[Federal Register Volume 84, Number 70 (Thursday, April 11, 2019)]
[Notices]
[Pages 14690-14698]
[FR Doc No: 2019-07207]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 33440; 812-14405]

Precidian ETFs Trust, et al.; Notice of Application

April 8, 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), and 22(d) 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
(each, an ``ETF'') and are actively managed to operate without being
subject to the current daily portfolio transparency condition in
actively managed ETF orders.

Applicants:  Precidian Funds LLC (the ``Initial Adviser''); Precidian
ETFs Trust and Precidian ETF Trust II (each, a ``Trust'' and, together
the ``Trusts''); and Foreside Fund Services, LLC.

Filing Dates:  The application was filed on December 22, 2014, and
amended on August 11, 2015, September 21, 2015, May 3, 2017, October 2,
2017, December 4, 2017, May 30, 2018, and April 4, 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 May 3, 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: Precidian ETFs Trust, Precidian
ETF Trust II and Precidian Funds LLC, 350 Main St., Suite 9,
Bedminster, NJ 07921, and Foreside Fund Services, LLC, Three Canal
Plaza, Suite 100, Portland, ME 04101.

FOR FURTHER INFORMATION CONTACT: Kay-Mario Vobis, Senior Counsel;
Deepak T. Pai, 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, an ``ActiveShares ETF''). 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) and 22(d) 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) ActiveShares ETFs 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 affiliated persons of an ActiveShares ETF to
deposit securities into, and receive securities from, the ActiveShares
ETF in connection with the purchase and redemption of creation units;
and (d) certain registered management investment companies and unit
investment trusts outside of the same group of investment companies as
the ActiveShares ETFs (``Acquiring Funds'') to acquire Shares of the
ActiveShares ETFs.
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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. 33140 (Jun. 28, 2018) (``ETF Rule Proposing 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 ActiveShares ETFs 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).
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    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.
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    \4\ See section 22(d) and rule 22c-1; see also infra section
IV.A (discussing section 22(d) and rule 22c-1).
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    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\
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    \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.
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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\
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    \6\ This has been a required representation in all ETF orders
since the Commission issued the first order. See supra note 1.
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    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\
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    \7\ See Investment Company Institute, 2018 Investment Company
Fact Book (2018) (``ICI Fact Book''), at 93; ETF Rule Proposing
Release, supra note 1, at note 28 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.
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    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.
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    \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.
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    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. To date, this mechanism has been dependent on daily
portfolio transparency.\10\ This transparency provides market
participants with an important tool to value the ETF portfolio on an
intraday basis, which, in turn, enables market participants to
effectively assess whether an arbitrage opportunity exists. It is the
exercise of such arbitrage opportunities that keeps the market price of
ETF shares at or close to the NAV per share of the ETF. 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\ The Commission therefore has granted such exemptive relief
to date only to those actively managed ETFs that have provided daily
transparency of their portfolio holdings.
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    \10\ The condition for daily portfolio transparency has
consistently been one of the conditions to the exemptive relief
issued to actively managed ETFs by the Commission. See PowerShares
Capital Management LLC, et al., Investment Company Act Release Nos.
28140 (Feb. 1, 2008) (notice) and 28171 (Feb. 27, 2008) (order). See
also, generally, ETF Rule Proposing Release, supra note 1, at
section II.C.4.
    \11\ See supra note 3 and accompanying text.
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C. Prior Commission Action

    13. The Applicants requested the same relief in a prior application
based on a different proposal for ETFs that would not disclose their
portfolio holdings on a daily basis.\12\ In 2014, the Commission issued
a notice preliminarily taking the position that the prior proposal did
not provide an adequate substitute for full portfolio transparency in
facilitating effective arbitrage.\13\ The Commission stated that
prospectus disclosure, quarterly portfolio holdings disclosure and the
proposed indicative intraday value did not provide sufficient
information to allow market makers to effectively assess whether real-
time arbitrage opportunities in ETF shares exist. In particular, the
Commission stated that an ETF's typical intraday indicative value,
which is calculated every 15 seconds, is not reliable as the primary
pricing signal for an ETF's portfolio, especially during stressed or
volatile market conditions, because: (i) It provides stale data, given
the 15-second intervals; (ii) it is not subject to meaningful
standards, given that there are no uniform methodology requirements for
its calculation and no one takes responsibility for its accuracy; and
(iii) it is of limited value for asset classes that cannot be easily
and accurately priced.\14\
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    \12\ See Precidian ETFs Trust, et al., File No. 812-14116,
Second Amendment, filed July 23, 2013 (the prior application also
included a request for relief from section 22(e) of the Act).
    \13\ Precidian ETFs Trust, et al., Investment Company Act
Release No. 31300 (October 21, 2014).
    \14\ Id. at section IV.A. See also, ETF Rule Proposing Release,
supra note 1, at section II.C.3.
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III. The Application

A. The Applicants

    14. The Trusts are each a statutory trust organized under the laws
of Delaware and registered under the Act as an open-end management
investment company with multiple series. The Initial Adviser, a limited
liability corporation organized under the laws of Delaware, is
registered as an investment adviser under the Investment Advisers Act
of 1940 (``Advisers Act'') and would serve as the investment adviser to
the initial ActiveShares ETFs. Foreside Fund Services, LLC, a Delaware
limited liability company, is a registered broker-dealer under the
Securities Exchange Act of 1934, as amended (``Exchange Act'').

B. Applicants' Proposal

    15. Applicants seek exemptive relief under section 6(c) to allow
them to introduce several actively-managed ActiveShares ETFs that would
not disclose their portfolio holdings on a daily basis.\15\ Applicants
maintain that operating the same ETFs as fully-transparent actively-
managed ETFs would make the ETFs susceptible to ``front running'' and
``free riding'' by other investors and/or managers, which can harm, and
result in substantial costs to, the ETFs and their shareholders.\16\
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    \15\ Applicants request that the order apply to the series of
the Trusts identified and described in the Application as well as to
additional series of the Trusts 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 ActiveShares ETF will: (a) Be advised by
the Initial Adviser or an entity controlling, controlled by, or
under common control with the Initial Adviser (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
ActiveShares ETFs. 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.
    \16\ See Application at 6.
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    16. Applicants assert that the ActiveShares ETFs 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 (i.e.,
tax efficiency, lower cash drag and lower operational expenses) and
without raising investor protection concerns that are not otherwise
addressed by the terms and conditions of the requested relief.
    17. 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
ActiveShares ETFs to operate on a non-transparent basis. These material
differences are discussed below.
    a. AP Representatives. To protect the identity and weightings of
their portfolio holdings, the ActiveShares ETFs would sell and redeem
their Shares in creation units to Authorized Participants only through
an unaffiliated broker-dealer acting on an agency basis (``AP
Representative'').\17\ Applicants state that each day, an ActiveShares
ETF would disclose to the AP Representative the basket of securities
that the ActiveShares ETF would exchange for its Shares. In the case of
creations, an Authorized Participant would deliver to the AP
Representative the cash necessary to purchase the basket of securities
to be exchanged for the Shares of the ActiveShares ETF. In the case of
redemptions, the ActiveShares ETF would deliver a basket of securities
to the AP Representative, who, in turn, would sell them in exchange for
cash on behalf of the Authorized Participant. The AP Representative
would know, but keep confidential, the identity and weightings of the
basket securities it exchanges for the Shares on behalf of the
Authorized Participants.\18\ Applicants assert that an Authorized
Participant would be able to effectively close a long (or short)
position in a creation unit of Shares as soon as it enters an order to
redeem (or create) the Shares and the AP Representative acquires or
sells the basket securities to be exchanged with the ActiveShares ETF
at the end of the day.\19\
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    \17\ The AP Representative will have entered into an agreement
with the Authorized Participants and the ActiveShares ETF. See
Application at 5. No AP Representative would be an ``affiliated
person'' (as defined in section 2(a)(3) of the Act) of the
ActiveShares ETF, the ActiveShares ETF's Adviser, or the
ActiveShares ETF's Authorized Participants.
    \18\ The ActiveShares ETFs will sell and redeem Shares in
creation units and generally on an in-kind basis. Each AP
Representative will be contractually restricted from disclosing the
portfolio information of an ActiveShares ETF and will undertake to
use the information only to execute creations and redemptions for
the ActiveShares ETF. The ActiveShares ETFs will also obtain
representations from the AP Representatives as to the
confidentiality of the portfolio information, the effectiveness of
information barriers, and the adequacy of insider trading policies
and procedures. In addition, section 15(g) of the Exchange Act will
require an AP Representative, as a registered broker, to establish,
maintain, and enforce written policies and procedures reasonably
designed to prevent the misuse of material, nonpublic information by
the AP Representative or any person associated with the AP
Representative. See Application at note 21.
    \19\ See Application at page 18. Except where purchases or
redemptions will include cash under certain limited circumstances,
the names and quantities of basket securities will correspond pro
rata to the portfolio holdings used to calculate an ActiveShares
ETF's NAV for that day. See Application at 13-14. As market
participants will be able to effectively close positions in Shares
intraday, they will be able to keep any risk associated with their
positions in Shares to a minimum. See infra notes 27-31 and
accompanying discussion.
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    b. Verified Intraday Indicative Value and ETF portfolio holdings.
To facilitate arbitrage, each ActiveShares ETF would disseminate a
``verified intraday indicative value,'' or ``VIIV,'' reflecting the
value of its portfolio holdings, calculated every second during the
trading day, rather than every 15 seconds like existing ETFs.\20\
Applicants have addressed the concerns noted by the Commission in 2014
\21\ with respect to reliance on the typical 15-second intraday
indicative value for arbitrage purposes, by creating a VIIV that: (i)
Would be calculated and disseminated every second; \22\ and (ii) has
precise and uniform parameters for calculation across all ActiveShares
ETFs, including that the ActiveShares ETFs and their Adviser take
responsibility for its calculation.\23\ To further facilitate arbitrage
and address those concerns, each ActiveShares ETF also will only invest
in certain securities that trade on a U.S. exchange, contemporaneously
with the ETF's Shares.\24\ Because the securities are exchange traded,
Applicants assert that the AP Representative would be able to promptly
buy or sell the basket securities that it exchanges with the
ActiveShares ETF on behalf of an Authorized Participant upon receiving
an order to enter into a creation or redemption transaction. The
portfolio

holdings' secondary market, moreover, would provide reliable price
inputs for the VIIV calculation.\25\
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    \20\ For purposes of the VIIV, all portfolio securities will be
valued at the mid-point between the current national best bid and
national best offer as disseminated by the Consolidated Quotation
System or UTP Plan Securities Information Processor (``National Best
Bid and Offer''). See Application at 23.
    \21\ See supra note 13 and accompanying text.
    \22\ In particular, Applicants assert that such a relatively
high frequency disclosure of the VIIV would permit market
participants to assess whether an ActiveShares ETF is trading at a
premium or discount to NAV and therefore provide a level of current
information that will facilitate intraday arbitrage. See Application
at 27.
    \23\ See Application at 22-23 and 28. In particular, Applicants
assert that each ActiveShares ETF would employ a primary and a
secondary calculation engine to provide two independently calculated
sources of intraday indicative values. Each ActiveShares ETF would
also employ a pricing verification agent to continuously compare the
two data streams from the calculation engines on a real time basis.
Each ActiveShares ETF would adopt procedures governing the
calculation and dissemination of the VIIV and its Adviser would bear
responsibility for the oversight of that process. Each Adviser would
also, as part of that oversight process, periodically, but no less
than annually, review the VIIV Procedures. Any changes to the
procedures would be submitted to the ActiveShares ETF's board of
directors for review. Id.
    \24\ Each ActiveShares ETF would invest only in ETFs and
exchange-traded notes, common stocks, preferred stocks, American
depositary receipts, real estate investment trusts, commodity pools,
metals trusts, currency trusts and futures. All of these instruments
will trade on an U.S. exchange contemporaneously with the Shares.
The reference assets of the exchange-traded futures in which an
ActiveShares ETF may invest would be assets that the ActiveShares
ETF could invest in directly, or in the case of an index future,
based on an index of a type of asset that the ActiveShares ETF could
invest in directly. An ActiveShares ETF may also invest in cash and
cash equivalents. No ActiveShares ETF would buy securities that are
illiquid investments (as defined in rule 22e-4(a)(8) under the Act)
at the time of purchase, borrow for investment purposes or hold
short positions. See Application at 8. An ActiveShares ETF may,
however, hold an illiquid investment if it becomes illiquid after
purchase. See Application at 28; see also rule 22e-4 under the Act
(requiring, among other things, that a fund develop a plan to
decrease its illiquid investments should they exceed 15% of the
fund's net assets).
    \25\ To the extent a portfolio holding does not have a readily
available market quotation, the ActiveShares ETF would make public
the identity of the holding and its weight in the VIIV, thus making
the holding fully transparent. See Application at 24 and 28. In
addition, at any time that portfolio holdings representing 10% or
more of an ActiveShares ETF's portfolio become subject to a trading
halt or otherwise do not have readily available market quotations,
Applicants would request that the exchange halt the ETF's trading.
See Application at 29.
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    c. Arbitrage transactions in the ActiveShares ETFs. Applicants
assert that an accurate VIIV on a per-second basis (together with
prospectus and quarterly portfolio disclosure),\26\ and the ability to
create and redeem ETF Shares in exchange for a basket that is a pro
rata slice of the ActiveShares ETF's portfolio holdings, is sufficient
to facilitate effective arbitrage.\27\ Market participants would be
able to identify potential arbitrage opportunities when an ActiveShares
ETF's VIIV and secondary market price diverge and could then take
advantage of those opportunities by entering into arbitrage
transactions. For example, similar to traditional ETFs, if an
ActiveShares ETF's Shares begin trading at a discount, an Authorized
Participant can purchase the Shares in secondary market transactions
and, after accumulating enough Shares to comprise a creation unit,
redeem them from the ActiveShares ETF (through an AP Representative) in
exchange for the more valuable securities in the ETF's redemption
basket.\28\ The purchases of the ActiveShares ETF's Shares would reduce
the supply of the Shares in the market, and thus tend to drive up the
Shares' market price to a level closer to the ETF's NAV.\29\
Alternatively, if an ActiveShares ETF's Shares are trading at a
premium, the transactions in the arbitrage process would be
reversed.\30\ Applicants further state that, like with traditional
ETFs, market participants will also be able to engage in arbitrage
without necessarily using the creation or redemption processes.\31\ For
example, if a market participant believes that an ActiveShares ETF is
trading at a discount, the market participant may buy ETF Shares and
take a short position in instruments whose returns the market
participant believes are correlated to those of the ETF Shares. The
market participant would wait for the trading prices to move toward
parity, and then close out the positions in both the ETF Shares and
those instruments, to realize a profit from the relative movement of
their trading prices.\32\ As a result, Applicants expect that ETF
Shares will trade at a market price at or close to the NAV per
Share.\33\
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    \26\ Like all other registered management investment companies,
the ActiveShares ETFs would also disclose their investment strategy
in their prospectus and publicly disclose portfolio holdings
information on a quarterly basis, with a 60-day lag. See rule 30e-1;
rule 30d-1; and rule 30b1-5 under the Act.
    \27\ See Application at 29.
    \28\ Applicants note that since the size of the creation and
redemption baskets will be relatively small, normally between
$100,000 and $300,000, positions in ETF Shares can be closed
throughout the day, resulting in minimal risk for a market
participant. See Application at 17. See also supra paragraph 17.a.
    \29\ The purchase of the ETF Shares in the secondary market,
combined with the sale of the redemption basket securities, may also
drive the market price of ETF Shares and the value of the
ActiveShares ETF's portfolio holdings closer together. See supra
section II.B herein.
    \30\ See supra section II.B herein.
    \31\ See supra section II.B herein.
    \32\ At any time during trading hours, a market participant has
the ability to eliminate all risk by closing its positions,
including positions in the Shares, by placing a creation or
redemption order, where the AP Representative would buy or sell on
behalf of the market participant the basket securities to be
exchanged with the ActiveShares ETF at the end of the day. See
Application at 18; supra note 18 and accompanying text.
    \33\ See Application at 5.
---------------------------------------------------------------------------

    d. Protective conditions. Because the ActiveShares ETFs and the
alternative arbitrage mechanism will be new to the market, Applicants
have agreed to comply with certain conditions in addition to those
included in prior ETF exemptive orders. First, the ActiveShares ETFs
will provide certain public disclosures to explain to investors how
they differ from traditional ETFs and inform investors that the
ActiveShares ETFs' 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 ActiveShares ETFs' Shares more expensive. The
ActiveShares ETFs will also disclose that market participants may
attempt to reverse engineer an ActiveShares ETF's trading strategy,
which, if successful, could increase opportunities for trading
practices that may disadvantage the ActiveShares ETF and its
shareholders.\34\ In addition, each ActiveShares ETF 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 ActiveShares ETFs and fully transparent actively managed ETFs and
the above costs and risk.\35\ Unless otherwise requested by the staff
of the Commission, the Legend will read as follows:
---------------------------------------------------------------------------

    \34\ See Application at 21.
    \35\ See Application at 20-21.
---------------------------------------------------------------------------

    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 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.
    18. Second, Applicants will comply with the requirements of
Regulation Fair Disclosure (``Reg. FD'') as if it applied to them, thus
prohibiting the ActiveShares ETF's selective disclosure of any material
nonpublic information.\36\ Because the ActiveShares ETFs 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.
---------------------------------------------------------------------------

    \36\ 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 ETF Rule Proposing Release, supra
note 1, at text accompanying notes 225-226. 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
ActiveShares ETFs will be continuously offered, this exemption would
likely make the condition requiring Applicants to comply with Reg.
FD meaningless.
---------------------------------------------------------------------------

    19. Third, the ActiveShares ETFs and their Adviser will take
remedial actions as necessary if the ActiveShares ETFs

do not function as anticipated. Prior to launch, the ActiveShares ETFs
will establish certain thresholds for their levels of premiums/
discounts and spreads, so that, upon an ActiveShares ETF's crossing a
threshold, the Adviser will promptly call a meeting of the ActiveShares
ETF's board of directors, and will present the board with
recommendations for appropriate remedial measures.\37\ The board would
then consider the continuing viability of the ActiveShares ETF, whether
shareholders are being harmed, and what, if any, action would be
appropriate.\38\ 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 ActiveShares ETFs.\39\
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    \37\ See Application at 25. For the first three years after
launch of an ActiveShares ETF, its board would promptly meet if, for
30 or more days in any quarter or 15 days in a row, the absolute
difference between either the market closing price or Bid/Ask Price,
on one hand, and NAV, on the other, exceeds 1%, or the bid/ask
spread exceeds 1%. An ActiveShares ETF may adopt additional or lower
(i.e., less than 1%) thresholds to the extent approved by the ETF's
board.
    \38\ For at least three years after launch of each ActiveShares
ETF, the Board will also undertake these considerations on an annual
basis, regardless of whether the ActiveShares ETF's preset
thresholds have been crossed. Potential actions may include, but are
not limited to, changing lead market makers, listing the
ActiveShares ETF on a different exchange, changing the size of
creations units, changing the ActiveShares ETF's investment
objective or strategy, and liquidating the ActiveShares ETF. See
Application at 25.
    \39\ See Application at 45, condition 7.
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IV. Requested Exemptive Relief

    20. Applicants request an order under section 6(c) of the Act for
an exemption from sections 2(a)(32), 5(a)(1), and 22(d) 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.
    21. 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.\40\ 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.\41\
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    \40\ Applicants are not seeking the customary relief from
section 22(e) of the Act, which permits ETFs that invest in foreign
instruments to delay the satisfaction of in-kind redemption requests
beyond seven days. See generally ETF Rule Proposing Release, supra
note 1, at section II.B.4. Given that the ActiveShares ETFs will not
invest in foreign markets, the relief is not necessary.
    \41\ Applicants anticipate that the Initial Adviser or an
affiliate thereof would enter into license agreements with other
registered investment advisers advising an open-end management
investment company that intends to launch new series operating as
the Applicants' ETFs (such licensed adviser and trust together, 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 6.
See also 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).
---------------------------------------------------------------------------

    22. 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

    23. 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.
    24. 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.\42\
---------------------------------------------------------------------------

    \42\ See ETF Rule Proposing Release, supra note 1, at text
accompanying note 111.
---------------------------------------------------------------------------

    25. 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 ActiveShares ETFs 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 contend 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 ActiveShares ETF's NAV.
    26. 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. As noted
earlier, the Commission has only granted relief from section 22(d) and
rule 22c-1 to actively managed ETFs that provide daily transparency of
their portfolio holdings.\43\ The Commission believes that the
alternative arbitrage mechanism proposed by Applicants can also work in
an efficient manner to maintain an ActiveShares ETF's secondary market
prices close to its NAV.\44\ The Commission recognizes, however, that
the lack of full transparency may cause the ActiveShares ETFs to trade
with spreads and premiums/discounts that are larger than those of
comparable,

fully transparent ETFs.\45\ Nonetheless, as long as arbitrage continues
to keep the ActiveShares ETF'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.\46\
---------------------------------------------------------------------------

    \43\ An effective arbitrage mechanism that maintains a close tie
between market price and NAV is the foundation for why the prices at
which retail investors buy and sell ETF shares are similar to the
price at which Authorized Participants are able to buy and redeem
shares directly from the ETF at NAV. See discussion following supra
note 9; see also ETF Rule Proposing Release, supra note 1, at
section II.B.2.
    \44\ See supra section III.B.c.
    \45\ While the VIIV will provide an approximate value of an
ActiveShares ETF's portfolio holdings, market participants will only
be able to estimate, not to observe, the spreads at which those
holdings trade, given that the VIIV would be based on the mid-point
between the current National Best Bid and Offer. See supra note 19.
For the same reason, market participants also will not know the
exact price at which the AP Representative buys or sells the
ActiveShares ETF's portfolio holdings as part of a creation or
redemption transaction with the ActiveShares ETF. To account for the
lack of this information, market participants may require wider
spreads than for other ETFs when they trade the ActiveShares ETF
Shares.
    \46\ Investors will have the information necessary to compare
the costs associated with investing in the ActiveShares ETFs with
the costs of investing in other ETFs and mutual funds. See Item 3 of
Form N-1A; condition 2. Cf. ETF Rule Proposing Release, supra note
1, at text following note 130 (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.''
---------------------------------------------------------------------------

B. Other Relief

    27. 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.
    28. 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 ActiveShares ETFs to register as open-end management
investment companies and issue Shares that are redeemable in creation
units only.
    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 ActiveShares ETFs, 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
ActiveShares ETFs. Applicants also seek relief from the prohibitions on
affiliated transactions in section 17(a) to permit an ActiveShares ETF
to sell its Shares to and redeem its Shares from an Acquiring Fund, and
to engage in the accompanying in-kind transactions with the Acquiring
Fund.\47\ The purchase of creation units by an Acquiring Fund directly
from an ActiveShares ETF will be accomplished in accordance with the
policies of the Acquiring Fund and will be based on the NAVs of the
ActiveShares ETFs.
---------------------------------------------------------------------------

    \47\ The requested relief would apply to direct sales of shares
in creation units by an ActiveShares ETF to an Acquiring 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 an ActiveShares ETF could be deemed an
affiliated person, or a second-tier affiliate, of an Acquiring Fund
because an Adviser or an entity controlling, controlled by or under
common control with an Adviser provides investment advisory services
to that Acquiring Fund.
---------------------------------------------------------------------------

    30. Section 12(d)(1) of the Act. Third, Applicants request an
exemption to permit Acquiring Funds to acquire ETF Shares beyond the
limits of section 12(d)(1)(A) of the Act and permit the ActiveShares
ETFs, and any principal underwriter for the ActiveShares ETFs, and/or
any broker or dealer registered under the Exchange Act, to sell ETF
Shares to Acquiring Funds beyond the limits of section 12(d)(1)(B) of
the Act. The application's terms and conditions are designed to, among
other things, help prevent any potential (i) undue influence over an
ETF 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.

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, and the risk of selective
disclosure 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 market price
and NAV per share of an ActiveShares ETF. We believe that the proposed
arbitrage mechanism can work in an efficient manner to maintain an
ActiveShares ETF's secondary market prices close to its NAV while
providing investors with the opportunity to invest in active strategies
through a vehicle that offers the traditional benefits of ETFs.\48\ In
addition, to the extent that the ActiveShares ETFs do not function as
anticipated, Applicants have undertaken to take remedial actions as
appropriate.\49\
---------------------------------------------------------------------------

    \48\ See supra paragraphs 17.c. and 26.
    \49\ See supra paragraph 19.
---------------------------------------------------------------------------

    33. Selective Disclosure. Another possible concern is that the
proposed AP Representative structure could create informational
asymmetries that raise legal and policy concerns regarding selective
disclosure of material non-public information. As discussed above, to
address this concern Applicants have undertaken to implement a number
of safeguards, including a condition requiring Applicants to comply
with Reg. FD as if it applied to ETFs.\50\
---------------------------------------------------------------------------

    \50\ See supra paragraph 18. In addition, the AP Representative
would contractually agree to use the identity and weighting of the
securities in the creation basket for no purpose other than
executing creations and redemptions for an ActiveShares ETF, and to
maintain such identities and weightings confidential. See
Application at 10. Further, the AP Representative, as a broker
registered under the Exchange Act, is required to establish,
maintain, and enforce written policies and procedures reasonably
designed to prevent the misuse of material, nonpublic information by
the AP Representative or any person associated with the AP
Representative. See Application at note 21.
---------------------------------------------------------------------------

    34. Reverse Engineering. A third possible concern is that other
market participants may be able to reverse engineer an ActiveShares
ETF's portfolio holdings and use such information to the disadvantage
of the ActiveShares ETF, Authorized Participants and shareholders.
Applicants have represented that they will operate the ActiveShares
ETFs in a manner designed to minimize the risk of reverse engineering
and the Commission anticipates that the ActiveShares ETFs will have the
ability to minimize such risk.\51\ 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.''
---------------------------------------------------------------------------

    \51\ Our Division of Economic Research and Analysis (``DERA'')
conducted an analysis of whether the ActiveShares ETFs' portfolios
could be reverse engineered, finding that the answer depends on the
specifics of each ActiveShares ETF, including the size of the
ActiveShares ETF's universe of potential portfolio selections. See
Memorandum from DERA, Inferring Non-Transparent ETF Portfolio
Holdings (Nov. 16, 2017), available at https://www.sec.gov/comments/sr-nysearca-2017-36/nysearca201736-2695453-161510.pdf. The
ActiveShares ETFs would disclose this risk to investors, even though
Applicants believe that such reverse engineering would be ``highly
unlikely.'' See Application at 24 and supra note 34 and accompanying
text.
---------------------------------------------------------------------------

V. Applicants' Conditions 52
---------------------------------------------------------------------------

    \52\ Unless the context otherwise requires, references to
``ETFs'' in the conditions below refer to ActiveShares ETFs.
Capitalized terms not otherwise defined herein shall have the same
meaning as in the Application.
---------------------------------------------------------------------------

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

A. ETF Relief

    1. As long as an ETF operates in reliance on the requested order,
the Shares of such ETF will be listed on an exchange.
    2. The website for the Trust, which will be publicly accessible at
no charge, will contain, on a per Share basis for each ETF, 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
registered under the Act. The website will also disclose the median
bid-ask spread for each ETF's most recent fiscal year based on the
National Best Bid and Offer at the time of calculation of NAV (or such
other spread measurement as may be required for other ETFs registered
under the Act).
    3. Each ETF 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. 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 ETF) to acquire any
deposit instrument for an ETF through a transaction in which the ETF
could not engage directly.
    5. On each Business day the VIIV for an ETF on a per-Share basis
will be provided to the market in one second intervals during regular
trading hours.
    6. Each ETF will maintain and preserve, for a period of not less
than five years, in an easily accessible place, all written agreements
(or copies thereof) between (i) the ETF and each AP Representative
related to the AP Representative's role as such and (ii) an Authorized
Participant and the ETF or one of its service providers that allows the
Authorized Participant to place orders for the purchase or redemption
of creation units.
    7. Each ETF will provide Commission staff with periodic reports
(for which confidential treatment may be requested) containing such
information as the Commission staff may request.
    8. Each ETF and each person acting on behalf of an ETF 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. 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 funds that create
and redeem their Shares exclusively through an AP Representative or
similar agent without daily public basket or portfolio disclosure.

B. Section 12(d)(1) Relief

    10. The members of the Acquiring Fund's Advisory Group will not
control (individually or in the aggregate) an ETF within the meaning of
section 2(a)(9) of the Act. The members of the Acquiring Fund's Sub-
Advisory Group will not control (individually or in the aggregate) an
ETF within the meaning of section 2(a)(9) of the Act. If, as a result
of a decrease in the outstanding voting securities of an ETF, an
Acquiring Fund's Advisory Group or the Acquiring Fund's Sub-Advisory
Group, each in the aggregate, becomes a holder of more than 25% of the
outstanding voting securities of an ETF, it will vote its Shares of the
ETF in the same proportion as the vote of all other holders of the
ETF's Shares. This condition does not apply to the Acquiring Fund's
Sub-Advisory Group with respect to an ETF for which the Acquiring Fund
Sub-Adviser or a person controlling, controlled by or under common
control with the Acquiring Fund Sub-Adviser acts as the investment
adviser within the meaning of section 2(a)(20)(A) of the Act.
    11. No Acquiring Fund or Acquiring Fund Affiliate will cause any
existing or potential investment by the Acquiring Fund in an ETF to
influence the terms of any services or transactions between the
Acquiring Fund or Acquiring Fund Affiliate and the ETF or ETF
Affiliate.
    12. The board of directors or trustees of an Acquiring Management
Company, including a majority of the Independent Trustees, will adopt
procedures reasonably designed to assure that the Acquiring Fund
Adviser and any Acquiring Fund Sub-Adviser are conducting the
investment program of the Acquiring Management Company without taking
into account any consideration received by the Acquiring Management
Company or an Acquiring Fund Affiliate from an ETF or a Fund Affiliate
in connection with any services or transactions.
    13. Once an investment by an Acquiring Fund in the securities of an
ETF exceeds the limit in section 12(d)(1)(A)(i) of the Act, the Board,
including a majority of the Independent Trustees, will determine that
any consideration paid by an ETF to an Acquiring Fund or an Acquiring
Fund Affiliate in connection with any services or transactions: (i) Is
fair and reasonable in relation to the nature and quality of the
services and benefits received by the ETF; (ii) is within the range of
consideration that the ETF 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 an ETF and its Adviser, or any person
controlling, controlled by or under common control with such Adviser.
    14. An Acquiring Fund Adviser, or a trustee or Sponsor of an
Acquiring Trust, as applicable, will waive fees otherwise payable to it
by the Acquiring Fund in an amount at least equal to any compensation
(including any fees received pursuant to any plan adopted by an ETF
pursuant to rule 12b-1 under the Act) received from an ETF by the
Acquiring Fund Adviser, or trustee or Sponsor of an Acquiring Trust, or
an affiliated person of the Acquiring Fund Adviser, or trustee or
Sponsor of the Acquiring Trust, other than any advisory fees paid to
the Acquiring Fund Adviser, or trustee or Sponsor of an Acquiring
Trust, or its affiliated person by the ETF, in connection with the
investment by the Acquiring Fund in the ETF. Any Acquiring Fund Sub-
Adviser will waive fees otherwise payable to the Acquiring Fund Sub-
Adviser, directly or indirectly, by the Acquiring Management Company in
an amount at least equal to any compensation received from an ETF by
the Acquiring Fund Sub-Adviser, or an affiliated person of the
Acquiring Fund Sub-Adviser, other than any advisory fees paid to the
Acquiring Fund Sub-Adviser or its affiliated person by the ETF, in
connection with the investment by the Acquiring Management Company in
the ETF made at the direction of the Acquiring Fund Sub-Adviser. In the
event that the Acquiring Fund Sub-Adviser waives fees, the benefit of
the

waiver will be passed through to the Acquiring Management Company.
    15. No Acquiring Fund or Acquiring Fund Affiliate (except to the
extent it is acting in its capacity as an investment adviser to an ETF)
will cause an ETF to purchase a security in an Affiliated Underwriting.
    16. The Board of an ETF, including a majority of the Independent
Trustees, will adopt procedures reasonably designed to monitor any
purchases of securities by an ETF in an Affiliated Underwriting, once
an investment by an Acquiring Fund in the securities of the ETF 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 Acquiring Fund in an ETF. The Board will consider, among other
things: (i) Whether the purchases were consistent with the investment
objectives and policies of the ETF; (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 ETF 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 ETF.
    17. Each ETF will maintain and preserve permanently in an easily
accessible place a written copy of the procedures described in the
preceding condition, and any modifications to such procedures, and will
maintain and preserve for a period of not less than six years from the
end of the fiscal year in which any purchase in an Affiliated
Underwriting occurred, the first two years in an easily accessible
place, a written record of each purchase of securities in Affiliated
Underwritings once an investment by an Acquiring Fund in the securities
of the ETF 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 an ETF in excess of the limits in section
12(d)(1)(A), an Acquiring Fund will execute an Acquiring Fund Agreement
with the ETF 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 an ETF in excess of the limit in section
12(d)(1)(A)(i), an Acquiring Fund will notify the ETF of the
investment. At such time, the Acquiring Fund will also transmit to the
ETF a list of the names of each Acquiring Fund Affiliate and
Underwriting Affiliate. The Acquiring Fund will notify the ETF of any
changes to the list as soon as reasonably practicable after a change
occurs. The ETF and the Acquiring Fund will maintain and preserve a
copy of the order, the Acquiring Fund Agreement, and the list with any
updated information for the duration of the investment and for a period
of not less than six years thereafter, the first two years in an easily
accessible place.
    19. Before approving any advisory contract under section 15 of the
Act, the board of directors or trustees of each Acquiring Management
Company, including a majority of the Independent 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 ETF in
which the Acquiring Management Company may invest. These findings and
their basis will be recorded fully in the minute books of the
appropriate Acquiring Management Company.
    20. Any sales charges (other than customary brokerage fees) and/or
service fees charged with respect to shares of an Acquiring Fund will
not exceed the limits applicable to a fund of funds as set forth in
FINRA Rule 2341.
    21. No ETF 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 an ETF acquires securities of another investment company
pursuant to exemptive relief from the Commission permitting the ETF to
acquire securities of one or more investment companies for short-term
cash management purposes.

    By the Commission,
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-07207 Filed 4-10-19; 8:45 am]
 BILLING CODE P