[Federal Register Volume 80, Number 27 (Tuesday, February 10, 2015)]
[Notices]
[Pages 7504-7511]
[FR Doc No: 2015-02660]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 31446; 812-14234]

Exceed Advisory LLC and Exceed ETFs; Notice of Application

February 4, 2015.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (``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 (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.

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Applicants: Exceed Advisory LLC (``Exceed'') and Exceed ETFs (the
``Trust'').

Summary of Application: Applicants request an order that permits: (a)
Actively-managed series of certain open-end management investment
companies to issue shares (``Shares'') redeemable in large aggregations
only (``Creation Units''); (b) secondary market transactions in Shares
to occur at negotiated market prices; (c) certain series to pay
redemption proceeds, under certain circumstances, more than seven days
from the tender of Shares for redemption; (d) certain affiliated
persons of the series to deposit securities into, and receive
securities from, the series in connection with the purchase and
redemption of Creation Units; and (e) certain registered management
investment companies and unit investment trusts outside of the same
group of investment companies as the series to acquire Shares.

Filing Dates: The application was filed on November 14, 2013.

Hearing or Notification of Hearing: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on March 2, 2015, and should be accompanied by proof of
service on applicants, in the form of an affidavit or, for lawyers, a
certificate of service. Pursuant to rule 0-5 under the Act, hearing
requests should state the nature of the writer's interest, any facts
bearing upon the desirability of a hearing on the matter, the reason
for the request, and the issues contested. Persons who wish to be
notified of a hearing may request notification by writing to the
Commission's Secretary.

ADDRESSES: Brent J. Fields, Secretary, U.S. Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090. Applicants:
Exceed and the Trust: Exceed Advisory LLC, 10 West 46th Street, #4A,
New York, New York 10036.

FOR FURTHER INFORMATION CONTACT:  Kieran G. Brown, Senior Counsel, at
(202) 551-6773 or Daniele Marchesani, Branch Chief, at<PHONE_NUMBER>
(Division of Investment Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or for an
applicant using the Company name box, at http://www.sec.gov/search/search.htm or by calling<PHONE_NUMBER>.

Applicants' Representations

    1. The Trust is a statutory trust organized under the laws of
Delaware and will register with the Commission as an open-end
management investment company. Applicants currently intend that the
initial series of the Trust that will rely on the order will be the
Exceed Market Opportunity ETF (the ``Initial Fund''), which will seek
to protect against a portion of market losses and to provide enhanced
returns on market gains up to a maximum return at the end of a
specified term. To achieve its investment objective, under normal
market conditions, the Initial Fund will

primarily invest in U.S. dollar denominated fixed income securities,
consisting of U.S. Treasuries, other U.S. government securities and
investment grade corporate bonds, and purchases and sells exchange-
traded options.
    2. Exceed, a Delaware limited liability company that is registered
with the Commission as an investment adviser under the Investment
Adviser Act of 1940 (``Advisers Act''), will be the investment adviser
to the Initial Fund. The Advisor (as defined below) may enter into sub-
advisory agreements with investment advisers to act as sub-advisors
with respect to the Funds (as defined below) (each a ``Sub-Advisor'').
Applicants state that any Sub-Advisor will be registered, or not
subject to registration, under the Advisers Act. A registered broker-
dealer (``Broker'') under the Securities Exchange Act of 1934 (the
``Exchange Act''), will be selected and approved by the Board (as
defined below) to act as the distributor and principal underwriter of
the Funds (the ``Distributor'').
    3. Applicants request that the order apply to the Initial Fund and
any future series of the Trust or of any other open-end management
companies that may utilize active management investment strategies
(collectively, ``Future Funds''). Any Future Fund will (a) be advised
by Exceed or an entity controlling, controlled by, or under common
control with Exceed (Exceed and each such other entity and any
successor thereto included in the term ``Advisor''),\1\ and (b) comply
with the terms and conditions of the application.\2\ The Initial Fund
and Future Funds together are the ``Funds''.\3\ Each Fund will consist
of a portfolio of securities (including fixed income securities and/or
equity securities) and/or currencies traded in the U.S. and/or non-U.S.
markets, and derivatives, other assets, and other investment positions
(``Portfolio Instruments'').\4\ Funds may invest in ``Depositary
Receipts''.\5\ Each Fund will operate as an actively managed exchange-
traded fund (``ETF'').
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    \1\ For the purposes of the requested order, a ``successor'' is
limited to an entity or entities that result from a reorganization
into another jurisdiction or a change in the type of business
organization.
    \2\ Any Advisor to a Future Fund will be registered as an
investment adviser under the Advisers Act. All entities that
currently intend to rely on the order are named as applicants. Any
other entity that relies on the order in the future will comply with
the terms and conditions of the application.
    \3\ Applicants further request that the order apply to any
future Distributor of the Funds, which would be a Broker and would
comply with the terms and conditions of the application. The
Distributor of any Fund may be an affiliated person of the Advisor
and/or Sub-Advisors.
    \4\ If a Fund invests in derivatives, then (a) the board of
trustees (``Board'') of the Fund will periodically review and
approve the Fund's use of derivatives and how the Advisor assesses
and manages risk with respect to the Fund's use of derivatives and
(b) the Fund's disclosure of its use of derivatives in its offering
documents and periodic reports will be consistent with relevant
Commission and staff guidance.
    \5\ Depositary Receipts are typically issued by a financial
institution, a ``depositary'', and evidence ownership in a security
or pool of securities that have been deposited with the depositary.
A Fund will not invest in any Depositary Receipts that the Advisor
or Sub-Advisor deems to be illiquid or for which pricing information
is not readily available. No affiliated persons of applicants, any
Future Fund, any Advisor or any Sub-Advisor will serve as the
depositary bank for any Depositary Receipts held by a Fund.
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    4. Applicants request that any exemption under section 12(d)(1)(J)
of the Act from sections 12(d)(1)(A) and (B) apply to: (i) Any Fund
that is currently or subsequently part of the same ``group of
investment companies'' as the Initial Fund within the meaning of
section 12(d)(1)(G)(ii) of the Act; (ii) any principal underwriter for
the Fund; (iii) any Brokers selling Shares of a Fund to an Investing
Fund (as defined below); and (iv) each management investment company or
unit investment trust registered under the Act that is not part of the
same ``group of investment companies'' as the Funds, and that enters
into a FOF Participation Agreement (as defined below) with a Fund (such
management investment companies, ``Investing Management Companies,''
such unit investment trusts, ``Investing Trusts,'' and Investing
Management Companies and Investing Trusts together, ``Investing
Funds''). Investing Funds do not include the Funds.\6\
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    \6\ An Investing Fund may rely on the order only to invest in
Funds and not in any other registered investment company.
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    5. Applicants anticipate that a Creation Unit will consist of at
least 25,000 Shares. Applicants anticipate that the trading price of a
Share will range from $10 to $100. All orders to purchase Creation
Units must be placed with the Distributor by or through a party that
has entered into a participant agreement with the Distributor and the
transfer agent of the Fund (``Authorized Participant'') with respect to
the creation and redemption of Creation Units. An Authorized
Participant is either: (a) A Broker or other participant, in the
Continuous Net Settlement System of the National Securities Clearing
Corporation (``NSCC''), a clearing agency registered with the
Commission and affiliated with the Depository Trust Company (``DTC''),
or (b) a participant in the DTC (``DTC Participant'').
    6. In order to keep costs low and permit each Fund to be as fully
invested as possible, Shares will be purchased and redeemed in Creation
Units and generally on an in-kind basis. Except where the purchase or
redemption will include cash under the limited circumstances specified
below, purchasers will be required to purchase Creation Units by making
an in-kind deposit of specified instruments (``Deposit Instruments''),
and shareholders redeeming their Shares will receive an in-kind
transfer of specified instruments (``Redemption Instruments'').\7\ On
any given Business Day,\8\ the names and quantities of the instruments
that constitute the Deposit Instruments and the names and quantities of
the instruments that constitute the Redemption Instruments will be
identical, and these instruments may be referred to, in the case of
either a purchase or redemption, as the ``Creation Basket.'' In
addition, the Creation Basket will correspond pro rata to the positions
in a Fund's portfolio (including cash positions),\9\ except: (a) In the
case of bonds, for minor differences when it is impossible to break up
bonds beyond certain minimum sizes needed for transfer and settlement;
(b) for minor differences when rounding is necessary to eliminate
fractional shares or lots that are not tradeable round lots; \10\ or
(c) TBA Transactions,\11\ short positions and other positions that
cannot be transferred in kind \12\ will be excluded from the Creation
Basket.\13\ If there is a

difference between NAV attributable to a Creation Unit and the
aggregate market value of the Creation Basket exchanged for the
Creation Unit, the party conveying instruments with the lower value
will also pay to the other an amount in cash equal to that difference
(the ``Cash Amount'').
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    \7\ The Funds must comply with the federal securities laws in
accepting Deposit Instruments and satisfying redemptions with
Redemption Instruments, including that the Deposit Instruments and
Redemption Instruments are sold in transactions that would be exempt
from registration under the Securities Act of 1933 (``Securities
Act''). In accepting Deposit Instruments and satisfying redemptions
with Redemption Instruments that are restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act, the Funds
will comply with the conditions of Rule 144A.
    \8\ Each Fund will sell and redeem Creation Units on any day the
Fund is open, including as required by section 22(e) of the Act
(each, a ``Business Day'').
    \9\ The portfolio used for this purpose will be the same
portfolio used to calculate the Fund's net asset value (``NAV'') for
that Business Day.
    \10\ A tradeable round lot for a security will be the standard
unit of trading in that particular type of security in its primary
market.
    \11\ A TBA Transaction is a method of trading mortgage-backed
securities. In a TBA Transaction, the buyer and seller agree on
general trade parameters such as agency, settlement date, par amount
and price.
    \12\ This includes instruments that can be transferred in kind
only with the consent of the original counterparty to the extent the
Fund does not intend to seek such consents.
    \13\ Because these instruments will be excluded from the
Creation Basket, their value will be reflected in the determination
of the Cash Amount (defined below).
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    7. Purchases and redemptions of Creation Units may be made in whole
or in part on a cash basis, rather than in kind, solely under the
following circumstances: (a) To the extent there is a Cash Amount, as
described above; (b) if, on a given Business Day, a Fund announces
before the open of trading that all purchases, all redemptions or all
purchases and redemptions on that day will be made entirely in cash;
(c) if, upon receiving a purchase or redemption order from an
Authorized Participant, a Fund determines to require the purchase or
redemption, as applicable, to be made entirely in cash; (d) if, on a
given Business Day, a Fund requires all Authorized Participants
purchasing or redeeming Shares on that day to deposit or receive (as
applicable) cash in lieu of some or all of the Deposit Instruments or
Redemption Instruments, respectively, solely because: (i) Such
instruments are not eligible for transfer through either the NSCC or
DTC; or (ii) in the case of Funds holding non-U.S. investment (``Global
Funds''), such instruments are not eligible for trading due to local
trading restrictions, local restrictions on securities transfers or
other similar circumstances; or (e) if a Fund permits an Authorized
Participant to deposit or receive (as applicable) cash in lieu of some
or all of the Deposit Instruments or Redemption Instruments,
respectively, solely because: (i) Such instruments are, in the case of
the purchase of a Creation Unit, not available in sufficient quantity;
(ii) such instruments are not eligible for trading by an Authorized
Participant or the investor on whose behalf the Authorized Participant
is acting; or (iii) a holder of Shares of a Global Fund would be
subject to unfavorable income tax treatment if the holder receives
redemption proceeds in kind.\14\
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    \14\ A ``custom order'' is any purchase or redemption of Shares
made in whole or in part on a cash basis in reliance on clause
(e)(i) or (e)(ii).
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    8. Each Business Day, before the open of trading on a national
securities exchange, as defined in section 2(a)(26) of the Act (``Stock
Exchange''), on which Shares are listed, each Fund will cause to be
published through the NSCC the names and quantities of the instruments
comprising the Creation Basket, as well as the estimated Cash Amount
(if any), for that day. The published Creation Basket will apply until
a new Creation Basket is announced on the following Business Day, and
there will be no intra-day changes to the Creation Basket except to
correct errors in the published Creation Basket. The Stock Exchange
will disseminate every 15 seconds throughout the trading day an amount
representing, on a per Share basis, the sum of the current value of the
Portfolio Instruments that were publicly disclosed prior to the
commencement of trading in Shares on the Stock Exchange.
    9. A Fund may recoup the settlement costs charged by NSCC and DTC
by imposing a transaction fee on investors purchasing or redeeming
Creation Units (the ``Transaction Fee''). The Transaction Fee will be
borne only by purchasers and redeemers of Creation Units and will be
limited to amounts that have been determined appropriate by the Advisor
to defray the transaction expenses that will be incurred by a Fund when
an investor purchases or redeems Creation Units.\15\ All orders to
purchase Creation Units will be placed with the Distributor by or
through an Authorized Participant and the Distributor will transmit all
purchase orders to the relevant Fund. The Distributor will be
responsible for delivering a prospectus (``Prospectus'') to those
persons purchasing Creation Units and for maintaining records of both
the orders placed with it and the confirmations of acceptance furnished
by it.
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    \15\ Where a Fund permits an in-kind purchaser to deposit cash
in lieu of depositing one or more Deposit Instruments, the purchaser
may be assessed a higher Transaction Fee to offset the cost to the
Fund of buying those particular Deposit Instruments. In all cases,
the Transaction Fee will be limited in accordance with the
requirements of the Commission applicable to open-end management
investment companies offering redeemable securities.
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    10. Shares will be listed and traded at negotiated prices on a
Stock Exchange and traded in the secondary market. Applicants expect
that Stock Exchange specialists or market makers (``Market Makers'')
will be assigned to Shares. The price of Shares trading on the Stock
Exchange will be based on a current bid/offer in the secondary market.
Transactions involving the purchases and sales of Shares on the Stock
Exchange will be subject to customary brokerage commissions and
charges.
    11. Applicants expect that purchasers of Creation Units will
include institutional investors and arbitrageurs. Specialists or Market
Makers, acting in their unique role to provide a fair and orderly
secondary market for Shares, also may purchase Creation Units for use
in their own market making activities.\16\ Applicants expect that
secondary market purchasers of Shares will include both institutional
and retail investors.\17\ Applicants expect that arbitrage
opportunities created by the ability to continually purchase or redeem
Creation Units at their NAV per Share should ensure that the Shares
will not trade at a material discount or premium in relation to their
NAV.
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    \16\ If Shares are listed on The NASDAQ Stock Market LLC
(``Nasdaq'') or a similar electronic Stock Exchange (including NYSE
Arca), one or more member firms of that Stock Exchange will act as
Market Maker and maintain a market for Shares trading on that Stock
Exchange. On Nasdaq, no particular Market Maker would be
contractually obligated to make a market in Shares. However, the
listing requirements on Nasdaq, for example, stipulate that at least
two Market Makers must be registered in Shares to maintain a
listing. In addition, on Nasdaq and NYSE Arca, registered Market
Makers are required to make a continuous two-sided market or subject
themselves to regulatory sanctions. No Market Maker will be an
affiliated person or an affiliated person of an affiliated person,
of the Funds, except within the meaning of section 2(a)(3)(A) or (C)
of the Act due solely to ownership of Shares as discussed below.
    \17\ Shares will be registered in book-entry form only. DTC or
its nominee will be the record or registered owner of all
outstanding Shares. Beneficial ownership of Shares will be shown on
the records of DTC or DTC Participants.
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    12. Shares will not be individually redeemable and owners of Shares
may acquire those Shares from a Fund, or tender such shares for
redemption to the Fund, in Creation Units only. To redeem, an investor
must accumulate enough Shares to constitute a Creation Unit. Redemption
requests must be placed by or through an Authorized Participant.
    13. Neither the Trust nor any Fund will be marketed or otherwise
held out as a ``mutual fund.'' Instead, each Fund will be marketed as
an ``actively managed exchange-traded fund''. In any advertising
material where features of obtaining, buying or selling Shares traded
on the Stock Exchange are described, there will be an appropriate
statement to the effect that Shares are not individually redeemable.
    14. The Funds' Web site, which will be publicly available prior to
the public offering of Shares, will include a Prospectus and additional
quantitative information updated on a daily basis, including, on a per
Share basis for each Fund, the prior Business Day's NAV and the market
closing price or mid-point of the bid/ask spread at the time of the
calculation of such NAV (``Bid/Ask Price''), and a calculation of the
premium or discount of the market closing price or Bid/Ask Price
against such NAV. On each Business Day, before commencement of trading
in

Shares on the Stock Exchange, the Fund will disclose on its Web site
the identities and quantities of the Portfolio Instruments held by the
Fund (including any short positions held in securities (``Short
Positions'')) that will form the basis for the Fund's calculation of
NAV at the end of the Business Day.\18\
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    \18\ Applicants note that under accounting procedures followed
by the Funds, trades made on the prior Business Day will be booked
and reflected in NAV on the current Business Day. Accordingly, each
Fund will be able to disclose at the beginning of the Business Day
the portfolio that will form the basis for its NAV calculation at
the end of such Business Day.
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Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act for an
exemption from sections 2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act
and rule 22c-1 under the Act, under 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.
    2. Section 6(c) of the Act provides that the Commission may exempt
any person, security or transaction, or any class of persons,
securities or transactions, from any 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 provisions of the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may exempt any person, security, or
transaction, or any class or classes of persons, securities or
transactions, from any provision of section 12(d)(1) if the exemption
is consistent with the public interest and the protection of investors.

Sections 2(a)(32) and 5(a)(1) of the Act

    3. Section 5(a)(1) of the Act defines an ``open-end company'' as a
management investment company that is offering for sale or has
outstanding any redeemable security of which it is the issuer. Section
2(a)(32) of the Act defines a redeemable security as any security,
other than short-term paper, under the terms of which the holder, upon
its presentation to the issuer, is entitled to receive approximately a
proportionate share of the issuer's current net assets, or the cash
equivalent. Because Shares will not be individually redeemable,
applicants request an order that would permit each Fund to redeem
Shares in Creation Units only. Applicants state that investors may
purchase Shares in Creation Units from each Fund and redeem Creation
Units from each Fund. Applicants further state that because the market
price of Creation Units will be disciplined by arbitrage opportunities,
investors should be able to sell Shares in the secondary market at
prices that do not vary materially from their NAV.

Section 22(d) of the Act and Rule 22c-1 Under the Act

    4. Section 22(d) of the Act, among other things, prohibits a dealer
from selling a redeemable security that is currently being offered to
the public by or through a principal underwriter, except at a current
public offering price described in the prospectus. Rule 22c-1 under the
Act generally requires that a dealer selling, redeeming, or
repurchasing a redeemable security do so only at a price based on its
NAV. Applicants state that secondary market trading in Shares will take
place at negotiated prices, not at a current offering price described
in the Prospectus, and not at a price based on NAV. Thus, purchases and
sales of Shares in the secondary market will not comply with section
22(d) of the Act and rule 22c-1 under the Act. Applicants request an
exemption under section 6(c) from these provisions.
    5. Applicants assert that the concerns sought to be addressed by
section 22(d) of the Act and rule 22c-1 under the Act with respect to
pricing are equally satisfied by the proposed method of pricing Shares.
Applicants maintain that while there is little legislative history
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to (a) prevent dilution caused by
certain riskless-trading schemes by principal underwriters and contract
dealers, (b) prevent unjust discrimination or preferential treatment
among buyers resulting from sales at different prices, and (c) assure
an orderly distribution system of investment company shares by
eliminating price competition from brokers offering shares at less than
the published sales price and repurchasing shares at more than the
published redemption price.
    6. Applicants believe that none of these purposes will be thwarted
by permitting Shares to trade in the secondary market at negotiated
prices. Applicants state that (a) secondary market trading in Shares
does not involve the Funds as parties and cannot result in dilution of
an investment in Shares, and (b) to the extent different prices exist
during a given trading day, or from day to day, such variances occur as
a result of third-party market forces, such as supply and demand.
Therefore, applicants assert that secondary market transactions in
Shares will not lead to discrimination or preferential treatment among
purchasers. Finally, applicants contend that the proposed distribution
system will be orderly because arbitrage activity should ensure that
the difference between the market price of Shares and their NAV remains
narrow.

Section 22(e) of the Act

    7. Section 22(e) of the Act generally prohibits a registered
investment company from suspending the right of redemption or
postponing the date of payment of redemption proceeds for more than
seven days after the tender of a security for redemption. Applicants
observe that settlement of redemptions of Creation Units of Global
Funds is contingent not only on the settlement cycle of the U.S.
securities markets but also on the delivery cycles present in foreign
markets in which those Funds invest. Applicants have been advised that,
under certain circumstances, the delivery cycles for transferring
Portfolio Instruments to redeeming investors, coupled with local market
holiday schedules, will require a delivery process of up to 14 calendar
days. Applicants therefore request relief from section 22(e) in order
to provide payment or satisfaction of redemptions within the maximum
number of calendar days required for such payment or satisfaction in
the principal local markets where transactions in the Portfolio
Instruments of each Global Fund customarily clear and settle, but in
all cases no later than 14 calendar days following the tender of a
Creation Unit.\19\
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    \19\ Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations that it
may otherwise have under rule 15c6-1 under the Exchange Act. Rule
15c6-1 requires that most securities transactions be settled within
three business days of the trade date.
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    8. Applicants state that section 22(e) was designed to prevent
unreasonable, undisclosed and unforeseen delays in the actual payment
of redemption proceeds. Applicants assert that the requested relief
will not lead to the problems that section 22(e) was designed to
prevent. Applicants state that allowing redemption payments for
Creation Units of a Fund to be made

within a maximum of 14 calendar days would not be inconsistent with the
spirit and intent of section 22(e). Applicants state each Global Fund's
statement of additional information (``SAI'') will disclose those local
holidays (over the period of at least one year following the date of
the SAI), if any, that are expected to prevent the delivery of
redemption proceeds in seven calendar days and the maximum number of
days needed to deliver the proceeds for each affected Global Fund.
Applicants are not seeking relief from section 22(e) with respect to
Global Funds that do not affect redemptions in-kind.

Section 12(d)(1) of the Act

    9. Section 12(d)(1)(A) of the Act prohibits a registered investment
company from acquiring shares of an investment company if the
securities represent more than 3% of the total outstanding voting stock
of the acquired company, more than 5% of the total assets of the
acquiring company, or, together with the securities of any other
investment companies, more than 10% of the total assets of the
acquiring company. Section 12(d)(1)(B) of the Act prohibits a
registered open-end investment company, its principal underwriter, or
any other broker or dealer from selling its shares to another
investment company if the sale will cause the acquiring company to own
more than 3% of the acquired company's voting stock, or if the sale
will cause more than 10% of the acquired company's voting stock to be
owned by investment companies generally.
    10. Applicants request relief to permit Investing Funds to acquire
Shares in excess of the limits in section 12(d)(1)(A) of the Act and to
permit the Funds, their principal underwriters and any Broker to sell
Shares to Investing Funds in excess of the limits in section
12(d)(l)(B) of the Act. Applicants submit that the proposed conditions
to the requested relief address the concerns underlying the limits in
section 12(d)(1), which include concerns about undue influence,
excessive layering of fees and overly complex structures.
    11. Applicants submit that their proposed conditions address any
concerns regarding the potential for undue influence. To limit the
control that an Investing Fund may have over a Fund, applicants propose
a condition prohibiting the adviser of an Investing Management Company
(``Investing Fund Advisor''), sponsor of an Investing Trust
(``Sponsor''), any person controlling, controlled by, or under common
control with the Investing Fund Advisor or Sponsor, and any investment
company or issuer that would be an investment company but for sections
3(c)(1) or 3(c)(7) of the Act that is advised or sponsored by the
Investing Fund Advisor, the Sponsor, or any person controlling,
controlled by, or under common control with the Investing Fund Advisor
or Sponsor (``Investing Fund's Advisory Group'') from controlling
(individually or in the aggregate) a Fund within the meaning of section
2(a)(9) of the Act. The same prohibition would apply to any sub-adviser
to an Investing Management Company (``Investing Fund Sub-Advisor''),
any person controlling, controlled by or under common control with the
Investing Fund Sub-Advisor, and any investment company or issuer that
would be an investment company but for sections 3(c)(1) or 3(c)(7) of
the Act (or portion of such investment company or issuer) advised or
sponsored by the Investing Fund Sub-Advisor or any person controlling,
controlled by or under common control with the Investing Fund Sub-
Advisor (``Investing Fund's Sub-Advisory Group'').
    12. Applicants propose a condition to ensure that no Investing Fund
or Investing Fund Affiliate \20\ (except to the extent it is acting in
its capacity as an investment adviser to a Fund) will cause a Fund to
purchase a security in an offering of securities during the existence
of an underwriting or selling syndicate of which a principal
underwriter is an Underwriting Affiliate (``Affiliated Underwriting'').
An ``Underwriting Affiliate'' is a principal underwriter in any
underwriting or selling syndicate that is an officer, director, member
of an advisory board, Investing Fund Advisor, Investing Fund Sub-
Advisor, employee or Sponsor of the Investing Fund, or a person of
which any such officer, director, member of an advisory board,
Investing Fund Advisor, Investing Fund Sub-Advisor, employee or Sponsor
is an affiliated person (except any person whose relationship to the
Fund is covered by section 10(f) of the Act is not an Underwriting
Affiliate).
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    \20\ An ``Investing Fund Affiliate'' is any Investing Fund
Advisor, Investing Fund Sub-Advisor, Sponsor, promoter and principal
underwriter of an Investing Fund, and any person controlling,
controlled by or under common control with any of these entities.
``Fund Affiliate'' is an investment adviser, promoter, or principal
underwriter of a Fund or any person controlling, controlled by or
under common control with any of these entities.
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    13. Applicants propose several conditions to address the potential
for layering of fees. Applicants note that the board of directors or
trustees of any Investing Management Company, including a majority of
the directors or trustees who are not ``interested persons'' within the
meaning of section 2(a)(19) of the Act (``independent directors or
trustees''), will be required to find that the advisory fees charged
under the contract are based on services provided that will be in
addition to, rather than duplicative of, services provided under the
advisory contract of any Fund in which the Investing Management Company
may invest. Applicants also state that 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 NASD
Conduct Rule 2830.\21\
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    \21\ Any reference to NASD Conduct Rule 2830 includes any
successor or replacement rule that may be adopted by the Financial
Industry Regulatory Authority.
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    14. Applicants submit that the proposed arrangement will not create
an overly complex fund structure. Applicants note that a Fund will be
prohibited from acquiring securities of any investment company or
company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of
the limits contained in section 12(d)(1)(A) of the Act, except to the
extent permitted by exemptive relief from the Commission permitting the
Fund to purchase shares of other investment companies for short-term
cash management purposes.
    15. To ensure that an Investing Fund is aware of the terms and
conditions of the requested order, the Investing Funds must enter into
an agreement with the respective Funds (``FOF Participation
Agreement''). The FOF Participation Agreement will include an
acknowledgement from the Investing Fund that it may rely on the order
only to invest in a Fund and not in any other investment company.

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

    16. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such a person (``second tier affiliate''), from selling any security to
or purchasing any security from the company. Section 2(a)(3) of the Act
defines ``affiliated person'' to include any person directly or
indirectly owning, controlling, or holding with power to vote, 5% or
more of the outstanding voting securities of the other person and any
person directly or indirectly controlling, controlled by, or under
common control with, the other person. Section 2(a)(9) of the Act
defines ``control'' as the power to exercise a controlling influence
over the

management or policies of a company and provides that a control
relationship will be presumed where one person owns more than 25% of
another person's voting securities. Each Fund may be deemed to be
controlled by an Advisor and hence affiliated persons of each other. In
addition, the Funds may be deemed to be under common control with any
other registered investment company (or series thereof) advised by an
Advisor (an ``Affiliated Fund'').
    17. Applicants request an exemption under sections 6(c) and 17(b)
of the Act from sections 17(a)(1) and 17(a)(2) of the Act to permit in-
kind purchases and redemptions of Creation Units by persons that are
affiliated persons or second tier affiliates of the Funds solely by
virtue of one or more of the following: (a) Holding 5% or more, or in
excess of 25% of the outstanding Shares of one or more Funds; (b)
having an affiliation with a person with an ownership interest
described in (a); or (c) holding 5% or more, or more than 25% of the
Shares of one or more Affiliated Funds.\22\ Applicants also request an
exemption in order to permit a Fund to sell its Shares to and redeem
its Shares from, and engage in the in-kind transactions that would
accompany such sales and redemptions with, certain Investing Funds of
which the Funds are affiliated persons or second-tier affiliates.\23\
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    \22\ Applicants are not seeking relief from section 17(a) for,
and the requested relief will not apply to, transactions where a
Fund could be deemed an affiliated person, or an affiliated person
of an affiliated person, of an Investing Fund because an investment
adviser to the Funds is also an investment adviser to an Investing
Fund.
    \23\ Applicants expect most Investing Funds will purchase Shares
in the secondary market and will not purchase Creation Units
directly from a Fund. To the extent that purchases and sales of
Shares occur in the secondary market and not through principal
transactions directly between an Investing Fund and a Fund, relief
from section 17(a) would not be necessary. However, the requested
relief would apply to direct sales of Shares in Creation Units by a
Fund to an Investing Fund and redemptions of those Shares. The
requested relief is intended to also cover the in-kind transactions
that may accompany such sales and redemptions.
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    18. Applicants assert that no useful purpose would be served by
prohibiting such affiliated persons from making in-kind purchases or
in-kind redemptions of Shares of a Fund in Creation Units. Absent the
unusual circumstances discussed in the application, the Deposit
Instruments and Redemption Instruments available for a Fund will be the
same for all purchasers and redeemers, respectively, and will
correspond pro rata to the Fund's Portfolio Instruments. The deposit
procedures for in-kind purchases of Creation Units and the redemption
procedures for in-kind redemptions will be the same for all purchases
and redemptions. Deposit Instruments and Redemption Instruments will be
valued in the same manner as those Portfolio Instruments currently held
by the relevant Funds, and the valuation of the Deposit Instruments and
Redemption Instruments will be made in the same manner and on the same
terms for all, regardless of the identity of the purchaser or redeemer.
Applicants do not believe that in-kind purchases and redemptions will
result in abusive self-dealing or overreaching of the Fund.
    19. Applicants also submit that the sale of Shares to and
redemption of Shares from an Investing Fund meets the standards for
relief under sections 17(b) and 6(c) of the Act. Applicants note that
any consideration paid for the purchase or redemption of Shares
directly from a Fund will be based on the NAV of the Fund in accordance
with policies and procedures set forth in the Fund's registration
statement.\24\ The FOF Participation Agreement will require any
Investing Fund that purchases Creation Units directly from a Fund to
represent that the purchase of Creation Units from a Fund by an
Investing Fund will be accomplished in compliance with the investment
restrictions of the Investing Fund and will be consistent with the
investment policies set forth in the Investing Fund's registration
statement. Applicants also state that the proposed transactions are
consistent with the general purposes of the Act and appropriate in the
public interest.
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    \24\ Applicants acknowledge that the receipt of compensation by
(a) an affiliated person of an Investing Fund, or an affiliated
person of such person, for the purchase by the Investing Fund of
Shares of the Fund or (b) an affiliated person of a Fund, or an
affiliated person of such person, for the sale by the Fund of its
Shares to an Investing Fund, may be prohibited by section 17(e)(1)
of the Act. The FOF Participation Agreement also will include this
acknowledgment.
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Applicants' Conditions

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

A. ETF Relief

    1. As long as a Fund operates in reliance on the requested order,
the Shares of the Fund will be listed on a Stock Exchange.
    2. Neither the Trust nor any Fund will be advertised or marketed as
an open-end investment company or a mutual fund. Any advertising
material that describes the purchase or sale of Creation Units or
refers to redeemability will prominently disclose that the Shares are
not individually redeemable and that owners of the Shares may acquire
those Shares from the Fund and tender those Shares for redemption to
the Fund in Creation Units only.
    3. The Web site 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 the market closing price or Bid/
Ask Price, and a calculation of the premium or discount of the market
closing price or Bid/Ask Price against such NAV.
    4. On each Business Day, before commencement of trading in Shares
on the Stock Exchange, the Fund will disclose on its Web site the
identities and quantities of the Portfolio Instruments held by the Fund
that will form the basis for the Fund's calculation of NAV at the end
of the Business Day.
    5. The Advisor or any Sub-Advisor, directly or indirectly, will not
cause any Authorized Participant (or any investor on whose behalf an
Authorized Participant may transact with the Fund) to acquire any
Deposit Instrument for the 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 exchange-traded
funds.

B. Section 12(d)(1) Relief

    1. 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-Advisor or a person controlling, controlled by or
under common control with the Investing Fund Sub-Advisor acts as the
investment adviser within the meaning of section 2(a)(20)(A) of the
Act.
    2. 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.
    3. 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 Advisor and any Investing Fund Sub-Advisor 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.
    4. 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).
    5. The Investing Fund Advisor, 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-1 under
the Act) received from a Fund by the Investing Fund Advisor, or Trustee
or Sponsor, or an affiliated person of the Investing Fund Advisor, or
Trustee or Sponsor, other than any advisory fees paid to the Investing
Fund Advisor, 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-Advisor will waive fees otherwise payable
to the Investing Fund Sub-Advisor, 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-Advisor, or
an affiliated person of the Investing Fund Sub-Advisor, other than any
advisory fees paid to the Investing Fund Sub-Advisor 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-Advisor. In the event that the Investing Fund Sub-Advisor
waives fees, the benefit of the waiver will be passed through to the
Investing Management Company.
    6. 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.
    7. 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.
    8. Each Fund will maintain and preserve permanently in an easily
accessible place a written copy of the procedures described in the
preceding condition, and any modifications to such procedures, and will
maintain and preserve for a period of not less than six years from the
end of the fiscal year in which any purchase in an Affiliated
Underwriting occurred, the first two years in an easily accessible
place, a written record of each purchase of securities in Affiliated
Underwritings once an investment by 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.
    9. 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.
    10. Before approving any advisory contract under section 15 of the
Act, the board of directors or trustees of each Investing Management
Company, including a majority of the 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.
    11. 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 NASD Conduct Rule 2830.
    12. No Fund relying on the section 12(d)(1) relief will acquire
securities of any investment company or company

relying on section 3(c)(1) or 3(c)(7) of the Act in excess of the
limits contained in section 12(d)(1)(A) of the Act, except to the
extent permitted by exemptive relief from the Commission permitting the
Fund to purchase shares of other investment companies for short-term
cash management purposes.

    For the Commission, by the Division of Investment Management,
under delegated authority.
Brent J. Fields,
Secretary.
[FR Doc. 2015-02660 Filed 2-9-15; 8:45 am]
BILLING CODE 8011-01-P