)(32) of the Act. First, because the
Shares will not be individually redeemable, Applicants request an
exemption from section 5(a)(1) and section 2(a)(32) of the Act that
would permit the Funds to register as open-end management investment
companies and issue Shares that are redeemable in creation units only.
    28. Section 22(e) of the Act. Second, Applicants seek relief from
section 22(e) to permit Funds to satisfy redemption requests more than
seven days from the tender of Shares for redemption with respect to
foreign securities where the settlement cycle, coupled with local
holiday schedules, would not permit a Fund to satisfy redemption
requests within the seven days required under section 22(e) of the Act.
A Fund would deliver the foreign securities as soon as practicable, but
in no event later than 15 days after the tender of Shares.
    29. Sections 17(a)(1) and (2) of the Act. Second, Applicants
request an exemption from sections 17(a)(1) and 17(a)(2) of the Act to
permit persons that are affiliated persons, or second-tier affiliates,
of the Funds, solely by virtue of certain ownership interests, to
effectuate purchases and redemptions in-kind. The deposit procedures
for in-kind purchases of creation units and the redemption procedures
for in-kind redemptions of creation units will be the same for all
purchases and redemptions and basket securities will be valued in the
same manner as those portfolio securities currently held by the Funds.
Applicants also seek relief from the prohibitions on affiliated
transactions in section 17(a) to permit a Fund to sell its Shares to
and redeem its Shares from an Investing Fund, and to engage in the
accompanying in-kind transactions with the Investing Fund.\35\ The
purchase of creation units by an Investing Fund directly from a Fund
will be accomplished in accordance with the policies of the Investing
Fund and will be based on the NAVs of the Funds.
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    \35\ The requested relief would apply to direct sales of shares
in creation units by a Fund to an Investing Fund and redemptions of
those shares. Applicants, moreover, 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 a
second-tier affiliate, of an Investing Fund because an Adviser or an
entity controlling, controlled by or under common control with an
Adviser provides investment advisory services to that Investing
Fund.
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    30. Section 12(d)(1) of the Act. Third, Applicants request an
exemption to permit Investing Funds to acquire Fund Shares beyond the
limits of section 12(d)(1)(A) of the Act and permit the Funds, and any
principal underwriter for the Funds, and/or any broker or dealer
registered under the Exchange Act, to sell Fund Shares to Investing
Funds beyond the limits of section 12(d)(1)(B) of the Act.\36\ The
application's terms and conditions are designed to, among other things,
help prevent any potential (i) undue influence over a Fund through
control or voting power, or in connection with certain services,
transactions, and underwritings, (ii) excessive layering of fees, and
(iii) overly complex fund structures, which are the concerns underlying
the limits in sections 12(d)(1)(A) and (B) of the Act.
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    \36\ Applicants requested a modification to a standard condition
of the Commission's fund of funds relief that would prohibit the
Funds from themselves investing in another registered investment
company beyond the section 12(d)(1) limits. Applicants require this
modification to permit a Fund to acquire Representative ETFs beyond
the limits of section 12(d)(1) solely for the purpose of effecting
transactions in creation units. See infra condition 21.
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C. Consideration of Possible Concerns Relating to the Requested Relief

    31. As part of our review, we have considered possible concerns
regarding the requested relief, including, among others, concerns
related to the proposed arbitrage mechanism, the use of Tracking
Baskets, and reverse engineering, as discussed below. We believe,
however, that the Applicants' proposed terms and conditions
sufficiently address such concerns.
    32. Proposed Arbitrage Mechanism. One possible concern is that the
proposed arbitrage mechanism may not facilitate effective arbitrage,
which could result in significant deviations between the secondary
market price and NAV per share of a Fund. We believe that the proposed
arbitrage mechanism can work in an efficient manner to maintain
secondary market prices of Shares close to their NAV while providing
investors with the opportunity to invest in active strategies through a
vehicle that offers the traditional benefits of ETFs.\37\ In addition,
to the extent that the Funds do not function as anticipated, Applicants
have undertaken to take remedial actions as appropriate.\38\
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    \37\ See supra paragraphs 15 and 16.
    \38\ See supra paragraph 18.
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    33. Use of Tracking Baskets. Applicants have also addressed
possible implications of using a Tracking Basket as an arbitrage
mechanism. First, Applicants note that a Fund's Tracking Basket would
not misrepresent the Fund's holdings or cause investor confusion.\39\
To that effect, the Funds would provide disclosures in their
prospectus, marketing materials and website clearly indicating the
Tracking Basket's purpose and that it is not the Fund's portfolio
holdings.\40\ Second, Applicants state that they would design their
Tracking Basket so that arbitrageurs' trading will not have a
significant market impact on the securities in the Tracking Basket, in
particular those that a Fund does not hold for investment purposes.\41\
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    \39\ See application at 32-33.
    \40\ See application at 33. In addition, every day the Funds
would disseminate the Tracking Basket Weight Overlap, which would
inform market participants as to the degree to which the Tracking
Basket and the Fund's portfolio actually differ. See application at
12 and 33.
    \41\ Specifically, the Funds expect to include in the Tracking
Basket only assets that are liquid and have a high trading volume.
See application at 31. Further, Applicants note that their proposed
use of a Tracking Basket is not novel in this respect. Currently,
arbitrageurs for fully-transparent ETFs may use securities that are
not in the ETFs' portfolio to hedge their positions in the ETFs'
shares. See application at 31-32.
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    34. Reverse Engineering. A third possible concern is that other
market participants may be able to reverse engineer current activity in
a Fund's holdings and use such information to the disadvantage of the
Fund, Authorized Participants and shareholders. Applicants have
represented that they will operate the Funds in a manner designed to

minimize the risk of reverse engineering and we anticipate that the
Funds will have the ability to minimize such risk.\42\ Indeed, we note
that the Applicants have a significant incentive to minimize this risk,
considering that the purpose of their proposed arbitrage mechanism is
to facilitate the operation of ETFs that limit the ETFs' susceptibility
to predatory trading practices, like ``front running'' and ``free
riding.'' \43\
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    \42\ Our Division of Economic Research and Analysis (``DERA'')
considered whether the current activity in a Fund's holdings could
be reverse engineered and concluded that the answer depends on the
specifics of each Fund, including the size of the Fund's universe of
potential portfolio selections, the mechanics of how the Fund's
Tracking Basket is constructed in relationship to the Fund's
portfolio holdings, the type of information disclosed about the
Fund's portfolio holdings, and the degree of overlap between the
Fund's Tracking Basket and its portfolio holdings. The Funds would
disclose this risk to investors. See application at 24.
    \43\ See application at 30.
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V. Applicants' Conditions 44
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    \44\ Capitalized terms not otherwise defined herein shall have
the same meaning as in the application.
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    Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:

A. ETF Relief

    1. As long as a Fund operates in reliance on the requested order,
the Shares of the Fund will be listed on an exchange.
    2. The website for the Funds, which is and will be publicly
accessible at no charge, will contain, on a per Share basis, for each
Fund the prior business day's NAV and market closing price or Bid/Ask
Price of the Shares, a calculation of the premium or discount of the
market closing price or Bid/Ask Price against such NAV, and any other
information regarding premiums and discounts as may be required for
other ETFs under rule 6c-11 under the Act, as amended. The website will
also disclose any information regarding the bid-ask spread for each
Fund as may be required for other ETFs under rule 6c-11 under the Act,
as amended.
    3. Each Fund will include the Legend in a prominent location on the
outside cover page of its prospectus, as well as on its website and any
marketing materials.
    4. On each business day, before the commencement of trading of
Shares, each Fund will publish on its website the Tracking Basket and
the Tracking Basket Weight Overlap for that day.
    5. No Adviser or Sub-Adviser, directly or indirectly, will cause
any Authorized Participant (or any investor on whose behalf an
Authorized Participant may transact with the Fund) to acquire any
deposit instrument for a Fund through a transaction in which the Fund
could not engage directly.
    6. The requested relief to permit ETF operations will expire on the
effective date of any Commission rule under the Act that provides
relief permitting the operation of actively managed ETFs that disclose
a proxy portfolio on each business day, without fully disclosing the
ETF's entire portfolio at the same time.
    7. Each Fund will provide the Commission staff with periodic
reports (for which confidential treatment may be requested) containing
such information as the Commission staff may request.
    8. Each Fund and each person acting on behalf of a Fund will comply
with and agree to be subject to the requirements of Regulation Fair
Disclosure as if it applied to them (except that the exemptions
provided in Rule 100(b)(2)(iii) therein shall not apply).
    9. Each Fund will maintain and preserve, for a period of not less
than five years, in an easily accessible place, (i) all written
agreements (or copies thereof) between an Authorized Participant and
the Fund or one of its service providers that allows the Authorized
Participant to place orders for the purchase or redemption of creation
units; (ii) a copy of the Tracking Basket published on the Fund's
website for each business day; and (iii) a list of all creation or
redemption baskets exchanged with an Authorized Participant where cash
was included in the basket in lieu of some or all of the Tracking
Basket securities (except for cash included because the securities are
not eligible for trading by the Authorized Participant or the investor
on whose behalf the Authorized Participant is acting), the amount of
any such cash in lieu and the identity of the Authorized Participant
conducting the transaction.

B. Section 12(d)(1) Relief

    10. The members of the Investing Fund's Advisory Group will not
control (individually or in the aggregate) a Fund within the meaning of
section 2(a)(9) of the Act. The members of the Investing Fund's Sub-
Advisory Group will not control (individually or in the aggregate) a
Fund within the meaning of section 2(a)(9) of the Act. If, as a result
of a decrease in the outstanding voting securities of a Fund, the
Investing Fund's Advisory Group or the Investing Fund's Sub-Advisory
Group, each in the aggregate, becomes a holder of more than 25 percent
of the outstanding voting securities of a Fund, it will vote its Shares
of the Fund in the same proportion as the vote of all other holders of
the Fund's Shares. This condition does not apply to the Investing
Fund's Sub-Advisory Group with respect to a Fund for which the
Investing Fund Sub-Adviser or a person controlling, controlled by or
under common control with the Investing Fund Sub-Adviser acts as the
investment adviser within the meaning of section 2(a)(20)(A) of the
Act.
    11. No Investing Fund or Investing Fund Affiliate will cause any
existing or potential investment by the Investing Fund in a Fund to
influence the terms of any services or transactions between the
Investing Fund or an Investing Fund Affiliate and the Fund or a Fund
Affiliate.
    12. The board of directors or trustees of an Investing Management
Company, including a majority of the independent directors or trustees,
will adopt procedures reasonably designed to ensure that the Investing
Fund Adviser and any Investing Fund 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 an Investing Fund Affiliate from a Fund or a Fund Affiliate
in connection with any services or transactions.
    13. Once an investment by an Investing Fund in the Shares of a Fund
exceeds the limit in section 12(d)(1)(A)(i) of the Act, the Board of a
Fund, including a majority of the independent directors or trustees,
will determine that any consideration paid by the Fund to the Investing
Fund or an Investing Fund Affiliate in connection with any services or
transactions: (i) Is fair and reasonable in relation to the nature and
quality of the services and benefits received by the Fund; (ii) is
within the range of consideration that the Fund would be required to
pay to another unaffiliated entity in connection with the same services
or transactions; and (iii) does not involve overreaching on the part of
any person concerned. This condition does not apply with respect to any
services or transactions between a Fund and its investment adviser(s),
or any person controlling, controlled by or under common control with
such investment adviser(s).
    14. The Investing Fund Adviser, or Trustee or Sponsor, as
applicable, will waive fees otherwise payable to it by the Investing
Fund 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 Investing Fund Adviser, or Trustee

or Sponsor, or an affiliated person of the Investing Fund Adviser, or
Trustee or Sponsor, other than any advisory fees paid to the Investing
Fund Adviser, or Trustee or Sponsor, or its affiliated person by the
Fund, in connection with the investment by the Investing Fund in the
Fund. Any Investing Fund Sub-Adviser will waive fees otherwise payable
to the Investing Fund 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 Investing Fund Sub-Adviser, or
an affiliated person of the Investing Fund Sub-Adviser, other than any
advisory fees paid to the Investing Fund 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 Investing
Fund Sub-Adviser. In the event that the Investing Fund Sub-Adviser
waives fees, the benefit of the waiver will be passed through to the
Investing Management Company.
    15. No Investing Fund or Investing Fund 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 Affiliated Underwriting.
    16. The Board of a Fund, including a majority of the independent
directors or trustees, will adopt procedures reasonably designed to
monitor any purchases of securities by the Fund in an Affiliated
Underwriting, once an investment by an Investing Fund in the securities
of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act,
including any purchases made directly from an Underwriting Affiliate.
The Board will review these purchases periodically, but no less
frequently than annually, to determine whether the purchases were
influenced by the investment by the Investing Fund 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
assure that purchases of securities in Affiliated Underwritings are in
the best interest of shareholders of the Fund.
    17. Each Fund will maintain and preserve permanently in an easily
accessible place a written copy of the procedures described in the
preceding condition, and any modifications to such procedures, and will
maintain and preserve for a period of not less than six years from the
end of the fiscal year in which any purchase in an Affiliated
Underwriting occurred, the first two years in an easily accessible
place, a written record of each purchase of securities in Affiliated
Underwritings once an investment by an Investing Fund in the securities
of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act,
setting forth from whom the securities were acquired, the identity of
the underwriting syndicate's members, the terms of the purchase, and
the information or materials upon which the Board's determinations were
made.
    18. Before investing in a Fund in excess of the limits in section
12(d)(1)(A), an Investing Fund will execute a FOF Participation
Agreement with the Fund stating 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), an Investing Fund will notify the Fund of
the investment. At such time, the Investing Fund will also transmit to
the Fund a list of the names of each Investing Fund Affiliate and
Underwriting Affiliate. The Investing Fund will notify the Fund of any
changes to the list as soon as reasonably practicable after a change
occurs. The Fund and the Investing Fund 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.
    19. 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 independent 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 recorded fully in the minute books of
the appropriate Investing Management Company.
    20. Any sales charges and/or service fees charged with respect to
shares of an Investing Fund will not exceed the limits applicable to a
fund of funds as set forth in FINRA Rule 2341.
    21. 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 (i) 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; and (ii) in connection with a Fund's
receipt of Representative ETFs included in its Tracking Basket solely
for purposes of effecting transactions in Creation Units.\45\
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    \45\ If the Commission rescinds the Section 12(d)(1) Relief in
connection with the adoption of a rule providing similar relief, but
that would not, in substance, make the exception in this
subparagraph (ii) available, such exception will nonetheless
continue be available with respect to such rule to a Fund relying on
the requested ETF Relief, unless the Commission provides otherwise
with specific reference to the Applicants.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-25070 Filed 11-19-19; 8:45 am]
 BILLING CODE 8011-01-P