UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
IN THE MATTER OF: )
)
FIRST TRUST EXCHANGE-TRADED FUND )
FIRST TRUST EXCHANGE-TRADED FUND II )
FIRST TRUST EXCHANGE-TRADED FUND III )
FIRST TRUST EXCHANGE-TRADED FUND IV )
FIRST TRUST EXCHANGE-TRADED FUND V ) File No. 812-
FIRST TRUST EXCHANGE-TRADED FUND VI )
FIRST TRUST EXCHANGE-TRADED ALPHADEX(R) FUND )
FIRST TRUST EXCHANGE-TRADED ALPHADEX(R) FUND II )
FIRST TRUST ADVISORS L.P. )
FIRST TRUST PORTFOLIOS L.P. )
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Application for an Order (i) under Section 6(c) of the Investment Company
Act of 1940, as amended (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 and (ii) 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.
All communications and orders to:
First Trust Exchange-Traded Fund
First Trust Exchange-Traded Fund II
First Trust Exchange-Traded Fund III
First Trust Exchange-Traded Fund IV
First Trust Exchange-Traded Fund V
First Trust Exchange-Traded Fund VI
First Trust Exchange-Traded AlphaDEX(R) Fund
First Trust Exchange-Traded AlphaDEX(R) Fund II
First Trust Advisors L.P.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
Attn: W. Scott Jardine
With a copy to:
Eric F. Fess
Felice R. Foundos
Suzanne M. Russell
Chapman and Cutler LLP
111 West Monroe
Chicago, IL 60603
Page 1 of 68 sequentially numbered pages (including exhibits).
As filed with the U.S. Securities and Exchange Commission on October 25, 2012
I. INTRODUCTION
A. Summary of Application
In this application ("Application"), First Trust Exchange-Traded Fund (the
"Initial Trust"), First Trust Exchange-Traded Fund II ("Trust II"), First Trust
Exchange-Traded Fund III ("Trust III"), First Trust Exchange-Traded AlphaDEX(R)
Fund (the "AlphaDEX(R) Trust"), First Trust Exchange-Traded AlphaDEX(R) Fund II
(the "AlphaDEX(R) Trust II"), First Trust Exchange-Traded Fund IV ("Trust IV"),
First Trust Exchange-Traded Fund V ("Trust V"), First Trust Exchange-Traded Fund
VI ("Trust VI" and, together with the Initial Trust, Trust II, Trust III, the
AlphaDEX(R) Trust, the AlphaDEX(R) Trust II, Trust IV and Trust V, the "Existing
Trusts" and each, an "Existing Trust"), First Trust Advisors L.P. ("First Trust
Advisors"), and First Trust Portfolios L.P. ("First Trust Portfolios" or the
"Distributor" and, together with the Existing Trusts and First Trust Advisors,
the "Applicants"), apply for and request from the U.S. Securities and Exchange
Commission ("Commission") an order (i) under Section 6(c) of the Act, for an
exemption from Sections 2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act and Rule
22c-1 thereunder, and (ii) 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 (referred to herein as
the "Order"). The relief requested in this Application relates to one series of
an Existing Trust (the "Initial Fund"). Applicants request that the Order
requested herein apply not only to the Existing Trusts and the Initial Fund, but
also to any other open-end management investment company existing or created in
the future (together with the Existing Trusts, the "Trusts" and each, a "Trust")
and any existing or future series of the Trusts, advised by First Trust Advisors
or an entity controlling, controlled by, or under common control with First
Trust Advisors ("Adviser")(1), that operate in accordance with the terms and
conditions stated in the Application (the "Future Funds"). The Initial Fund and
the Future Funds together are each referred to as a "Fund" and collectively as
the "Funds."
The Order, if granted, would permit, among other things:
(a) the Funds to issue their shares ("Shares") in large aggregations
only;
(b) secondary market transactions in Shares to be effected at
negotiated market prices rather than at net asset value ("NAV") per Share
on a national securities exchange as defined in Section 2(a)(26) of the
Act ("Exchange");
(c) certain affiliated persons of the open-end investment company
described herein to deposit securities into, and receive securities from,
such investment company, in connection with the purchase and redemption of
aggregations of Shares of such investment company; and
(1) All references herein to the term "Adviser" include any successor to the
Adviser. For 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.
Page 2 of 68
(d) the payment or satisfaction of redemptions in periods exceeding
seven (7) calendar days under specified limited circumstances.
Applicants believe that (i) with respect to the relief requested pursuant
to Section 6(c), the requested exemption for the proposed transactions is
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 and (ii) with respect to the relief requested pursuant to Section 17(b), the
proposed transactions are reasonable and fair and do not involve overreaching on
the part of any person concerned; the proposed transactions are or will be
consistent with the policy of each Fund; and the proposed transactions are
consistent with the general purposes of the Act. The relief requested by
Applicants will be collectively referred to herein as the "Relief."
Each Fund will seek to provide investment returns that correspond, before
fees and expenses, generally to the performance of a specified securities index
(each an "Underlying Index" and collectively, "Underlying Indexes"). Certain
Underlying Indexes may consist of sub-indices. The component securities of an
Underlying Index are referred to as the "Component Securities" and an entity
that compiles, creates, sponsors or maintains an Underlying Index is referred to
as an "Index Provider."
Applicants are seeking an Order to create and operate certain types of
index-based portfolios, as described herein (referred to as "Index-Based
Funds"), for which the Index Provider is not an affiliated person as defined in
Section 2(a)(3) of the Act, or an affiliated person of an affiliated person, of
a Trust, the Adviser, any Sub-Adviser (as defined herein), the Distributor or a
promoter of the portfolio (an "Unaffiliated Index Provider").(2) In addition,
Applicants seek the Order to create and operate index-based portfolios of the
Trusts for which the Adviser or an affiliated person, as defined in Section
2(a)(3) of the Act, or an affiliated person of an affiliated person, of a Trust,
the Adviser, any Sub-Adviser (as defined herein), the Distributor or a promoter
of the portfolio (each, other than the Adviser, an "Affiliated Person") will
serve as the Index Provider (each such portfolio, an "Affiliated Index Fund").
Funds will be either Index-Based Funds or Affiliated Index Funds. Any Future
Fund will (a) be advised by the Adviser or an entity controlling, controlled by,
or under common control with the Adviser and (b) comply with the terms and
conditions of this Application.
(2) Applicants intend to continue to rely on a previously obtained order for
purposes of creating and operating index-based portfolios that hold equity
securities selected to correspond generally to the price and yield
performance of a specified domestic or international equity securities
index for which the Index Provider is an Unaffiliated Index Provider. In
the Matter of First Trust Exchange-Traded Fund, et al., Investment Company
Act Release Nos. 27051 (Aug. 26, 2005) (notice) and 27068 (Sept. 20, 2005)
(order), as amended by In the Matter of First Trust Exchange-Traded Fund,
et al., Investment Company Act Release Nos. 27772 (Mar. 30, 2007) (notice)
and 27784 (Apr. 25, 2007) (order).
Page 3 of 68
The Initial Trust, Trust II, the AlphaDEX(R) Trust, First Trust Advisors
and First Trust Portfolios have received exemptive relief from Section
12(d)(1)(A) and (B) of the Act and Section 17(a) of the Act permitting, in
relevant part, certain investment companies and unit investment trusts to invest
in shares of such Existing Trusts beyond the limits of Section 12(d)(1)(A) and
(B) of the Act (the "Section 12(d)(1) Order").(3) The relief in the Section
12(d)(1) Order extends to any other registered open-end investment company
created in the future and comprising part of the same "group of investment
companies" within the meaning of Section 12(d)(1)(G)(ii) of the Act such as the
other Trusts and their series. Accordingly, the Funds will rely on the relief
granted in the Section 12(d)(1) Order.
B. Comparability of Relief Sought to Prior Relief Granted by the
Commission
Applicants seek Relief substantially similar to the relief granted by the
Commission to other open-end management investment companies commonly referred
to as "exchange-traded funds" ("ETFs"), including PIMCO ETF Trust, Old Mutual
Global Shares Trust, Global X Funds, Javelin Exchange-Traded Trust, ALPS ETF
Trust, iShares Trust, ETFs advised by SSgA Funds Management, Inc., NETS Trust
and PowerShares Exchange-Traded Fund Trust (collectively, "Prior Index-Based
ETFs"). Applicants further seek Relief with respect to the Affiliated Index
Funds substantially similar to the relief granted by the Commission to ETFs
issued by IndexIQ ETF Trust, WisdomTree Trust, Market Vectors ETF Trust and
Russell Exchange Traded Funds Trust (collectively, "Prior Self-Indexing
ETFs").(4) Also, Applicants seek Relief with respect to Long/Short Funds and
(3) See Investment Company Act Release Nos. 27812 (Apr. 30, 2007) (notice) and
27845 (May 30, 2007) (order).
(4) Pacific Investment Management Company LLC and PIMCO ETF Trust, Investment
Company Act Release No. 28752 (June 1, 2009); Old Mutual Global Shares
Trust, et al., Investment Company Act Release No. 28898 (Sept. 9, 2009);
Global X Funds, et al., Investment Company Act Release No. 28433 (Oct. 3,
2008); Javelin Exchange-Traded Trust, et al., Investment Company Act
Release No. 28367 (Aug. 26, 2008); ALPS Advisers, Inc., et al., Investment
Company Act Release No. 28262 (May 1, 2008); Barclays Global Fund
Advisors, Investment Company Act Release No. 24451 (May 12, 2000);
Barclays Global Fund Advisors, Investment Company Act Release No. 24452
(May 12, 2000); Barclays Global Fund Advisors, et al., Investment Company
Act Release No. 25622 (June 25, 2002), as subsequently amended by iShares
Trust, et al., Investment Company Act Release No. 26006 (Apr. 15, 2003),
Barclays Global Fund Advisors, et al., Investment Company Act Release No.
26175 (Sept. 8, 2003), and Barclays Global Fund Advisors, et al.,
Investment Company Act Release No. 27417 (June 23, 2006); NETS Trust, et
al., Investment Company Act Release No. 28195 (Mar. 17, 2008); SSgA Funds
Management, Inc. et al., Investment Company Act Release No. 27839 (May 25,
2007); PowerShares Exchange-Traded Fund Trust, et al., Investment Company
Act Release No. 25985 (Mar. 28, 2003); PowerShares Exchange-Traded Fund
Trust, et al., Investment Company Act Release No. 27841 (May 25, 2007); In
the Matter of WisdomTree Investments Inc., et al., Investment Company Act
Release No. 27391 (June 12, 2006) ("WisdomTree Order"); In the Matter of
IndexIQ ETF Trust, et al., Investment Company Act Release No. 28653 (Mar.
20, 2009) ("IndexIQ Order"); In the Matter of Market Vectors ETF Trust, et
al., Investment Company Act Release No. 29490 (Oct. 26, 2010) ("Market
Vectors Order"); and In the Matter of Russell Investment Management
Company, et al., Investment Company Act Release No. 29671 (May 16, 2011)
("Russell Order") (collectively referred to herein as the "Prior ETF
Orders"; the WisdomTree Order, the Index IQ Order, the Market Vectors
Order and the Russell Order are collectively referred to herein as the
"Prior Self-Indexing ETF Orders"). In addition, Applicants note that the
Commission recently issued a notice of application with respect to an
application seeking relief similar to that which Applicants are seeking
with respect to Affiliated Index Funds. See In the Matter of Northern
Trust Investments, Inc., et al., Investment Company Act Release No. 30211
(Sept. 24, 2012).
Page 4 of 68
130/30 Funds (each as defined below) substantially similar to the relief granted
by the Commission to ETFs issued by FQF Trust (collectively, "Prior Long/Short
ETFs")(5). The Prior Index-Based ETFs, Prior Self-Indexing ETFs and Prior
Long/Short ETFs are collectively referred to herein as the "Prior ETFs."
No form having been specifically prescribed for this Application,
Applicants proceed under Rule 0-2 of the General Rules and Regulations of the
Commission.
II. BACKGROUND
A. General
Applicants intend to establish certain index-based market basket
investment products intended to be made available to both institutional and
retail investors. Each Trust intends to create diversified and non-diversified
Funds, each of which will operate pursuant to the terms and conditions stated in
this Application.
Each Trust is or will be registered with the Commission as an open-end
management investment company and offers and sells (or will offer and sell) its
shares pursuant to a registration statement on Form N-1A filed with the
Commission under the Securities Act of 1933 (the "Securities Act") and the Act
(the "Registration Statement"). Funds which track Domestic Indexes (as defined
below) are referred to as "Domestic Funds" and Funds which track Foreign Indexes
(as defined below) are referred to as "Foreign Funds." Funds which track an
Underlying Index that includes equity securities, but not fixed income
securities, are referred to as "Equity Funds" and Funds that track an Underlying
Index that includes fixed income securities or a combination of fixed income
securities and equity securities are referred to as "Fixed Income Funds."
As discussed below, certain of the Underlying Indexes will include only
long (as opposed to long and short) positions in Component Securities, while
other Underlying Indexes will include both long and short positions. In
addition, certain of the Underlying Indexes will be comprised of securities
(including positions therein) traded in the U.S. markets ("Domestic Indexes"),
while other Underlying Indexes will be comprised of securities (including
positions therein) not traded in the U.S. markets or a combination of domestic
and foreign securities (including positions therein) ("Foreign Indexes"). Future
Funds may be based on Domestic Indexes as well as on Foreign Indexes. The
securities in which a Fund invests are referred to as the "Portfolio
Securities."
Each Trust will issue, with respect to each Fund on a continuous offering
basis, only specified large aggregations of Shares (e.g., at least 25,000
Shares) (each such aggregation of Shares, a "Creation Unit"). The size of a
Creation Unit for each Fund will initially be determined by the Adviser, based
in part on the estimated initial trading price per individual Share of such Fund
(5) In the Matter of FQF Trust, et al., Investment Company Act Release No.
29747 (Aug. 5, 2011).
Page 5 of 68
and the size of Creation Units for other ETFs trading at that time, as well as
each Fund's target audience.(6) Applicants expect that the initial price of a
Creation Unit will be a minimum of $625,000 and will be in the range of $625,000
to $10 million, and that the initial trading price per individual Share of each
Fund will be in the range of $25 to $100. Individual Shares will not be
individually redeemable. Only Shares assembled into Creation Units will be
redeemable, but Creation Units will not be listed or traded. Applicants intend
that the initial NAV of the Shares will be established per Share at a level
convenient for trading purposes.
Shares of each Fund will be listed and traded individually on an Exchange.
It is expected that one or more member firms of an Exchange will be designated
to act as a market maker ("Market Maker") and maintain a market for Shares
trading on the Exchange. The Exchange on which Shares are primarily listed is
referred to as the "Listing Exchange."(7)
Applicants believe that the Funds, like other ETFs, must offer securities
that will be available on an "open-end" basis (i.e., continuously offered) and
provide ready redeemability for investors presenting one or more Creation Units
for redemption. This open-end structure of each Fund will permit efficiencies in
pricing, be most responsive to market needs and demands, and minimize the costs
that are sometimes encountered in connection with the underwritten public
offerings of shares of closed-end funds. Therefore, purchases and redemptions of
Creation Units of the Funds generally will be made by an "in-kind" tender of
specified securities, with any cash portion of the purchase price and redemption
proceeds to be kept to a minimum, all in the manner described below in Section
II.K., entitled "Sales of Shares." Applicants believe that this "in-kind" method
minimizes the need to liquidate Portfolio Securities to meet redemptions or to
acquire Portfolio Securities in connection with purchases of Creation Units and
would permit closer tracking of each Fund's Underlying Index. Applicants submit
that this "in-kind" mechanism also will provide a number of benefits to
investors such as efficiencies in pricing, response to market needs and
reductions in certain costs, such as brokerage fees, custodian fees and various
other fund overhead costs and fund accounting costs, and significant reductions
in transfer agency fees, as well as potential tax efficiencies.
Each Fund that intends to qualify as a regulated investment company
("RIC") will maintain the required level of diversification, and otherwise
(6) The size of a Creation Unit as stated in a Fund's prospectus
("Prospectus") may be changed, from time to time, if the individual Share
price of such Fund increases to such an extent that the Creation Unit
price becomes unappealing to investors and arbitrageurs seeking to create
or redeem.
(7) If Shares are listed on The NASDAQ Stock Market LLC ("NASDAQ") or a
similar electronic Exchange, including NYSE Arca, Inc. ("Arca"), one or
more member firms of that Exchange will act as Market Maker and maintain a
market for Shares trading on that Exchange. If Shares are listed on
NASDAQ, no particular Market Maker will be contractually obligated to make
a market in Shares, although NASDAQ's listing requirements stipulate that
at least two Market Makers must be registered in Shares to maintain the
listing. In addition, on NASDAQ and Arca, registered Market Makers are
required to make a continuous, two-sided market at all times or they are
subject to regulatory sanctions. No Market Maker will be an affiliated
person, or an affiliated person of an affiliated person, of the Funds,
within the meaning of Section 2(a)(3) of the Act, except pursuant to
Sections 2(a)(3)(A) and (C) of the Act, due to ownership of Shares, as
described below.
Page 6 of 68
conduct its operations, so as to meet the RIC diversification requirements of
the Internal Revenue Code of 1986, as amended (the "Code").
B. The Initial Fund
The Initial Fund (consisting of an initial Affiliated Index Fund) and its
Underlying Index are described in Appendix B hereto.
C. The Adviser
The Adviser is an Illinois limited partnership, with its principal office
in Wheaton, Illinois. The Adviser is registered as an investment adviser under
Section 203 of the Investment Advisers Act of 1940, as amended (the "Advisers
Act").
The Adviser, subject to the oversight and authority of the Board of
Trustees of the Trusts ("Board"), will develop the overall investment program
for each Fund.(8) The Adviser may enter into sub-advisory agreements with one or
more investment advisers to act as "sub-advisers" with respect to particular
Funds (each, a "Sub-Adviser" and collectively, the "Sub-Advisers"). The
Sub-Advisers, if any, will serve as the portfolio managers for the Funds. Under
the Adviser's supervision, each Sub-Adviser will manage the investment and
reinvestment of each applicable Fund's assets in accordance with the applicable
Fund's investment objective. Any Sub-Adviser for a Fund will be registered under
the Advisers Act.
D. The Distributor
The Distributor, an Illinois broker-dealer, is a broker-dealer registered
under the Securities Exchange Act of 1934 (the "Exchange Act"). The Distributor
is an affiliate of the Adviser. The Distributor will act as distributor and
principal underwriter of the Funds. Applicants request that the Order apply to
the Distributor, any successor to the Distributor, and to any other entity hired
by a Fund as a future distributor (each, a "Future Distributor") that complies
with the terms and conditions of this Application. Neither the Distributor nor
any Future Distributor is or will be affiliated with any Exchange.
E. Administrator, Custodian, Fund Accountant, Transfer Agent, Dividend
Disbursing Agent and Securities Lending Agent
Each Fund will have an administrator ("Administrator"), custodian
("Custodian"), fund accountant ("Fund Accountant"), transfer agent ("Transfer
Agent"), and dividend disbursing agent ("Dividend Disbursing Agent"), and may
have a securities lending agent ("Securities Lending Agent") of Portfolio
Securities. The Trusts and any Securities Lending Agent will comply with
guidelines of the Commission staff regarding the lending of portfolio securities
of an open-end investment company. Subject to the approval of the Board, the
(8) The term "Board" includes any board of trustees of any Existing Trust or
future Trust.
Page 7 of 68
Adviser, a Sub-Adviser or an affiliate of the Adviser and/or Sub-Advisers may
provide administration, custody, fund accounting, transfer agency, dividend
disbursement and securities lending services to the Funds.
F. Underlying Indexes and Licensing Arrangements
The Adviser has selected the Underlying Index identified in Appendix B to
this Application as the Underlying Index on which the Initial Fund will be
based. Except with respect to the Affiliated Index Funds, no Index Provider(9)
is or will be an "affiliated person," as defined in Section 2(a)(3) of the Act,
or an affiliated person of an affiliated person, of a Trust or a Fund, of the
Adviser, of any Sub-Adviser to or promoter of a Fund or of the Distributor.
G. Special Considerations Applicable to Affiliated Index Funds
1. Overview
The Index Provider to an Affiliated Index Fund (an "Affiliated Index
Provider") will create a proprietary, rules based methodology described below in
Section G.4. ("Rules Based Process") to create Underlying Indexes for use by the
Affiliated Index Funds and other investors (each an "Affiliated Index" and
collectively the "Affiliated Indexes").(10)
All of the Affiliated Indexes will be reconstituted periodically to ensure
new and growing investments are reflected. The Affiliated Indexes will be built
according to transparent rules. Rules dictate additions/deletions to the
Affiliated Indexes ensuring constant coverage. The Affiliated Index Provider
will utilize a rules based methodology to determine what securities are included
in the Affiliated Indexes so that the Affiliated Indexes will remain relevant no
matter how market activity changes.
(9) An Unaffiliated Index Provider will not provide recommendations to a Fund
regarding the purchase or sale of specific securities. In addition, an
Unaffiliated Index Provider will not provide any information relating to
changes to an Underlying Index's methodology for the inclusion of
Component Securities, the inclusion or exclusion of specific Component
Securities, or the methodology for the calculation of the return of
Component Securities, in advance of a public announcement of such changes
by the Unaffiliated Index Provider.
(10) It is currently contemplated that the Adviser will be the Affiliated Index
Provider. The Affiliated Indexes may be made available to registered
investment companies, as well as separately managed accounts of
institutional investors and privately offered funds that are not deemed to
be "investment companies" in reliance on Section 3(c)(1) or 3(c)(7) of the
Act for which the Adviser acts as adviser and/or sub-adviser ("Affiliated
Accounts") as well as other such registered investment companies,
separately managed accounts and privately offered funds for which it does
not act either as adviser and/or sub-adviser ("Unaffiliated Accounts").
The Affiliated Accounts and the Unaffiliated Accounts (collectively
referred to herein as "Accounts"), like the Funds, would seek to track the
performance of one or more Underlying Index(es) by investing in the
constituents of such index(es) or a representative sample of such
constituents of the index. To the extent prohibited by Section 17(a) of
the Act and consistent with the Relief requested from Section 17(a)
herein, the Affiliated Accounts will not engage in Creation Unit
transactions with a Fund.
Page 8 of 68
The Affiliated Indexes will be "transparent," meaning that (i) both the
Rules Based Process and the composition of each Affiliated Index will be freely
available to the public, (ii) any change to the Rules Based Process will be
announced at least sixty (60) days prior to becoming effective, (iii) any
changes to constituents of and weightings of each Affiliated Index will be
announced at least two (2) days prior to the Reconstitution Date and the
Rebalance Date (as both such terms are defined herein) and (iv) all such changes
will be made freely available to the public as well.
Applicants believe that each Affiliated Index Fund's investment strategy
of tracking its Underlying Index fits squarely within the scope of the relief
previously granted in the Prior ETF Orders to the Prior Index-Based ETFs.
Indeed, Applicants submit that, were the Affiliated Index Provider not the
Adviser or an Affiliated Person, (i) each Affiliated Index Fund's use of its
Affiliated Index would be indistinguishable from the use of existing indexes by
other ETFs that track indices of unaffiliated index providers currently trading
and (ii) the Affiliated Index Provider would be viewed no differently than the
existing index providers that create and license their intellectual property for
use by various persons, such as portfolio managers and their funds, including
ETFs. Moreover, Applicants assert that the structure of the Affiliated Index
Funds will be substantially similar to the Prior Self-Indexing ETFs. Applicants
further submit that the operation of the Affiliated Index Funds and the
Affiliated Index Funds' arbitrage mechanism, for all practical purposes, will be
identical to the operation and arbitrage mechanism of ETFs now trading.
Applicants contend that the potential conflicts of interest arising from
the fact that the Affiliated Index Provider will be the Adviser or an Affiliated
Person are not actual concerns, and will not have any impact on the operation of
the Affiliated Index Funds, because the Affiliated Indexes will maintain
transparency. The Affiliated Index Funds' portfolios will be transparent and the
Adviser, any Affiliated Person who is an Affiliated Index Provider, any
Sub-Adviser and the Affiliated Index Funds each will adopt policies and
procedures to address any potential conflicts of interest ("Policies and
Procedures"), all as discussed herein. Among other things, the Policies and
Procedures will be designed to limit or prohibit communications with respect to
issues/information related to the maintenance, calculation and reconstitution of
the Affiliated Indexes between (i) personnel who have responsibility for the
Affiliated Indexes and the Rules Based Process (referred to as "Index
Personnel")(11) and (ii) personnel who have responsibility for the maintenance
of the Affiliated Index Funds or any Affiliated Accounts.
Applicants assert that the Affiliated Indexes will be as transparent as,
or more transparent than, indexes used by existing ETFs. Like the indexes used
by ETFs currently trading, the Affiliated Indexes owned by the Affiliated Index
Provider will be created using a detailed Rules Based Process that will be made
publicly available. The Affiliated Index Provider will publish in the public
domain, including on its website and/or the Affiliated Index Funds' website
("Website"), the rules that govern the inclusion and weighting of securities in
(11) Index Personnel may be employees of the Adviser or an affiliate of the
Adviser ("Adviser Affiliate") or employees of an Affiliated Person who is
an Affiliated Index Provider, as the case may be.
Page 9 of 68
each of its Affiliated Indexes. Applicants believe that this public disclosure
will prevent the Adviser from possessing any advantage over other market
participants by virtue of being the Affiliated Index Provider or being
affiliated with the Affiliated Index Provider. Of course, like all index
providers, the Affiliated Index Provider will reserve the right to modify the
Rules Based Process in the future. The Rules Based Process could be modified,
for example, to reflect changes in the underlying market tracked by an
Affiliated Index, the way in which the Rules Based Process takes into account
market events or to change the way a corporate action, such as a stock split, is
handled. Such changes would not take effect until the Affiliated Index Provider
has given (1) the Calculation Agent (defined below) reasonable prior written
notice of such rule changes and (2) the investing public at least sixty (60)
days published notice that such changes will be implemented. The Index Personnel
will be solely responsible for the creation and development of the Rules Based
Process and determining the nature of modifications to the Rules Based Process.
In conjunction with the Policies and Procedures discussed herein, these
restrictions will prevent the Adviser, any Sub-Adviser or any person affiliated
with it or any Affiliated Index Fund from having any advantage over other market
participants, including the investing public, with respect to prior knowledge of
companies and other issuers that may be added to or deleted from the Affiliated
Index or from any Affiliated Index Funds that track the Affiliated Indexes.
Applicants believe that by publicly disclosing the Rules Based Process governing
the construction and maintenance of the Affiliated Indexes, and requiring
significant advance publication of changes to the Rules Based Process, the
Affiliated Indexes that will be owned by the Affiliated Index Provider will be
at least as transparent as indexes underlying existing ETFs.
In conclusion, Applicants submit that the Affiliated Index Funds will use
their Affiliated Indexes and operate, function and trade in a manner very
similar to the other index-based ETFs which are currently traded, without
raising any new issues or concerns, and that they merit the requested Relief.
2. Potential Conflicts of Interest
Applicants do not believe the potential for conflicts of interest raised
by the Adviser's use of the Affiliated Indexes in connection with the management
of the Affiliated Index Funds and the Affiliated Accounts will be substantially
different from the potential conflicts presented by an adviser managing two or
more registered funds or by the side-by-side management of traditional funds and
unregistered funds. More specifically, Applicants do not believe the potential
for conflicts presented by the Adviser's use of the Affiliated Indexes in
connection with the management of the Affiliated Index Funds and the Affiliated
Accounts will be substantially different from the potential for conflicts
presented by the side-by-side management of Prior ETFs which track the
performance of an index that also serves as the benchmark for a traditional
mutual fund or unregistered account managed by the same adviser. Furthermore,
Applicants do not believe the potential for conflicts presented by the Adviser's
use of the Affiliated Indexes in connection with the management of the
Affiliated Index Funds and the Affiliated Accounts will be substantially
different from the potential for conflicts presented and addressed in the Prior
Self-Indexing ETF Orders. The Adviser and any Affiliated Person who is an
Affiliated Index Provider will adopt and implement the Policies and Procedures
that they believe will minimize or eliminate any potential conflicts of
interest.
Page 10 of 68
First, the Adviser will disclose the potential for conflicts to the
Affiliated Index Funds. Second, as discussed further herein, the Adviser, if it
is the Affiliated Index Provider, or any Affiliated Person who is an Affiliated
Index Provider, as the case may be, will adopt Policies and Procedures designed
to prevent the dissemination and improper use of non-public information about
changes to the constituents of the Affiliated Index and the Rules Based Process.
In addition, the Adviser and any Sub-Adviser will adopt and implement, pursuant
to Rule 206(4)-7 under the Advisers Act, written policies and procedures
designed to prevent violations of the Advisers Act and the rules thereunder.
These include Policies and Procedures designed to minimize potential conflicts
of interest between Affiliated Index Funds and the Affiliated Accounts, such as
cross trading policies, as well as those designed to ensure the equitable
allocation of portfolio transactions and brokerage commissions. The structure of
the Affiliated Index Funds, as index funds, as well as those of the Affiliated
Accounts, minimizes the potential for conflicts as the investment strategies of
each Affiliated Index Fund and the Affiliated Accounts will be constrained by
their objective to track the performance of their respective Affiliated Index.
It is not contemplated that the Adviser or any Sub-Adviser will receive
incentive fees for outperforming the Affiliated Index of any Affiliated Index
Fund. In fact, the Adviser believes that any significant outperformance or
underperformance would be viewed negatively by investors in such Funds, which
will have an objective of seeking to track their Affiliated Index.
To the extent the Affiliated Index Funds transact with an Adviser
Affiliate or affiliated persons of any Sub-Adviser (the "Sub-Adviser
Affiliates"), such transactions will comply with the Act, the rules thereunder
and the terms and conditions of this Application. Subject to the approval of the
Board, the Adviser, an Adviser Affiliate, any Sub-Adviser and/or any Sub-Adviser
Affiliates may be authorized to provide custody, fund accounting and
administration, transfer agency and securities lending services to the
Affiliated Index Funds.
The conflicts of interest do not exist where the index creator is not an
affiliated person, or an affiliated person of an affiliated person, of an ETF or
its investment adviser or any sub-adviser. Therefore, with respect to the
Index-Based Funds, the representations and undertakings designed to prevent such
potential conflicts of interest should not be applicable.
3. Index Provider and Calculation Agent
As owner of the Affiliated Indexes, the Affiliated Index Provider will
enter into an agreement ("Calculation Agent Agreement") with a third party to
act as "Calculation Agent." The Calculation Agent will not be an affiliated
person, as such term is defined in the Act, or an affiliated person of an
affiliated person, of the Affiliated Index Funds, the Adviser, any Sub-Adviser,
any promoter or the Distributor. Pursuant to the terms of the Calculation Agent
Agreement, the Affiliated Index Provider will initially apply the Rules Based
Process to the universe of equity and/or fixed income securities and will
determine the number, type, and weight of securities that will comprise each
Affiliated Index, and will perform all calculations necessary to determine the
proper make-up of the Affiliated Index. Thereafter, (i) the Calculation Agent
will be solely responsible for the calculation and maintenance of each
Affiliated Index, as well as the dissemination of the values of each Affiliated
Index and (ii) the Affiliated Index Provider will be responsible solely for
performing the reconstitution updates and rebalance updates for each Affiliated
Page 11 of 68
Index on the relevant Reconstitution Dates and Rebalance Dates (each as defined
below).(12)
The Calculation Agent will disseminate Affiliated Index information
through one or more unaffiliated third party data providers, which are available
to subscribers. Affiliated Index values on a total return basis will be
disseminated on an end-of-day basis through such unaffiliated third party data
provider(s). The "price index values"(13) of each Affiliated Index will be
calculated by the Calculation Agent and disseminated in accordance with the
rules of the Exchange. Information about each Affiliated Index, including data
on Component Securities and weightings, will be available on the Website, as
will a rule book describing the Rules Based Process applicable to such
Affiliated Index ("Rule Book"). The Index Personnel will monitor the results
produced by the Calculation Agent on a periodic basis to determine whether the
Calculation Agent is performing such maintenance, calculation and dissemination
functions in accordance with the Rules Based Process. The Index Personnel will
not have any responsibility for management of the Affiliated Index Funds.
4. Rules Based Process
(a) Securities Selection.
All of the Affiliated Indexes for which an Affiliated Index Fund seeks to
track will be derived from the application of the Rules Based Process as
described above. In order to be included in an Affiliated Index, each Component
Security must meet the eligibility requirements set forth in the Rules Based
Process and contained in the Rule Book for such Affiliated Index. The Rule Book
for each Affiliated Index will be published on the Website.
(b) Component and Weighting Changes to Affiliated Indexes.
In accordance with the Rules Based Process, the Index Personnel will
provide data to the Calculation Agent, who will update each Affiliated Index on
at least an annual basis (in some cases on a more frequent periodic basis) to
add or delete individual Component Securities that have been selected or deleted
pursuant to the Rules Based Process after the close of trading on the date
provided for in the relevant Rule Book (each such date a "Reconstitution Date")
and to rebalance the Component Securities from time to time, as described in the
relevant Rule Book (each such occurrence a "Rebalance Date").(14) The Index
(12) The Affiliated Index Provider will reserve the right to modify the Rules
Based Process in the future.
(13) A "total return index value" reflects price appreciation (or depreciation)
of the constituent securities plus reinvestment of dividends, whereas a
"price index value" reflects only price appreciation (or depreciation) of
the constituent securities.
(14) Affiliated Indexes may have Reconstitution Dates and Rebalance Dates that
occur on a periodic basis more frequently than once yearly, but no more
frequently than monthly. The Reconstitution Dates and Rebalance Dates for
each Affiliated Index will be made available on the Website.
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Personnel will not disclose any information concerning the identity of Component
Securities that have been added to, or deleted from, each Affiliated Index, or
the weightings of such Component Securities, to the Adviser, any Sub-Adviser,
the Affiliated Index Funds, the Affiliated Accounts or any other affiliated
entities (except other Index Personnel) before such information is publicly
disclosed on the Website (or otherwise publicly disseminated by the Calculation
Agent) and is available to the entire investing public. Notwithstanding the
foregoing, the Calculation Agent may disclose such information solely to the
Index Personnel in order to permit such persons to monitor the results produced
by the Calculation Agent for compliance with the Rules Based Process and to the
Legal and Compliance teams of the Affiliated Index Funds, the Adviser and the
Sub-Adviser for purposes of such persons' monitoring of compliance with such
entities' Code of Ethics. The Calculation Agent will be expressly prohibited
from providing this information to employees of the Adviser or any Sub-Adviser
or their affiliates (except Index Personnel and the Legal and Compliance teams
of the Affiliated Index Funds, the Adviser and the Sub-Adviser) before such
information is publicly disclosed on the Website (or otherwise publicly
disseminated by the Calculation Agent). The Index Personnel (i) will not have
any responsibility for the management of the Affiliated Index Funds or the
Affiliated Accounts, (ii) will be expressly prohibited from sharing this
information with those employees of the Adviser or any Sub-Adviser that have
responsibility for the management of the Affiliated Index Funds or the
Affiliated Accounts until such information is publicly announced,(15) and (iii)
will be expressly prohibited from sharing or using this non-public information
in any way except in connection with the performance of their respective duties.
The new Component Securities and their approximate new weightings will be
announced at least two (2) days prior to a Reconstitution Date or a Rebalance
Date, and then again, with definitive weights, after the close on each
Reconstitution Date or Rebalance Date before the opening on the next day to the
general public and the Adviser and any Sub-Adviser (on behalf of the Affiliated
Index Funds and the Affiliated Accounts). Again, except as specifically noted
herein, none of the Adviser, any Sub-Adviser or any other person, whether
affiliated or unaffiliated (except Index Personnel) would be provided with the
Affiliated Index weightings and composition until such information is publicly
disclosed on the Website (or otherwise publicly disseminated by the Calculation
Agent).(16)
(15) However, in accordance with the Policies and Procedures, the Index
Personnel may make such information available to very senior management or
other personnel of the Adviser or its affiliates or an Affiliated Person
who is an Affiliated Index Provider who, in the ordinary course of their
duties, may have responsibilities relating to multiple aspects of the
business of the Adviser, its affiliates or an Affiliated Person, as the
case may be. The Adviser, its affiliates and any Affiliated Person who is
an Affiliated Index Provider, as the case may be, will adopt Policies and
Procedures forbidding their personnel, including senior management, who
receive such information from (i) improperly using or disseminating such
information, and (ii) using this information to influence changes to the
Rules Based Process or the Affiliated Indexes.
(16) The Adviser and the Distributor have each adopted a Code of Ethics as
required under Rule 17j-1 of the Act and Rule 204-2 of the Advisers Act
which contains provisions reasonably necessary to prevent Access Persons
(as defined in Rule 17j-1) from engaging in any conduct prohibited in Rule
17j-1. The Adviser and the Distributor have each adopted Policies and
Procedures to detect and prevent insider trading, as required under
Section 204A of the Advisers Act, which are reasonably designed, taking
into account the nature of their business, to prevent the misuse of
material non-public information in violation of the Advisers Act or the
Page 13 of 68
Component Securities may be added to and/or deleted from any Affiliated
Index on a day other than the Reconstitution Date if there is a change to the
Rules Based Process that results in such new constituents being added to such
Affiliated Index. Changes to the Rules Based Process resulting in the addition
of Component Securities to any Affiliated Index on a day other than the
Reconstitution Date should occur only infrequently, if at all. In addition,
Component Securities may be added to and/or deleted from an Affiliated Index on
a day other than the Reconstitution Date as a result of either (i) changes to
the Rules Based Process or (ii) the occurrence of "corporate actions" as set
forth in the Rule Book. These additions and/or deletions will be executed by the
Calculation Agent as soon as possible after the corporate action is announced.
Except as described above, new Component Securities will not be added to any
Affiliated Index other than on a Reconstitution Date.
As is the case with Prior ETFs and other index funds, each Affiliated
Index Fund will make changes to its Portfolio Securities in response to certain
announced changes in its Affiliated Index when the applicable Adviser and/or
Sub-Adviser believes it is in the best interest of the Affiliated Index Fund to
do so. Additions to and deletions from an Affiliated Index Fund's Portfolio
Securities could be made (i) immediately or shortly after a change to its
Component Securities or Rules Based Process is announced, (ii) on or about the
date the announced change to such Component Securities or Rules Based Process is
actually implemented by the Calculation Agent or (iii) any time thereafter. In
determining whether and when to implement a change to an Affiliated Index Fund's
Portfolio Securities, an Adviser and/or Sub-Adviser would consider brokerage
costs, market impact costs (e.g., changes to the price of a security caused by
executing a large order all at once), portfolio tax efficiency, cash flow and
the impact that such changes would have on the Affiliated Index Fund's tracking
error against its Affiliated Index.
(c) Market Impact of Underlying Index Changes.
It is impossible to predict when and how market participants will react to
announced changes in the Rules Based Process or the Component Securities of the
Affiliated Index Funds' Affiliated Indexes. Nevertheless, Applicants expect
market participants to react to such changes in the same manner as they would to
announced changes in other indexes tracked by traditional mutual funds, Prior
ETFs and other investors. The announcement that a security has been added to a
widely-followed index or benchmark may cause the price of that security to
increase and an announcement that a security has been deleted from a
widely-followed index or benchmark may cause the price of that security to
decrease. To the extent an index or benchmark is not widely followed, any price
increase or decrease generally would be expected to be smaller than a
corresponding change to a widely-followed index or benchmark. Similarly, other
things being equal, to the extent that an index or benchmark's methodology is
rules-based and transparent, any price increase or decrease generally would be
expected to be smaller than the increase or decrease resulting from a change to
Exchange Act or the rules or regulations thereunder. Similarly, any
Sub-Adviser will also have a Code of Ethics and Policies and Procedures to
detect and prevent insider trading.
Page 14 of 68
a non-transparent index or benchmark (because the transparency of the index or
benchmark likely would provide the market with more notice of such change).
Because it is not possible to predict when and how market participants will
react to announced changes in the Rules Based Process or the Component
Securities of the Affiliated Index Funds' Affiliated Indexes, Applicants cannot
predict when and how these changes will impact the market price and NAV per
Share of an Affiliated Index Fund. In this respect, Applicants do not believe
that the Affiliated Index Funds and their Affiliated Indexes are any different
than existing ETFs and their respective underlying indexes or benchmarks.
5. Transparency of Affiliated Indexes
The Affiliated Index Provider will describe the basic concept of each
Affiliated Index and disclose the relevant Rule Book laying out the Rules Based
Process on the Website. As discussed above, changes to the Rules Based Process
will be publicly disclosed on the Website prior to actual implementation. Such
changes will not take effect until the Affiliated Index Provider has given the
investing public at least sixty (60) days published notice that such changes are
being planned to take effect. Applicants note that the identity and Affiliated
Index weightings of the securities that meet the criteria of the Rules Based
Process will be readily ascertainable by anyone since the Rules Based Process,
including the selection criteria, will be freely available. The Index Personnel
will not provide any employee or director of the Adviser or Adviser Affiliate or
of any Affiliated Person who is an Affiliated Index Provider (except other Index
Personnel), any Sub-Adviser, Affiliated Account or the Affiliated Index Funds
with notice of changes to the Rules Based Process prior to making such
information publicly available.(17)
The Website also may include information designed to educate investors.
The Calculation Agent may make available to the Affiliated Index Provider
information on the Affiliated Indexes that the Affiliated Index Provider will
make available to the general public on the Website. Each Business Day (defined
below), the Website will publish free of charge (or provide a link to another
website that will publish free of charge) the Component Securities of each
Affiliated Index and their respective weightings in each Affiliated Index as of
the close of the prior Business Day, the Portfolio Securities held by each
Affiliated Index Fund and their respective weightings, each Affiliated Index
Fund's per share NAV, and the market closing price or the midpoint of the
bid/ask spread at the time of the calculation of such NAV per Share ("Bid/Ask
Price") and a calculation of the premium or discount of the market closing price
or Bid/Ask Price against such NAV per Share, all as of the prior Business Day.
The components and weightings of the Affiliated Indexes, as well as the
(17) However, in accordance with the Policies and Procedures, the Index
Personnel may make such information available to very senior management or
other personnel of the Adviser or its affiliates or an Affiliated Person
who is an Affiliated Index Provider who, in the ordinary course of their
duties, may have responsibilities relating to multiple aspects of the
business of the Adviser, its affiliates or an Affiliated Person, as the
case may be. The Adviser, its affiliates and any Affiliated Person who is
an Affiliated Index Provider, as the case may be, will adopt Policies and
Procedures forbidding their personnel, including senior management, who
receive information about changes to the Rules Based Process from (i)
improperly using or disseminating such information, and (ii) using this
information to influence changes to the Rules Based Process or the
Affiliated Indexes.
Page 15 of 68
portfolio holdings of each Affiliated Index Fund, are also expected to be
available through unaffiliated third-party data vendors.
Changes to the constituents of each Affiliated Index made by the
Affiliated Index Provider and/or the Calculation Agent will be disclosed by such
party and published on the Website. Any such announcements and Website
disclosures to the public will be made in such a manner that none of the
employees of the Adviser, an Adviser Affiliate, any Affiliated Person who is an
Affiliated Index Provider (outside of the Index Personnel), any Sub-Adviser, or
any Affiliated Index Fund is notified of actions prior to the general investing
public, except as described herein.
Applicants believe that each Affiliated Index will maintain transparency.
All components, weightings, additions and deletions from the Affiliated Indexes
will not only be publicly available, but also will be publicly announced prior
to any changes being made. As stated above, Applicants believe that this level
of disclosure is similar to that of other Underlying Indexes currently used by
ETFs. The Adviser, if it is the Affiliated Index Provider, or any Affiliated
Person who is an Affiliated Index Provider, will adopt Policies and Procedures
prohibiting employees from disclosing or using any non-public information
acquired through their employment, except as appropriate in connection with the
administration of the Affiliated Indexes. Also, the Adviser, if it is the
Affiliated Index Provider, or any Affiliated Person who is an Affiliated Index
Provider, as the case may be, will adopt Policies and Procedures that prohibit
and are designed to prevent anyone, including the Index Personnel, from
disseminating or using non-public information about pending changes to the
Component Securities or Rules Based Process, except as described herein. These
policies will specifically prohibit the Index Personnel from sharing any
non-public information about the Affiliated Indexes with any personnel of the
Adviser and/or Sub-Advisers responsible for management of the Affiliated Index
Funds and/or any Affiliated Account. The Adviser and any Sub-Adviser also will
adopt policies that prohibit personnel responsible for the management of the
Affiliated Index Funds and/or any Affiliated Account from sharing any non-public
information about the management of the Affiliated Index Funds and any
Affiliated Account with the Index Personnel. The Adviser and any Sub-Adviser
will have, pursuant to Rule 206(4)-7 under the Advisers Act, written policies
and procedures designed to prevent violations of the Advisers Act and the rules
thereunder.
In addition, the Affiliated Index Provider will retain an unaffiliated
third-party Calculation Agent to calculate and maintain the Affiliated Indexes
on a daily basis. The Calculation Agent will be instructed to not communicate
any non-public information about the Affiliated Indexes to anyone, and expressly
not to the personnel of the Adviser or any Sub-Advisers responsible for the
management of the Affiliated Index Funds or Affiliated Accounts. The Calculation
Agent will be instructed to disseminate information about the daily constituents
of the Affiliated Indexes to the Adviser, any Sub-Adviser, any Affiliated Person
who is an Affiliated Index Provider and the public at the same time, except as
otherwise described herein.
The Index Personnel will be employees of the Adviser and/or an Adviser
Affiliate, if the Adviser is the Affiliated Index Provider, or employees of an
Affiliated Person who is an Affiliated Index Provider or its affiliate. The
Calculation Agent will not be affiliated with the Adviser, Adviser Affiliate, or
Page 16 of 68
any Sub-Adviser, or any Affiliated Person who is an Affiliated Index Provider.
The Index Personnel responsible for creating and monitoring the Affiliated
Indexes and the personnel of the Calculation Agent responsible for calculating
and maintaining the Underlying Indexes will be employees of separate
organizations and will be located in physically separate offices.
The portfolio managers responsible for day-to-day portfolio management of
the Affiliated Index Funds and Affiliated Accounts will be employees of the
Adviser or a Sub-Adviser. The personnel responsible for overseeing the
activities of any Sub-Adviser in connection with the management of the
Affiliated Index Funds and Affiliated Accounts also will be employees of the
Adviser. The Index Personnel and the personnel responsible for the management of
the Affiliated Index Funds and/or any Affiliated Account will either be
employees of separate entities or will be employees of the same entity and, in
either case, be located in offices on separate floors of the same building or in
separate buildings. The Adviser will adopt procedures and implement processes
that are designed to prevent Index Personnel from having access to non-public
information about management of the Affiliated Index Funds and/or any Affiliated
Account (such access could be electronic (e.g., by computer) or physical (e.g.,
paper) or otherwise). Similarly, the Adviser, if it is the Affiliated Index
Provider, or an Affiliated Person who is an Affiliated Index Provider, as the
case may be, will adopt procedures and implement processes that are designed to
prevent the personnel of the Adviser or any Sub-Adviser (other than Index
Personnel) from having access to the information related to the Affiliated
Indexes and Rule Based Process before such information is made public (such
access could be electronic (e.g., by computer) or physical (e.g., paper) or
otherwise). The personnel of the Adviser or any Sub-Adviser (other than Index
Personnel) also will not have access to the computer systems used by the
Calculation Agent.
All Index Personnel who are employees of the Adviser or any Adviser
Affiliate, Sub-Adviser or any Sub-Adviser Affiliate will be "Access Persons"
under the Adviser's Code of Ethics (within the meaning of Rule 17j-1 under the
Act). The Adviser will have policies which will (i) require any personnel
responsible for the management of an Affiliated Index Fund and/or any Affiliated
Account to pre-clear all personal securities transactions with a designated
employee within the Legal or Compliance teams of the Adviser; (ii) require all
Index Personnel who are employees of the Adviser and/or Adviser Affiliate to
pre-clear all personal securities transactions within the Legal or Compliance
teams of the Adviser; and (iii) require reporting of personal securities
transactions to a designated employee within the Legal or Compliance teams of
the Adviser in accordance with Rule 17j-1 under the Act and Rule 204A-1 under
the Advisers Act. Furthermore, the Adviser, if it is the Affiliated Index
Provider, or any Affiliated Person who is an Affiliated Index Provider, as the
case may be, will adopt policies and procedures which impose a restricted list
and blackout period requirements(18) on all Index Personnel. Also, any
(18) The Adviser, if it is the Affiliated Index Provider, or any Affiliated
Person who is an Affiliated Index Provider, as the case may be, will adopt
"Restricted List" and "Blackout Period" procedures and requirements. In
summary, no Index Personnel will be permitted to trade in any security on
the Restricted List during the Blackout Period, as defined below. The
"Restricted List" will include any security that is a Component Security
of any Affiliated Index upon which any Affiliated Index Fund or Affiliated
Account is based. The "Blackout Period" is a time period that extends five
Business Days -- from the close of trading a full 24 hours before the
Page 17 of 68
Sub-Adviser will be required to adopt a Code of Ethics pursuant to Rule 17j-1
under the Act and Rule 204A-1 under the Advisers Act and to provide the
applicable Trust with the certification required by Rule 17j-1 under the Act.
6. Use of Affiliated Indexes by Affiliated Index Funds
As discussed above, the Affiliated Index Provider will be the Adviser or
an Affiliated Person. The Adviser, if it is the Affiliated Index Provider, will
be the owner of the Affiliated Indexes and all related intellectual property.
Otherwise, the Adviser will enter into a license agreement with any Affiliated
Person who is an Affiliated Index Provider for the use of the Underlying Indexes
and related intellectual property in connection with a Trust and its Affiliated
Index Funds. In either case, the Adviser will provide the Affiliated Indexes and
related intellectual property at no cost to the applicable Trust and Affiliated
Index Funds.
H. Capital Structure and Voting Rights: Book-Entry
Shareholders of a Fund will have one vote per Share or one vote per dollar
with respect to matters regarding the Fund for which a shareholder vote is
required consistent with the requirements of the Act, the rules promulgated
thereunder and applicable state law.
Shares will be registered in book-entry form only. The Funds will not
issue individual Share certificates. The Depository Trust Company, New York, New
York, a limited purpose trust company organized under the laws of the State of
New York ("DTC"), or its nominee will be the record or registered owner of all
outstanding Shares. Beneficial ownership of Shares (owners of such beneficial
interests referred to herein as "Beneficial Owners") will be shown on the
records of DTC or DTC participants (the "DTC Participants"). Beneficial Owners
of Shares will exercise their rights in such securities indirectly through DTC
and DTC Participants. All references herein to owners or holders of such Shares
shall reflect the rights of persons holding an interest in such securities as
they may indirectly exercise such rights through DTC and DTC Participants,
except as otherwise specified. No Beneficial Owner shall have the right to
receive a certificate representing such Shares. Delivery of all notices,
statements, shareholder reports and other communications from any Fund to its
Beneficial Owners will be at such Fund's expense through the customary practices
and facilities of DTC and DTC Participants.
Affiliated Index Fund or Affiliated Account or portfolio manager for such
Affiliated Index Fund or Affiliated Account receives its rebalance or
reconstitution information from the Affiliated Index Provider until three
trading days after such Affiliated Index Fund or Affiliated Account or
portfolio manager receives its rebalance or reconstitution information
from the Affiliated Index Provider. For example, if the applicable
Affiliated Index Fund or Affiliated Account or portfolio manager receives
rebalance or reconstitution information on a Monday, the Blackout Period
extends from market close on the prior Thursday to market close on the
following Thursday.
Page 18 of 68
I. Investment Objectives and Policies
1. General
The investment objective of each Fund will be to provide investment
returns that correspond, before fees and expenses, generally to the performance
of its relevant Underlying Index. In seeking to achieve the investment objective
of a Fund, the relevant Adviser and/or Sub-Adviser will utilize the indexing
investment approaches described below.
At all times, at least 80% of each Fund's total assets will be invested in
Component Securities. In the case of Foreign Funds, the 80% requirement may also
include Depositary Receipts (as defined below) representing such securities (or,
in cases where a Depositary Receipt is a Component Security, a security
underlying such Depositary Receipt) and, in the case of Fixed Income Funds, the
80% requirement may also include to-be-announced transactions or "TBA
Transactions." Any Depositary Receipts held by a Foreign Fund will be negotiable
securities that represent ownership of a non-U.S. company's publicly traded
stock. Applicants believe that, in certain cases, holding one or more Depositary
Receipts rather than the Component Securities of the relevant Foreign Index will
improve the liquidity, tradability and settlement of a Foreign Fund's then
current Portfolio Deposit (as defined below) (thereby improving the efficiency
of the creation and redemption process and facilitating efficient arbitrage
activity), while at the same time permitting a Foreign Fund to maintain direct
exposure to Component Securities of its Foreign Index.
A Fund may also invest up to 20% ("20% Asset Basket") of its assets in
certain index futures, options, options on index futures, swap contracts or
other derivatives, as related to its respective Underlying Index and its
Component Securities, cash and cash equivalents, other investment companies, as
well as in securities and other instruments not included in its Underlying Index
but which the Adviser believes will help the Fund track its Underlying Index.
A Fund may also engage in short sales(19) in accordance with its
investment objective.
(19) Funds may seek to track Underlying Indexes constructed using 130/30 or
similar investment strategies ("130/30 Funds") or other long/short
investment strategies ("Long/Short Funds"). Each Long/Short Fund will
establish (i) exposures equal to approximately 100% of the long positions
specified by the Long/Short Index (as defined below) and (ii) exposures
equal to approximately 100% of the short positions specified by the
Long/Short Index. Each 130/30 Fund will include strategies that: (i)
establish long positions in securities so that total long exposure
represents approximately 130% of a Fund's net assets; and (ii)
simultaneously establish short positions in other securities so that total
short exposure represents approximately 30% of such Fund's net assets.
Applicants also intend that the Relief would apply to Funds that utilize
strategies where the applicable percentages vary from 130% and 30%,
respectively (e.g., a 140/40 strategy); however, for the sake of
convenience, such Funds are included in the term "130/30 Funds" for
purposes of this Application. The Long/Short Funds and 130/30 Funds will
operate as index funds in the same way as the other Funds described in
this Application; however, there will be no short positions in the list of
Deposit Securities (as defined below) or Redemption Securities (as defined
below).
Page 19 of 68
A Fund will utilize either a "replication strategy" or "representative
sampling" as described below. A Fund using a "replication strategy" will invest
in the Component Securities in its Underlying Index in the same approximate
proportions as in the Underlying Index. A Fund utilizing representative sampling
will hold some, but not necessarily all, of the Component Securities of its
Underlying Index. From time to time, adjustments will be made in the portfolio
of each Fund in accordance with changes in the composition of the Underlying
Index or to maintain RIC compliance (see the discussion below in subsection 2).
Applicants expect that the correlation coefficient between a Fund and its
Underlying Index will be at least 95% over extended periods.
A Fund may utilize a representative sampling strategy with respect to its
Underlying Index when a replication strategy might be detrimental to its
Beneficial Owners, such as when there are practical difficulties or substantial
costs involved in compiling a portfolio of securities to follow its Underlying
Index which contains Component Securities too numerous to efficiently purchase
or sell; or, in certain instances, when a Component Security becomes temporarily
illiquid, unavailable or less liquid. A Fund using representative sampling will
invest in what the Adviser or Sub-Adviser believes to be a representative sample
of the Component Securities in the Underlying Index, which will be selected by
its Adviser and/or Sub-Adviser utilizing quantitative analytical procedures
described below. Under the representative sampling technique, each security is
selected for inclusion in a Fund through its Adviser's or Sub-Adviser's
application of quantitative analytical procedures to give the Fund's portfolio
an investment profile similar to that of its Underlying Index. Securities are
selected for inclusion in a Fund following a representative sampling strategy to
have aggregate investment characteristics (based on market capitalization and
industry weightings), fundamental characteristics (such as return variability,
earnings valuation and yield) and liquidity measures similar to those of the
Fund's Underlying Index taken in its entirety. If the representative sampling
technique is used, a Fund will not be expected to track the performance of its
Underlying Index with the same degree of accuracy as would an investment vehicle
that invested in every Component Security of the Underlying Index with the same
weighting as the Underlying Index. An Adviser and/or Sub-Adviser may also use
representative sampling to exclude less liquid Component Securities contained in
the Underlying Index from a Fund's portfolio in order to create a more tradable
portfolio and improve arbitrage opportunities. Finally, the Fund may realize
savings in transaction costs or other efficiencies by gaining exposure to the
return of an Underlying Index through the use of securities or instruments in
its 20% Asset Basket.
2. Securities in Fund's 20% Asset Basket Not Included in Its Underlying
Index
As discussed above in subsection 1, a Fund may hold, as part of its 20%
Asset Basket, securities and other financial instruments not included in its
Underlying Index, but which the Fund's Adviser and/or Sub-Adviser believes will
help the Fund track the performance of its Underlying Index. The following
examples illustrate the circumstances in which a Fund would hold Portfolio
Securities that are not Component Securities of its Underlying Index. First, in
order to reflect various corporate actions (such as mergers) and other changes
in the Fund's Underlying Index (such as reconstitutions), a Fund may accept as
Deposit Securities (as defined below) securities that are publicly announced as
additions to the Underlying Index prior to their actual date of inclusion in
such Underlying Index. Second, a Fund may hold Portfolio Securities that have
Page 20 of 68
recently been deleted from the Underlying Index due to various corporate actions
and reconstitutions. Third, a Fund may invest in securities that are not
Component Securities of its Underlying Index when necessary to meet RIC
diversification requirements. For example, if an issuer represents a percentage
of the Underlying Index that is in excess of the RIC single issuer limits, an
Adviser and/or Sub-Adviser may invest in securities that are not Component
Securities of its Underlying Index, but which the Adviser and/or Sub-Adviser
believes have performance characteristics of the securities of that large
issuer. In such cases, the securities will be securities in the relevant region,
country, industry, market, market segment or market sector tracked by its
Underlying Index.
3. Depositary Receipts
The Funds may invest in depositary receipts ("Depositary Receipts")
representing foreign securities in which they seek to invest. Depositary
Receipts are typically issued by a financial institution ("Depositary") and
evidence ownership interests in a security or a pool of securities ("Underlying
Securities") that have been deposited with the Depositary.(20) A Fund will not
invest in any Depositary Receipts that the Adviser and/or Sub-Adviser deems to
be illiquid or for which pricing information is not readily available.
4. Long/Short Funds
Underlying Indexes that include both long and short positions in
securities are referred to as "Long/Short Indexes." The Long/Short Indexes will
employ a rules-based approach to determine the Component Securities, and the
weightings of the Component Securities, in the long portion and the short
portion of the Long/Short Index. The Long/Short Indexes will have a
well-developed, specified methodology, and have fully transparent Component
Securities and weightings.
Each Long/Short Fund will establish (i) exposures equal to approximately
100% of the long positions specified by the Long/Short Index and (ii) exposures
equal to approximately 100% of the short positions specified by the Long/Short
Index. The net investment exposure of each of the Long/Short Funds will equal
its net assets.
(20) Depositary Receipts include American Depositary Receipts ("ADRs") and
Global Depositary Receipts ("GDRs"). With respect to ADRs, the Depositary
is typically a U.S. financial institution and the Underlying Securities
are issued by a foreign issuer. The ADR is registered under the Securities
Act on Form F-6. ADR trades occur either on an Exchange or off-exchange.
The Financial Industry Regulatory Authority ("FINRA") Rule 6620 requires
all off-exchange transactions in ADRs to be reported within 90 seconds and
ADR trade reports to be disseminated on a real-time basis. With respect to
GDRs, the Depositary may be a foreign or a U.S. entity, and the Underlying
Securities may have a foreign or a U.S. issuer. All GDRs are sponsored and
trade on a foreign exchange. No affiliated persons of Applicants will
serve as the depositary bank for any Depositary Receipts held by a Fund,
except a depositary bank that is deemed to be affiliated solely because a
Fund owns greater than 5% of the outstanding voting securities of such
depositary bank.
Page 21 of 68
With respect to a Long/Short Fund's long position, each such Fund expects
to hold long positions in Component Securities from the long portion of the
Long/Short Index. With respect to a Long/Short Fund's short position, each Fund
expects to hold short positions in Component Securities from the short portion
("Short Positions") of the Long/Short Index. Each Long/Short Fund will invest at
least 80% of its total assets in the Component Securities (including Depositary
Receipts and TBA Transactions), including Short Positions, of the Long/Short
Index. The remainder of each Long/Short Fund's assets will be its 20% Asset
Basket and may be invested as described above. To the extent required by Section
18(f) of the Act, Portfolio Securities and/or cash in a Long/Short Fund's
portfolio would be segregated to cover Short Positions in the portfolio.
5. 130/30 Funds
Underlying Indexes that use a 130/30 (or similar) investment strategy are
referred to as "130/30 Indexes." The 130/30 Indexes will employ a rules-based
approach to determine the Component Securities, and the weightings of the
Component Securities, in the long portion and the short portion of the index.
The 130/30 Indexes will have a well-developed, specified methodology and have
fully transparent Component Securities and weightings.
Each 130/30 Fund will establish (i) exposures to long positions in
Component Securities equal in value to approximately 130% (or another percentage
greater than 100%) of total net assets and (ii) exposures to short positions in
Component Securities equal in value to approximately 30% (or another percentage
less than 100%) of total net assets, as specified by the underlying 130/30
Index. The net investment exposure of each of the 130/30 Funds will equal its
net assets.
With respect to a 130/30 Fund's long position, each Fund expects to hold
long positions in Component Securities from the long portion of the 130/30
Index. With respect to a 130/30 Fund's short position, each such Fund expects to
hold Short Positions.
Each Domestic 130/30 Fund will hold at least 80% of its total assets in
Component Securities that are specified for the long positions and short
positions in its underlying Domestic 130/30 Index.(23) By way of example,
assuming total assets equal $100, the Domestic 130/30 Fund would take at least
$80 (i.e., 80%) and invest it directly in Component Securities specified as the
(21) For purposes of this calculation, cash proceeds received from short sales
are not included in total assets.
(22) See Securities Trading Practices of Registered Investment Companies,
Investment Company Act Release No. 10666 (Apr. 18, 1979). See also
Robertson Stephens Investment Trust (pub. avail. Aug. 24, 1995) and
Merrill Lynch Asset Management, L.P. (pub. avail. July 2, 1996).
(23) Applicants use the following naming convention throughout the Application:
a Domestic Index that is a 130/30 Index is referred to as a "Domestic
130/30 Index" and a Fund that seeks to track a Domestic 130/30 Index is
referred to as a "Domestic 130/30 Fund." This same naming convention is
applied to Long/Short Funds and therefore a Foreign Index that is a
Long/Short Index is referred to as a "Foreign Long/Short Index" and a Fund
that seeks to track a Foreign Long/Short Index is referred to as a
"Foreign Long/Short Fund," etc.
Page 22 of 68
long positions of its underlying Domestic 130/30 Index. The Domestic 130/30 Fund
would then establish Short Positions in short positions dictated by the Domestic
130/30 Index. In connection with the establishment of the Short Positions, the
Domestic 130/30 Fund would obtain $30 in cash, which it would expect to invest
in additional Component Securities specified as long positions by its Domestic
130/30 Index. It would then invest the remainder of its assets (i.e., $20) in
Component Securities, non-Component Securities, or securities or instruments in
its 20% Asset Basket, as deemed appropriate by the Adviser to track the Domestic
130/30 Index. To the extent required by Section 18(f) of the Act, Portfolio
Securities and/or cash in the Domestic 130/30 Fund's portfolio would be
segregated to cover Short Positions in the portfolio.(24)
Foreign 130/30 Funds will invest at least 80% of their total assets in
Component Securities that are specified for the long positions and short
positions in their Foreign 130/30 Indexes or Depositary Receipts representing
Component Securities that are specified for the long and short positions in
their Foreign 130/30 Indexes. Fixed Income 130/30 Funds will invest at least 80%
of their total assets in Component Securities that are specified for the long
positions and short positions in their Fixed Income 130/30 Indexes or TBA
Transactions representing Component Securities that are specified for the long
positions and short positions in their Fixed Income 130/30 Indexes.
The Long/Short Funds' and 130/30 Funds' holdings of Short Positions, along
with Portfolio Deposit (as defined below) information, will be provided in both
the IIV File (as defined below), which will be available upon request, and in
the full portfolio holdings disclosure, which will be on the Funds' Website.
Given either the IIV File or the Website disclosure, anyone will be able to know
in real time the intraday value of the Long/Short and 130/30 Funds. With respect
to Long/Short and 130/30 Funds, the investment characteristics of any Short
Positions used to achieve short and long exposures will be described in
sufficient detail for market participants to understand the principal investment
strategies of the Funds and to permit informed trading of their Shares.
J. Exchange Listing
The applicable Trust will submit an application to list the Shares of a
Fund on an Exchange. The Distributor will serve as principal underwriter only of
the Creation Units of Shares and will not maintain a secondary market in Shares.
Shares traded on the Listing Exchange or other Exchange will be traded in a
manner similar to Prior ETFs, and it is expected that one or more Exchange
member firms will be designated by the Listing Exchange to act as Market Makers
in Shares. Shares of each Fund will be traded on an Exchange in a manner similar
to that of other ETFs.
As long as each Fund operates in reliance on the requested Order, Shares
will be listed on a Listing Exchange. Shares may also be cross-listed on one or
more foreign securities markets.
(24) See supra, note 22.
Page 23 of 68
K. Sales of Shares
1. General
Each Trust is or will be structured in a manner similar to other ETFs
currently trading in the United States and therefore will offer, issue and sell
Shares of each Fund to investors only in Creation Units through the Distributor
on a continuous basis at the NAV per Share next determined after an order in
proper form is received. The NAV per Share of each Fund is expected to be
determined as of the close of the regular trading session on the New York Stock
Exchange ("NYSE") (ordinarily 4:00 p.m. Eastern Time ("ET")) on each day that
the NYSE is open. Each Fund will sell and redeem Creation Units only on a
"Business Day," which is defined as any day that the NYSE, the relevant Listing
Exchange, the relevant Trust and the Custodian are open for business and
includes any day that a Fund is required to be open under Section 22(e) of the
Act.
2. Purchase and Redemption of Creation Units
In order to keep costs low and, potentially, permit closer tracking of
each Fund's Underlying Index, Shares will be purchased and redeemed in Creation
Units and generally on an in-kind basis. Accordingly, 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 Securities"), and shareholders
redeeming their Shares will receive an in-kind transfer of specified instruments
("Redemption Securities").(25)
On any given Business Day, the names and quantities of the instruments
that constitute the Deposit Securities and the names and quantities of the
instruments that constitute the Redemption Securities will be identical, unless
the Fund is Rebalancing (as defined below). In addition, the Deposit Securities
and the Redemption Securities will each correspond pro rata to the positions in
the Fund's portfolio (including cash positions),(26) 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;
(25) The Funds must comply with the federal securities laws in accepting
Deposit Securities and satisfying redemptions with Redemption Securities,
including that the Deposit Securities and Redemption Securities are sold
in transactions that would be exempt from registration under the
Securities Act. In accepting Deposit Securities and satisfying redemptions
with Redemption Securities 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.
(26) The portfolio used for this purpose will be the same portfolio used to
calculate the Fund's NAV for that Business Day.
Page 24 of 68
(b) for minor differences when rounding is necessary to eliminate
fractional shares or lots that are not tradeable round lots;(27)
(c) TBA Transactions, Short Positions, derivatives and other
positions that cannot be transferred in kind(28) will be excluded from the
Deposit Securities and the Redemption Securities;(29)
(d) to the extent the Fund determines, on a given Business Day, to
use a representative sampling of the Fund's portfolio;(30) or
(e) for temporary periods, to effect changes in the Fund's portfolio
as a result of the rebalancing of its Underlying Index (any such change, a
"Rebalancing").
If there is a difference between the net asset value attributable to a
Creation Unit and the aggregate market value of the Deposit Securities or
Redemption Securities 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 "Balancing Amount"). A difference may occur where
the market value of the Deposit Securities or Redemption Securities, as
applicable, changes relative to the net asset value of the Fund for the reasons
identified in clauses (a) through (e) above.
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 Balancing Amount, as described above;
(b) if, on a given Business Day, the Fund announces before the open
of trading that all purchases, all redemptions or all purchases and
redemptions on that day will be made entirely in cash;
(27) A tradeable round lot for a security will be the standard unit of trading
in that particular type of security in its primary market.
(28) 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.
(29) Because these instruments will be excluded from the Deposit Securities and
the Redemption Securities, their value will be reflected in the
determination of the Balancing Amount (defined below).
(30) A Fund may only use sampling for this purpose if the sample: (i) is
designed to generate performance that is highly correlated to the
performance of the Fund's portfolio; (ii) consists entirely of instruments
that are already included in the Fund's portfolio; and (iii) is the same
for all Authorized Participants (defined below) on a given Business Day.
Page 25 of 68
(c) if, upon receiving a purchase or redemption order from an
Authorized Participant (as defined below), the Fund determines to require
the purchase or redemption, as applicable, to be made entirely in
cash;(31)
(d) if, on a given Business Day, the Fund requires all Authorized
Participants (as defined below) purchasing or redeeming Shares on that day
to deposit or receive (as applicable) cash in lieu of some or all of the
Deposit Securities or Redemption Securities, respectively, solely because:
(i) such instruments are not eligible for transfer through either the NSCC
(as defined below) or DTC; or (ii) in the case of Foreign Funds holding
non-U.S. investments, such instruments are not eligible for trading due to
local trading restrictions, local restrictions on securities transfers or
other similar circumstances; or
(e) if the Fund permits an Authorized Participant (as defined below)
to deposit or receive (as applicable) cash in lieu of some or all of the
Deposit Securities or Redemption Securities, 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; (iii) an Authorized
Participant does not have appropriate arrangements to take delivery of the
Redemption Securities in the applicable jurisdictions and it is not
possible to make such arrangements; or (iv) a holder of Shares of a
Foreign Fund holding non-U.S. investments would be subject to unfavorable
income tax treatment if the holder receives redemption proceeds in
kind.(32)
Each Business Day, before the open of trading on the Listing Exchange, the
Fund will cause to be published through the NSCC (as defined below) the names
and quantities of the instruments comprising the Deposit Securities and the
Redemption Securities, as well as the estimated Balancing Amount (if any), for
that day.(33) The list of Deposit Securities and Redemption Securities will
apply until a new list is announced on the following Business Day, and there
will be no intra-day changes to the list except to correct errors in the
published list.
(31) In determining whether a particular Fund will sell or redeem Creation
Units entirely on a cash or in-kind basis (whether for a given day or a
given order), the key consideration will be the benefit that would accrue
to the Fund and its investors. For instance, in bond transactions, the
Adviser may be able to obtain better execution than Share purchasers
because of the Adviser's size, experience and potentially stronger
relationships in the fixed income markets. Purchases of Creation Units
either on an all cash basis or in-kind are expected to be neutral to the
Funds from a tax perspective. In contrast, cash redemptions typically
require selling portfolio holdings, which may result in adverse tax
consequences for the remaining Fund shareholders that would not occur with
an in-kind redemption. As a result, tax considerations may warrant in-kind
redemptions.
(32) 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).
(33) If the Fund is Rebalancing, it may need to announce two estimated
Balancing Amounts for that day, one for deposits and one for redemptions.
Page 26 of 68
3. Transaction Fees
Transaction expenses, including operational processing and brokerage
costs, will be incurred by a Fund when investors purchase or redeem Creation
Units "in-kind" and such costs have the potential to dilute the interests of the
Fund's existing shareholders. Hence, each Fund will impose purchase or
redemption transaction fees ("Transaction Fees") in connection with effecting
such purchases or redemptions of Creation Units. Since the Transaction Fees are
intended to defray the transaction expenses as well as to prevent possible
shareholder dilution resulting from the purchase or redemption of Creation
Units, the Transaction Fees will be borne only by such purchasers or redeemers.
Where a Fund permits an "in-kind" purchaser to substitute cash in lieu of
depositing one or more of the requisite Deposit Securities, the purchaser may be
assessed a higher Transaction Fee on the cash in lieu portion of its investment
to cover the cost of purchasing such Deposit Securities, including operational
processing and brokerage costs, and part or all of the spread between the
expected bid and offer side of the market relating to such Deposit Securities.
The amounts of such Transaction Fees will be determined separately for each
Fund. The amount of the maximum Transaction Fee for each Fund will be set
separately.
Variations in the Transaction Fee may be imposed from time to time. Any
variations in the Transaction Fees will be imposed in accordance with Rule 22d-1
under the Act. Transaction Fees will be limited to amounts that have been
determined by the Adviser to be appropriate and will take into account
transaction costs associated with the relevant Deposit Securities and Redemption
Securities of the Funds. In all cases, such Transaction Fees will be limited in
accordance with requirements of the Commission applicable to management
investment companies offering redeemable securities.
4. Section 12(d)(1)
Each individual Share is issued by its applicable Fund and, accordingly,
the acquisition of any Share by an investment company, whether acquired from the
applicable Fund or in the secondary market, ordinarily would be subject to the
restrictions of Section 12(d)(1) of the Act. However, Applicants may rely on the
Section 12(d)(1) Order.(34)
5. Purchase of Creation Units; General
All orders to purchase Shares of a Fund in Creation Units must be placed
with the Distributor by or through an "Authorized Participant" which is either:
(1) a "Participating Party," i.e., a broker-dealer or other participant in the
Continuous Net Settlement ("CNS") System of the National Securities Clearing
Corporation ("NSCC"), a clearing agency registered with the Commission, or (2) a
Participant in DTC, which, in either case, has signed a "Participant Agreement"
with the Distributor. An Authorized Participant is not required to be a member
of an Exchange. The Distributor will be responsible for transmitting the orders
(34) See supra, note 3.
Page 27 of 68
to the Funds and will furnish to those placing such orders confirmation that the
orders have been accepted, but the Distributor may reject any order which is not
submitted in proper form. Subsequent to the acceptance of an order to purchase
Shares in Creation Units, upon delivery of the requisite Deposit Securities, the
Balancing Amount, and any other required cash amounts, the Distributor will
instruct the applicable Fund to initiate "delivery" of the appropriate number of
Shares of the applicable Fund to the book-entry account specified by the entity
placing the order. The Distributor also will be responsible for delivering the
Fund's Prospectus and/or summary prospectus(35) to those persons purchasing
Shares in Creation Units and for maintaining records of both the orders placed
with it and the confirmations of acceptance furnished by it. In addition, the
Distributor will maintain a record of the instructions given to the applicable
Fund to implement the delivery of its Shares.
6. Payment Requirements for Creation Units
Creation Units may be purchased only by or through an Authorized
Participant that has entered into a Participant Agreement. An investor does not
have to be an Authorized Participant, but must place an order through, and make
appropriate arrangements with, an Authorized Participant. Authorized
Participants making payment for Creation Units of Shares of any Domestic Fund
that is an Equity Fund placed through the Distributor must either: (1) initiate
instructions pertaining to the requisite Deposit Securities and cash, as
determined in accordance with the procedures described above in Section II.K.2
(collectively referred to herein as a "Portfolio Deposit") through the CNS
System as such processes have been enhanced to effect purchases and redemptions
of Creation Units of Shares (such process being referred to herein as the "NSCC
Clearing Process") or (2) deposit Portfolio Deposits with the Fund "outside" the
NSCC Clearing Process through the facilities of DTC ("DTC Facilities").
7. Placement and Acceptance of Creation Unit Purchase Orders
All orders to purchase Creation Units, whether through the NSCC Clearing
Process, or "outside" the NSCC Clearing Process through DTC Facilities or
otherwise, must be received by the Distributor no later than the order cut-off
time designated as such in the Participant Agreement ("Order Cut-Off Time") on
the relevant Business Day, in each case on the date such order is placed
("Transmittal Date") in order for creation of Creation Units to be effected
based on the NAV per Share of the relevant Funds as determined on such date. In
the case of custom orders, the order must be received by the Distributor no
later than 3:00 p.m. ET.
The NSCC Clearing Process is not currently available for purchases (or
redemptions) of Foreign Funds (except for those Funds holding portfolios
exclusively comprised of ADRs). Accordingly, Authorized Participants making
payment for orders of Creation Units of Shares of Foreign Funds must have
international trading capabilities and must effect such transactions "outside"
the NSCC Clearing Process. Once the Custodian has been notified of an order to
purchase, it will provide such information to the relevant sub-custodian(s) of
each Foreign Fund.
(35) As defined in Investment Company Act Release No. 28584 (Jan. 13, 2009).
Page 28 of 68
The Custodian shall cause the sub-custodian(s) of each Foreign Fund to
maintain an account into which the Authorized Participant shall deliver, on
behalf of itself or the party on whose behalf it is acting, the designated
Portfolio Deposit. Deposit Securities must be maintained by the applicable local
sub-custodian(s). Following the notice of intention, an irrevocable order to
purchase Creation Units, in the form required by the Fund, must be received by
the Distributor, as principal underwriter, from an Authorized Participant on its
own or another investor's behalf by the Order Cut-Off Time on the date such
request is submitted.
Except as described below, the Shares and Deposit Securities of Fixed
Income Funds will clear and settle in the same manner as the Shares and Deposit
Securities of Equity Funds. The Shares and Deposit Securities of Fixed Income
Funds will clear and settle in a manner consistent with other ETFs that invest
in fixed income securities. Deposit Securities that are U.S. government or U.S.
agency securities and any cash will settle via free delivery through the Federal
Reserve System. Non-U.S. fixed income securities will settle in accordance with
the normal rules for settlement of such securities in the applicable non-U.S.
market. The Shares will settle through DTC. The Custodian will monitor the
movement of the underlying Deposit Securities or cash and will instruct the
movement of Shares only upon validation that such securities or cash have
settled correctly. The settlement of Shares will be aligned with the settlement
of the underlying Deposit Securities or cash and, except as discussed below with
respect to Portfolio Securities traded in foreign markets, will generally occur
on a settlement cycle of T+3 Business Days or shorter, at the sole discretion of
the applicable Trust on behalf of each Fixed Income Fund.(36) Applicants do not
believe the issuance and settlement of Creation Units in the manner described
above will have any material impact on the arbitrage efficiency or the secondary
market trading of Shares of the Fixed Income Funds. Each Fund may recoup the
settlement costs charged by NSCC and DTC by imposing Transaction Fees on
investors purchasing or redeeming Creation Units.
Subject to the conditions that (i) a properly completed irrevocable
purchase order has been submitted by the Authorized Participant (either on its
own or another investor's behalf) not later than the Order Cut-Off Time on the
Transmittal Date, and (ii) arrangements satisfactory to the applicable Fund are
in place for payment of the Balancing Amount and any other cash amounts which
may be due, the applicable Fund will accept the order, subject to its right (and
(36) Applicants note that Shares of the Fixed Income Funds typically will trade
and settle on a trade date plus three business days ("T+3") basis. Where
this occurs, Applicants believe that Shares of each Fixed Income Fund will
trade in the secondary market at prices that reflect interest and coupon
payments on Portfolio Securities through the Shares' T+3 settlement date.
As with other investment companies, the Act requires the Fixed Income
Funds to calculate NAV based on the current market value of portfolio
investments, and does not permit the Fixed Income Funds to reflect in NAV
interest and coupon payments not due and payable. Therefore, to the extent
that Shares of the Fixed Income Funds may trade in the secondary market at
a price that reflects interest and coupon payments due on a T+3 settlement
date, Applicants anticipate that such Shares may trade in the secondary
market at a slight premium to NAV that reflects these interest and coupon
payments. Applicants do not believe that this apparent premium will have
any impact on arbitrage activity or the operations of the Fixed Income
Funds. The Market Makers (and other institutional investors) who would
take advantage of arbitrage activity have full access to this information
and regularly consider such information when buying an individual bond or
baskets of fixed income securities.
Page 29 of 68
the right of the Distributor, its Adviser and its Sub-Adviser (if any)) to
reject any order not submitted in proper form.
A Creation Unit of a Fund will generally not be issued until the transfer
of good title to the Fund of the Deposit Securities and the payment of the
Balancing Amount and any other required cash amounts have been completed.
Notwithstanding the foregoing, to the extent contemplated by a Participant
Agreement, Creation Units will be issued to an Authorized Participant
notwithstanding the fact that the corresponding Portfolio Deposits have not been
received in part or in whole, in reliance on the undertaking of such Authorized
Participant to deliver the missing Deposit Securities as soon as possible, which
undertaking shall be secured by such Authorized Participant's delivery and
maintenance of collateral. The Participant Agreement will permit the Fund to use
such collateral to buy the missing Deposit Securities at any time and will
subject the Authorized Participant to liability for any shortfall between the
cost to the Fund of purchasing such securities and the value of the collateral.
8. Rejection of Creation Unit Purchase Orders
As noted above, the Distributor may reject any order to purchase Creation
Units for any reason, including if an order to purchase Shares is not submitted
in proper form. In addition, a Fund may reject a purchase order transmitted to
it by the Distributor if:
(i) the purchaser or group of related purchasers, upon obtaining the
Creation Units of Shares of a Fund order, would own eighty percent (80%)
or more of the outstanding Shares of such Fund;
(ii) the acceptance of the Portfolio Deposit would have certain
adverse tax consequences, such as causing the Fund no longer to meet the
requirements for RIC status under the Code for federal income tax
purposes;
(iii) the acceptance of the Portfolio Deposit would, in the opinion
of the Fund, be unlawful, as in the case of a purchaser who was banned
from trading in securities;
(iv) the acceptance of the Portfolio Deposit would otherwise, in the
discretion of the Fund, its Adviser and/or Sub-Advisers, have an adverse
effect on the Fund or on the rights of the Fund's Beneficial Owners; or
(v) there exist circumstances outside the control of the Fund that
make it impossible to process purchases of Creation Units of Shares for
all practical purposes. Examples of such circumstances include: acts of
God or public service or utility problems such as fires, floods, extreme
weather conditions and power outages resulting in telephone, telecopy and
computer failures; market conditions or activities causing trading halts;
systems failures involving computer or other information systems affecting
the Funds, the Adviser, any Sub-Adviser, the Transfer Agent, the
Custodian, the Distributor, DTC, NSCC or any other participant in the
purchase process; and similar extraordinary events.
Page 30 of 68
L. Pricing
The price of Shares trading on an Exchange will be based on a current
bid/offer market. The price of Shares of each Fund, like the price of all traded
securities, will be subject to factors such as supply and demand, as well as the
current value of the Portfolio Securities held by such Fund. In addition, Shares
are available for purchase or sale on an intraday basis on an Exchange and do
not have a fixed relationship to the previous day's NAV per Share or the current
day's NAV per Share. Prices on an Exchange therefore may be below, at, or above
the most recently calculated per share NAV of such Shares. No secondary sales
will be made to brokers or dealers at a concession by the Distributor or by a
Fund. Transactions involving the sale of Shares on an Exchange will be subject
to customary brokerage commissions and charges.
Applicants believe that the existence of a continuous trading market on an
Exchange for Shares, together with the publication by the Exchange of the
current market value of the sum of the Deposit Securities and the estimated
Balancing Amount, will be features of each Fund particularly attractive to
certain types of investors. Applicants intend to emphasize these features in the
marketing of Shares.
M. Redemption
Beneficial Owners of Shares may sell their Shares in the secondary market,
but must accumulate enough Shares to constitute a Creation Unit in order to
redeem through the applicable Fund. Redemption requests must be placed by or
through an Authorized Participant. Creation Units will be redeemable at their
NAV per individual Share next determined after receipt of a request for
redemption by the applicable Fund.
Consistent with the provisions of Section 22(e) of the Act and Rule 22e-2
thereunder, the right to redeem will not be suspended, nor payment upon
redemption delayed, except as provided by Section 22(e) of the Act, and/or
except as may be permitted under the Relief requested herein in connection with
Foreign Funds (See Section IV.A.4).
Redemption of Shares in Creation Units will be subject to a Transaction
Fee imposed in the same amount and manner as the Transaction Fee incurred in
purchasing such Shares. Redemption of Shares may be made either through the NSCC
Clearing Process (with respect to Domestic Funds only) or "outside" the NSCC
Clearing Process through DTC Facilities or otherwise (with respect to Domestic
Funds or Foreign Funds). As discussed herein, a redeeming investor will pay a
Transaction Fee to offset the Fund's trading costs, operational processing
costs, brokerage commissions and other similar costs incurred in transferring
the Portfolio Securities from its account to the account of the redeeming
investor. An entity redeeming Shares in Creation Units "outside" the NSCC
Clearing Process may be required to pay a higher Transaction Fee than would have
been charged had the redemption been effected through the NSCC Clearing Process.
A redeeming investor receiving cash in lieu of one or more Portfolio Securities
may also be assessed a higher Transaction Fee on the cash in lieu portion to
cover the costs of selling such securities, including all the costs listed above
plus all or part of the spread between the expected bid and offer side of the
market relating to such Portfolio Securities. This higher Transaction Fee will
Page 31 of 68
be assessed in the same manner as the Transaction Fee incurred in purchasing
Creation Units.
To the extent contemplated by a Participant Agreement, in the event an
Authorized Participant has submitted a redemption request in proper form but is
unable to transfer all or part of the Creation Unit to be redeemed to the
Distributor, on behalf of the Fund, by the closing time of the regular trading
session on the Exchange on the date such redemption request is submitted, the
Distributor will nonetheless accept the redemption request in reliance on the
undertaking by the Authorized Participant to deliver the missing Shares as soon
as possible, which undertaking shall be secured by the Authorized Participant's
delivery and maintenance of collateral. The Participant Agreement will permit
the relevant Fund to use such collateral to purchase the missing Shares or
acquire the Deposit Securities and the Balancing Amount underlying such Shares,
and will subject the Authorized Participant to liability for any shortfall
between the cost to the Fund of acquiring such Shares, Deposit Securities or
Balancing Amount and the value of the collateral.
A redemption request "outside" the NSCC Clearing Process will be
considered to be in proper form if (i) a duly completed request form is received
by the Distributor from the Authorized Participant on behalf of itself or
another redeeming investor at a time specified by the Fund (currently expected
to be 4:00 p.m. ET), and (ii) arrangements satisfactory to the Fund are in place
for the Authorized Participant to transfer or cause to be transferred to the
Fund the Creation Unit of such Fund being redeemed through the book-entry system
of DTC on or before contractual settlement of the redemption request.
In the case of Shares of Foreign Funds, upon redemption of Creation Units
and taking delivery of the Redemption Securities into the securities account of
the redeeming shareholder or an Authorized Participant acting on behalf of such
investor, such person must maintain appropriate security arrangements with a
broker-dealer, bank or other custody provider in each jurisdiction in which any
of such Redemption Securities are customarily traded.
N. Dividend Reinvestment Service
No Fund will make DTC book-entry dividend reinvestment service available
for use by Beneficial Owners for reinvestment of their cash proceeds but certain
individual brokers may make a dividend reinvestment service available to their
clients.
O. Shareholder Transaction and Distribution Expenses
No sales charges for purchases of Creation Units of any Fund are
contemplated. As indicated above in Section II.M. entitled "Redemption," each
Fund will charge a Transaction Fee only to those investors purchasing and
redeeming Shares in Creation Units. Investors purchasing and selling Shares in
the secondary market may incur customary brokerage commissions, fees and
expenses. A Trust may be authorized by its Board, including a majority of the
trustees who are not "interested persons" as defined in Section 2(a)(19) of the
Act, to implement a plan under Rule 12b-1 under the Act on behalf of a Fund and
to assess a 12b-1 fee of up to 25 basis points, calculated on the average daily
NAV of each Fund.
Page 32 of 68
P. Shareholder Reports
Each Fund will furnish to DTC Participants, for distribution to Beneficial
Owners of Shares, copies of the Funds' annual and semi-annual shareholder
reports.
Q. Availability of Information Regarding Shares and Underlying Indexes
Certain information will be made available as described above in Section
II.K.2. In addition, each Listing Exchange or other major market data provider
will disseminate, every 15 seconds during regular Exchange trading hours,
through the facilities of the Consolidated Tape Association, an amount for each
Fund representing the sum of (i) the estimated Balancing Amount and (ii) the
current value of the Deposit Securities and any Short Positions, on a per
individual Share basis. The Listing Exchange will not be involved in, nor be
responsible for, the calculation of the estimated Balancing Amount, nor will it
guarantee the accuracy or completeness of the estimated Balancing Amount. No
Fund will be involved in, or responsible for, the calculation or dissemination
of the sum of the estimated Balancing Amount and the current value of the
Deposit Securities, and will make no warranty as to its accuracy.
Applicants expect that the value of the Underlying Indexes will be
disseminated by the relevant Listing Exchange or such other organization
authorized by the Index Provider in accordance with Commission and Exchange
requirements. Applicants expect the same from the Index Providers of future
Underlying Indexes and future primary Listing Exchanges. In addition, these
organizations will disseminate values for each Underlying Index once each
trading day based on closing prices in the relevant exchange market. As
described above, each Business Day, before the open of trading on the Listing
Exchange, the Fund will cause to be published through the NSCC information about
the Deposit Securities and the Redemption Securities, as well as the estimated
Balancing Amount (if any), for that day.(37) In addition, the Website will
publish free of charge (or provide a link to another website that will publish
free of charge) (i) the Component Securities of each Affiliated Index that an
Affiliated Index Fund seeks to track and their respective weightings in each
Affiliated Index as of the close of the prior Business Day and (ii) the
Portfolio Securities held by each Affiliated Index Fund and their respective
weightings.
(37) The NSCC's system for the receipt and dissemination to its participants of
portfolio information, however, was designed for portfolios consisting
entirely of equity or fixed income securities, cash and money market
instruments. As a result, it is not currently capable of processing
information with respect to Short Positions. Therefore, for the Long/Short
Funds and 130/30 Funds, the Adviser will provide full portfolio holdings
disclosure on the Website and will develop an "IIV File," which it will
use to disclose the Funds' full portfolio holdings, including Short
Positions, until such time (or perhaps longer, if the applicable Trust
deems it advisable) as the NSCC can process such information. Before the
opening of business on each Business Day (i) the applicable Trust, the
Adviser or a third party, on the Trust's behalf, will make the IIV File
available by e-mail upon request; and (ii) the Adviser will disclose on
the Website the identities and quantities of Portfolio Securities of each
Long/Short Fund or 130/30 Fund that will form the basis for the Funds'
calculation of NAV at the end of the Business Day.
Page 33 of 68
Because bonds typically trade through "over-the-counter" or "OTC"
transactions, information about the intra-day prices of such bonds comes from a
variety of sources. With respect to Fixed Income Funds, this information
includes: (i) executed bond transactions as reported on FINRA's Trace Reporting
and Compliance System ("TRACE" or the "TRACE System"); (ii) intra-day prices
obtained directly from broker-dealers, and/or (iii) intra-day prices obtained
from subscription services, such as Bloomberg. For these purposes, "intra-day
prices" may include executed transaction prices, executable prices or indicative
prices, all of which are available to Authorized Participants and other
investors from major broker-dealers. "Executed transaction prices," as the term
suggests, are the prices at which completed bond transactions actually occurred,
such as those executed transactions reported on TRACE or other transaction
reporting systems. "Executable quotations" are price quotations provided by
broker-dealers that indicate the price at which such broker-dealer would buy or
sell a specified amount of securities. "Indicative quotations" are price
quotations provided by broker-dealers that, while not necessarily executable,
provide an indication of the price at which such broker-dealer would buy or sell
a specified amount of securities.
As previously noted, one source of intra-day U.S. bond prices is the TRACE
system. The TRACE system reports executed prices on corporate bonds. The
development of the TRACE system provides evidence that transparency in the U.S.
bond market is increasing. TRACE reported prices are available without charge on
FINRA's website on a "real time" basis (subject to a fifteen minute delay as of
July 1, 2005) and also are available by subscription from various information
providers (e.g., Bloomberg). In addition, Authorized Participants and other
market participants, particularly those that regularly deal or trade in bonds,
have access to intra-day bond prices from a variety of sources other than TRACE.
One obvious source of information for Authorized Participants is their own
trading desks.
Applicants understand that many Authorized Participants already make
markets in the bonds included in the Underlying Indexes and that, when acting as
such, they have access to intra-day bond prices through their own trading desks
and will be able to assess the intra-day value of each Fund's Deposit Securities
using this information. Market participants, particularly large institutional
investors, regularly receive executable and indicative quotations on bonds from
broker-dealers. Authorized Participants and other market participants also can
obtain bond prices by subscription from third parties through on-line
client-based services.(38)
The Website will include the current version of the Prospectus and
Statement of Additional Information ("SAI"), as well as quantitative information
for each Fund, updated on a daily basis, including the market closing price or
the Bid/Ask Price, and a calculation of the premium or discount of the market
closing price or Bid/Ask Price against such NAV per Share. Also, the Applicants
expect the Listing Exchange to disseminate a variety of data with respect to
(38) "[M]ost professional market participants, dealers, investors and issuers
have access to reliable bond price data through commercial vendors."
Statement of William H. James of the Bond Market Association before the
House Committee on Commerce Subcommittee on Finance and Hazardous
Materials, September 29, 1998, reported in The Bond Market
Association--Legislative Issues (discussing the increasing availability of
pricing information in all sectors of the bond market).
Page 34 of 68
Shares on a daily basis by means of CTA and CQ High Speed Lines, including the
NAV and the number of Shares outstanding as of the previous day's close. In
addition, the previous day's closing price of each Fund's Deposit Securities and
Short Positions will be readily available from, as applicable, the relevant
Listing Exchange, automated quotation systems, published or other public
sources, such as TRACE, or on-line information services such as Quotron,
Bloomberg or Reuters. Similarly, information regarding market prices and volume
of Shares will be broadly available on a real time basis throughout the trading
day. In addition, Applicants expect, given the past history of other Prior ETFs,
that Shares will be followed closely by stock market and mutual fund
professionals as well as investment advisers, who will offer their analysis of
why investors should purchase, hold, sell or avoid Shares. In conclusion,
Exchange listing of Shares should help ensure that there is a substantial amount
of raw data available, and that such data is packaged, analyzed and widely
disseminated to the investing public.
R. Sales and Marketing Materials
Applicants will take appropriate steps as may be necessary to avoid
confusion in the public's mind between a Fund and a conventional "open-end
investment company" or "mutual fund." Although each Trust will be classified and
registered under the Act as an open-end management investment company, no Fund
will be marketed or otherwise held out as a "mutual fund," in light of the
features, described in this Application, that make each Fund significantly
different from what the investing public associates with a conventional mutual
fund. Instead, each Fund will be marketed as an "exchange-traded fund." No Fund
marketing materials (other than as required in the Fund's Prospectus) will
reference an "open-end fund" or "mutual fund," except to compare and contrast a
Fund with conventional mutual funds. Further, in all marketing materials where
the features or method of obtaining, buying or selling Shares traded on an
Exchange are described, there will be an appropriate statement or statements to
the effect that Shares are not individually redeemable.
None of the Funds will be advertised or marketed as open-end investment
companies, i.e., as mutual funds, which offer individually redeemable
securities. Any advertising material where features of obtaining, buying or
selling Creation Units are described or where there is reference to
redeemability will prominently disclose that Shares are not individually
redeemable and that owners of Shares may acquire Shares from a Fund and tender
those Shares for redemption to a Fund in Creation Units only.
As indicated above, the Funds will provide copies of their annual and
semi-annual shareholder reports to DTC Participants for distribution to
shareholders. The above policies will also be followed in all reports to
shareholders.
S. Procedure by Which Shares Will Reach Investors; Disclosure Documents
Based on the experience of Prior ETFs, Applicants expect that there will
be several categories of market participants who are likely to be interested in
purchasing Creation Units of a Fund. One is the institutional investor that
desires to keep a portion of its portfolio indexed to the relevant Underlying
Index and finds Shares a cost effective means to do so, with the added benefit
of exchange-traded liquidity should it wish to sell some or all of its holdings.
Page 35 of 68
Institutional investors may also wish to purchase or redeem Creation Units of a
Fund to take advantage of the potential arbitrage opportunities in much the same
manner as the arbitrageurs discussed in the next sentence. The other likely
institutional investor is the arbitrageur, who stands ready to take advantage of
any slight premium or discount in the market price of Shares on an Exchange
measured against the Fund's NAV. Applicants do not expect that arbitrageurs will
hold positions in Shares for any length of time unless the positions are
appropriately hedged. Applicants believe that arbitrageurs will purchase or
redeem Creation Units of a Fund in pursuit of arbitrage profit, and in so doing
will enhance the liquidity of the secondary market, as well as keep the market
price of Shares close to their NAV per Share. Lastly, Applicants observe that
Market Makers, acting in their roles to provide a fair and orderly secondary
market for the Shares, may from time to time find it appropriate to purchase or
redeem Creation Units in connection with their market-making activities.
In the above examples, those who purchase Shares in Creation Units may
hold such Shares or may, at the time of purchase or at a later time, sell such
Shares into the secondary market. Applicants expect that secondary market
purchasers of Shares will include both institutional investors and "retail"
investors for whom such Shares provide a useful, "retail-priced" exchange-traded
mechanism for investing in the country, industry, market, market segment or
market sector represented by the relevant Underlying Index. The price at which
Shares trade will be disciplined by arbitrage opportunities created by the
option continually to purchase or redeem Shares in Creation Units, which should
help to ensure that Shares will not trade at a material discount or premium in
relation to their NAV per Share.
As described above, Shares in Creation Units will be offered continuously
to the public. Because new Shares may be created and issued on an ongoing basis,
at any point during the life of the relevant Fund, a "distribution," as such
term is used in the Securities Act, may be occurring. Some activities on the
part of broker-dealers and other persons may, depending on the circumstances,
result in their being deemed participants in a distribution in a manner which
could render them statutory underwriters and subject them to the prospectus
delivery and liability provisions of the Securities Act. For example, a
broker-dealer firm and/or its client may be deemed a statutory underwriter if it
takes Creation Units after placing an order with the Distributor, breaks them
down into the constituent individual Shares, and sells such Shares directly to
customers, or if it chooses to couple the purchase of a supply of new Shares
with an active selling effort involving solicitation of secondary market demand
for Shares. A determination of whether one is an underwriter must take into
account all the facts and circumstances pertaining to the activities of the
broker-dealer or its client in the particular cases.
Dealers who are not "underwriters," but are participating in a
distribution (as contrasted to ordinary secondary trading transactions), and
thus dealing with Shares that are part of an "unsold allotment" within the
meaning of Section 4(3)(C) of the Securities Act, would be unable to take
advantage of the prospectus-delivery exemption provided by Section 4(3) of the
Securities Act.(39)
(39) Applicants note that prospectus delivery is not required in certain
instances, including purchases of Shares by an investor who has previously
been delivered a Prospectus (until such Prospectus is supplemented or
Page 36 of 68
The Distributor will act as coordinator in connection with the production
and distribution of such materials to broker-dealers and will make generally
known among the broker-dealer community that a current version of such Fund's
Prospectus and SAI may be obtained through the Distributor. Brokerage firms will
be able to order in advance their anticipated quantities of such materials from
the Distributor. Additionally, the Distributor will arrange to deliver the
Fund's Prospectus and SAI to the Listing Exchange, where they will be available
for review by investors.
III. THE RELIEF REQUESTED.
A. Summary of This Application
Applicants seek an Order from the Commission permitting (1) the Funds to
issue Shares that are redeemable in Creation Units only; (2) secondary market
transactions in Shares on an Exchange at negotiated prices, rather than at the
current offering price as described in the Fund's Prospectus; (3) certain
affiliated persons of each Fund to deposit securities into, and receive
securities from, each Fund in connection with the purchase and redemption of
Creation Units, all as more fully set forth below; and (4) a Foreign Fund to
provide payment or satisfaction of redemption requests in periods exceeding
seven days in certain circumstances.
The Relief specified below is requested pursuant to Section 6(c) of the
Act, which provides that the Commission may exempt any person, security or
transaction or any class of persons, securities or transactions from any
provision of the Act:
"if and to the extent that such exemption is necessary or
appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the
policy and provisions of. . . [the Act]."
Applicants believe that Shares of each Fund will afford significant
benefits in the public interest. Among other benefits, availability of Shares
should provide increased investment opportunities, which should encourage
diversified investment; provide in the case of individual tradable Shares, a
relatively low-cost, market-basket security for small and middle-sized accounts
of individuals and institutions that would be available at intra-day prices
reflecting minute-by-minute market conditions rather than only closing prices;
make available a vehicle that would track the selected Underlying Indexes more
closely than most alternative market-basket investments due, in part, to the
realization of efficiencies, cost savings and economies of scale; provide a
otherwise updated) and unsolicited brokers' transactions in Shares
(pursuant to Section 4(4) of the Securities Act). Also, firms that do
incur a prospectus-delivery obligation with respect to Shares will be
reminded that under Securities Act Rule 153, a prospectus-delivery
obligation under Section 5(b)(2) of the Securities Act owed to a member of
the Exchange in connection with a sale on such Exchange, is satisfied by
the fact that the Fund's Prospectus and SAI are available at such Exchange
upon request. The Fund's Prospectus also will note that the
prospectus-delivery mechanism provided in Rule 153 is only available with
respect to transactions on the Listing Exchange.
Page 37 of 68
security that should be freely available in response to market demand; provide
competition for comparable products available in both foreign and U.S. markets;
attract capital to the U.S. markets; provide enhanced liquidity; facilitate the
implementation of diversified investment management techniques; and provide a
more tax- efficient investment vehicle than most traditional mutual funds or
closed-end funds.
The Commission has indicated that Section 6(c) permits it to exempt
"particular vehicles and particular interests" from provisions of the Act that
would inhibit "competitive development of new products and new markets offered
and sold in or from the United States."(40) The Shares proposed to be offered
would provide to both retail and institutional investors new exchange-traded
investment company products representing interests in targeted securities
markets. As such, Applicants believe the Shares of the Funds are appropriate for
exemptive relief under Section 6(c).
Applicants have made every effort to achieve their stated objectives in a
manner consistent with existing statutory and regulatory constraints and within
the substantive limits of exemptive relief previously granted to others. They
have concluded that in-kind redemption of Creation Units of the Funds to the
maximum extent practicable as described herein will be essential in order to
minimize the need for selling securities of a Fund's portfolio to meet
redemptions, to permit the maximum amount of resources of each Fund to be used
to track the Underlying Index and to alleviate the inappropriate taxation of
ongoing shareholders.
With respect to the exemptive relief specified below regarding Sections
17(a)(1) and 17(a)(2), Relief is requested pursuant to Section 17(b), which
provides that the Commission may approve the sale of securities to an investment
company and the purchase of securities from an investment company, in both cases
by an affiliated person of such company, if the Commission finds that:
"(1) the terms of the proposed transaction, including the
consideration to be paid or received, are reasonable and fair and do
not involve any overreaching on the part of any person concerned;
(2) the proposed transaction is consistent with the policy of each
registered investment company concerned. . .; and (3) the proposed
transaction is consistent with the general purposes of [the Act]."
The sale and redemption of Creation Units of each Fund is on the same
terms for all investors, whether or not such investor is an affiliate. In each
case, Creation Units are sold and redeemed by each Fund at their NAV. The
Portfolio Deposit for a Fund is based on a standard applicable to all investors
and valued in the same manner in all cases. Except for permitted cash-in-lieu
amounts, Deposit Securities and Redemption Securities will be the same for each
purchaser or redeemer regardless of their identity. Such transactions do not
involve "overreaching" by an affiliated person. Accordingly, Applicants believe
(40) Investment Company Act Release No. 17534 (June 15, 1990), at 84.
Page 38 of 68
the proposed transactions described herein meet the Section 17(b) standards for
relief because the terms of such proposed transactions, including the
consideration to be paid or received for the Creation Units, are reasonable and
fair and do not involve overreaching on the part of any person concerned; and
the proposed transactions will be consistent with the policy of each Fund as
described herein and are consistent with the general purposes of the Act.
Applicants believe that the exemptions requested are necessary and appropriate
in the public interest and consistent with the protection of investors and the
purposes fairly intended by the Act. The exemptions and Order requested are also
substantially similar to those granted in Prior ETF Orders.
B. Benefits of the Proposal
1. General
The typical ETF allows investors to trade a standardized portfolio of
securities in a size comparable to a share of common stock. Trading in
exchange-basket products is an important investment strategy, due in part to the
widely acknowledged benefits of diversification and in part to the attraction of
baskets selected from a market segment or industry sector that investors want to
incorporate into their portfolio to express a specific investment theme or to
participate in an economic/investment trend. The popularity of current ETFs,
including but not limited to the Prior ETFs, all of which are basket products,
is ample testimony to the fact that this basket structure has proven attractive
to investors.
2. Intra-Day Trading
Investors have also been drawn to the liquidity provided by many ETFs. In
contrast to traditional open-end funds which do not provide investors the
ability to trade throughout the day, Shares of the Funds will be listed on an
Exchange and will trade throughout the Listing Exchange's regular trading hours.
Applicants believe that the price at which Shares trade will be disciplined by
arbitrage opportunities created by the option continually to purchase or redeem
Shares in Creation Units, which should help prevent Shares from trading at a
material discount or premium in relation to their NAV per Share, in sharp
distinction to closed-end investment companies. The continuous ability to
purchase and redeem Shares in Creation Units also means that Share prices in
secondary trading should not ordinarily be greatly affected by limited or excess
availability.
3. Maintaining a Competitive Position in the International Financial
Community
To maintain a competitive position in global securities markets, U.S.
participants must respond to new developments and encourage the development of
new products. Innovative financial vehicles such as the Funds will provide
investors greater access to U.S. markets. By providing a wide range of investors
with a U.S. exchange-traded security that permits participation in significant
segments of various domestic and global securities markets, Applicants believe
that the proposed new basket securities will benefit both investors and the
markets. Section 6(c) provides a means for the Commission to respond to evolving
domestic and international financial market developments not specifically
contemplated when the Act was passed and a mechanism to permit innovation which
serves the public interest.
Page 39 of 68
4. Introducing Additional Competition into the U.S. ETF Market
Applicants submit that granting the requested Relief will introduce
greater competition into the U.S. ETF market by allowing new ETF sponsors to
offer their products. Applicants believe that the Affiliated Indexes and
rules-based portfolio selection methods will create new and attractive
investment choices for consumers, and should be available to investors so long
as their product design has solved potential conflicts of interest. Applicants
believe that the potential conflicts of interest have been addressed as
discussed in Section III.D.3. below.
D. The Trusts and the Funds Do Not Raise Concerns
1. Structure and Operation of the Trusts and the Funds Compared to Prior
ETFs
Applicants believe that the structure and operation of the Trusts and the
Funds will be extremely similar to that of the Prior ETFs discussed in this
Application. As discussed below, the liquidity of each Fund's Portfolio
Securities, the portfolio transparency, the arbitrage mechanism, and the level
and detail of information contained in the Prospectus for each Fund, as well as
that displayed on the Website, will be extremely familiar to investors of Prior
ETFs. Consequently, Applicants have every expectation that the Funds will
operate very similarly to those domestic and international ETFs now trading in
the secondary market.
(a) Portfolio Transparency, "Front Running" and "Free Riding."
As discussed throughout this Application, Applicants believe that the
information about each Fund's Portfolio Securities, the composition of its
Underlying Index and the disclosure about the Rules Based Process with respect
to the Affiliated Index Funds and the Affiliated Indexes, will be both public
and as extensive as that information now provided by Prior ETFs currently listed
and traded. In addition, the current total aggregate market values of the
Deposit Securities, on a per Share basis, will be disseminated in accordance
with the rules of the Exchange. Further, the identity of Deposit Securities and
Redemption Securities, if different, will be made available to market
participants in the same manner and to the same extent as is provided in
connection with current ETFs.
Applicants believe that the disclosure of Portfolio Securities would be
unlikely to lead to "front running" (where other persons would trade ahead of
the Fund and the investors assembling the Deposit Securities for Creation Units)
any more than is the case with the ETFs now trading. Similarly, Applicants
assert that the frequent disclosures of Portfolio Securities would not lead to
"free riding" (where other persons mirror the Fund's investment strategies
without investing in the Fund and thus avoiding the Fund's expenses, including
advisory fees) any more than such disclosures cause this problem in connection
with the ETFs now trading.
(b) Arbitrage Mechanism.
Applicants assert that the arbitrage opportunities offered by the Trusts
and the Funds will be the same as those offered by existing ETFs. Therefore,
Applicants believe that the secondary market prices of the Shares will closely
track their respective per Share NAVs or otherwise correspond to the fair value
Page 40 of 68
of their underlying portfolios. The Commission has granted exemptive relief to
existing ETFs in large part because their structures enable efficient arbitrage,
thereby minimizing the premium or discount relative to such ETFs' NAV per Share.
Portfolio transparency has been recognized by market commentators and analysts,
as well as by the Commission itself, to be a fundamental characteristic of
current ETFs. This transparency is acknowledged to facilitate the arbitrage
mechanism described in many of the applications for relief submitted by existing
ETFs.
Applicants have every reason to believe that the design, structure and
transparency of the Funds will result in an arbitrage mechanism as efficient and
robust as that which now exists for current ETFs.(41) Applicants expect that the
spread between offer and bid prices for Shares will be very similar to such
spreads experienced for shares of existing ETFs. Therefore, in light of the
portfolio transparency and efficient arbitrage mechanism inherent in each Fund's
structure, Applicants submit that the secondary market prices for Shares of such
Funds should trade at prices close to NAV per Share and should reflect the value
of each Fund's portfolio.
2. Investor Uses and Benefits of Products
Applicants believe that the Trusts and the Funds will offer a variety of
benefits that will appeal to individual and institutional investors alike.
Applicants assert that these will be identical or substantially similar to the
benefits offered by current ETFs. These benefits include flexibility,
tradability, availability, certainty of purchase price and tax efficiencies.
Equally of interest to investors will be the relatively low expense ratios of
the Funds, as compared to those of their directly competitive traditional mutual
funds, due to their in-kind efficiencies in portfolio management as well as
other reduced infrastructure costs. Reductions in the cost of trading, clearing,
custody processes, shareholder reporting and accounting experienced by ETFs
currently trading should be similarly experienced by the Trusts and the Funds.
The last, but by no means least important, benefit is that investors will have
access to extensive information regarding the Component Securities of the
relevant Underlying Index, the Portfolio Securities of each Fund and
Deposit/Redemption Securities. Applicants believe that this updated information
will be used also by fund analysts, fund evaluation services, financial planners
and advisers and broker dealers, among others, and will enhance general market
knowledge about the Fund's holdings as well as the performance of its Adviser
and/or Sub-Adviser.
(41) Applicants are not aware of any characteristics of a NASDAQ listing that
would cause Shares to operate or trade differently than if they were
listed on another domestic Exchange. Applicants do acknowledge that unlike
the structure of the other domestic Exchanges where a single member is
contractually obligated to make a market in Shares and oversees trading in
Shares, the NASDAQ trading system allows numerous Market Makers who wish
to trade Shares to compete for business, creating liquidity by being
willing to buy and sell Shares for their own accounts on a regular and
continuous basis. Applicants note that NASDAQ's listing requirements
require at least two Market Makers to be registered in Shares in order to
maintain their NASDAQ listing and that registered Market Makers on NASDAQ
must make a continuous, two-sided market at all times or risk regulatory
sanctions. Applicants believe that the competition on NASDAQ among Market
Makers, many of whom may be Authorized Participants engaging in arbitrage
activities, would result in a highly efficient and effective market for
Shares.
Page 41 of 68
Applicants have made every effort to structure the Funds in a way that
would not favor creators, redeemers and arbitrageurs over retail investors
buying and selling in the secondary market. All investors, large and small, will
have information readily available as to how changes in each Underlying Index
are determined and information with respect to all changes made to each
Underlying Index will be available to all investors at the same time. Given that
each Fund will be managed to replicate or closely track its Underlying Index,
neither the Adviser nor a Sub-Adviser will have latitude to change or specify
certain Deposit Securities or Redemption Securities to favor an affiliate.
3. Potential Conflicts of Interest Related to Affiliated Index Funds
Similar to Those Involved in Prior Approvals
In the Prior Self-Indexing ETF Orders, the Commission considered the
potential conflicts presented with an affiliated person of an investment adviser
to an index management investment company (organized as an ETF) acting as an
index provider to the investment company.(42) Applicants believe the potential
conflicts of interest presented and addressed in the Prior Self-Indexing ETF
Orders are essentially identical to the potential conflicts created by the
operation of the Affiliated Index Funds and the Affiliated Indexes. Applicants
therefore do not believe that their request for Relief presents any novel legal
issues that the Commission has not already considered.
Applicants will adopt Policies and Procedures designed to address
potential conflicts substantially similar to those described in the Prior
Self-Indexing ETF Orders. As discussed above, the Adviser will adopt policies
prohibiting its employees from disclosing or using any non-public information
acquired through their employment, except as appropriate in connection with the
rendering of services to the Affiliated Index Funds and the Affiliated Accounts.
Similarly, the Adviser, if it is the Affiliated Index Provider, or any
Affiliated Person who is an Affiliated Index Provider, will adopt Policies and
Procedures that prohibit the Index Personnel from disseminating or using
non-public information about pending changes to Component Securities or any
Rules Based Process except in connection with the performance of their
respective duties. These Policies and Procedures will specifically prohibit
Index Personnel from sharing any non-public information about the Affiliated
Indexes with personnel of the Adviser and/or Sub-Advisers responsible for
management of the Affiliated Index Funds and/or any Affiliated Accounts, except
as described herein. The Adviser will adopt Policies and Procedures that
prohibit personnel responsible for the management of the Affiliated Index Funds
and/or any Affiliated Accounts from sharing any non-public information about the
management of the Affiliated Index Funds and any Affiliated Account with the
Index Personnel and personnel of the Calculation Agent. Any Sub-Adviser will be
instructed to not discuss, and will have adopted policies and procedures that
prohibit the Sub-Adviser from disclosing, non-public information about portfolio
management of the Affiliated Index Funds and Affiliated Accounts to Index
Personnel and personnel of the Calculation Agent.
(42) See supra, note 4.
Page 42 of 68
Further, Applicants assert that the potential conflicts of interest
arising from the fact that the Affiliated Index Provider will be the Adviser or
an Affiliated Person are not actual concerns and will not have any impact on the
operation of the Affiliated Index Funds because the Affiliated Indexes will
maintain transparency. The Affiliated Index Funds' portfolios will be
transparent, and the Adviser, any Affiliated Person who is an Affiliated Index
Provider, any Sub-Adviser and the Affiliated Index Funds will adopt Policies and
Procedures to address any potential conflicts of interest, all as discussed
herein. Among other things, these Policies and Procedures will be designed to
limit or prohibit communication with respect to issues/information related to
the maintenance, calculation and reconstitution of the Affiliated Indexes
between Index Personnel and personnel who have responsibility for the management
of Affiliated Index Funds or any Affiliated Accounts, as described herein.
In conjunction with the Policies and Procedures discussed herein, these
restrictions will prevent the Adviser, any Sub-Adviser or any person affiliated
with it, or any Affiliated Index Fund, from having any advantage over other
market participants with respect to prior knowledge of companies and other
issuers that may be added to or deleted from the Affiliated Index or from any
Affiliated Index Funds that track the Affiliated Indexes.
In addition, the Affiliated Index Provider will retain an unaffiliated
Calculation Agent to calculate and maintain the Affiliated Indexes on a daily
basis. The Calculation Agent will be instructed to not communicate any
non-public information about the Affiliated Indexes to anyone, and specifically
not to the personnel of the Adviser or Sub-Adviser responsible for the
management of the Affiliated Index Funds or Affiliated Accounts. The Calculation
Agent will be instructed to disseminate information about the Component
Securities to the Adviser or any Sub-Adviser, on behalf of the Affiliated Index
Funds and Affiliated Accounts, as applicable, any Affiliated Person who is an
Affiliated Index Provider, and the public at the same time, except as otherwise
described herein. The Index Personnel and the personnel of the Calculation Agent
will be employees of separate organizations and located in physically separate
offices. Similarly, the personnel of the Adviser and those of any Sub-Adviser
responsible for day-to-day portfolio management of the Affiliated Index Funds
and/or any Affiliated Account and the personnel of the Calculation Agent will be
employees of separate organizations and will be located in physically separate
offices. Also, as discussed above, the Adviser, if it is the Affiliated Index
Provider, or any Affiliated Person who is an Affiliated Index Provider, as the
case may be, will adopt Policies and Procedures which impose a Restricted List
and Blackout Period requirements on all Index Personnel. The Adviser will also
adopt Policies and Procedures which require any personnel responsible for the
management of an Affiliated Index Fund and any Affiliated Account to pre-clear
all personal securities transactions with a designated employee within the Legal
or Compliance teams of the Adviser and report personal securities transactions
to a designated employee within the Legal or Compliance teams of the Adviser in
accordance with Rule 17j-1 under the Act and Rule 204A-1 under the Advisers Act.
Any Sub-Adviser will be required to confirm to the Adviser and the applicable
Trust that it has adopted policies and procedures to monitor and restrict
securities trading by certain employees. Also, any Sub-Adviser will be required
to adopt a Code of Ethics pursuant to Rule 17j-1 under the Act and Rule 204A-1
under the Advisers Act and provide the applicable Trust with the certification
required by Rule 17j-1 under the Act.
Page 43 of 68
The Affiliated Index Provider will describe the basic concept of each
Affiliated Index and disclose the Rules Based Process on the Website. Changes to
the Rules Based Process will be publicly disclosed on the Website prior to
actual implementation. Such changes will not take effect until the Affiliated
Index Provider has given the investing public at least 60 days published notice
that such changes are being planned to take effect.
4. The Commission Should Grant the Exemptive Relief Requested in this
Application
In summary, Applicants believe that the Trusts and the Funds will operate
in the same manner as existing ETFs, and that the Affiliated Index Funds will
operate in essentially the same manner as the Prior Self-Indexing ETFs, provide
necessary safeguards against shareholder discrimination and potential conflicts
of interest, and create no new regulatory concerns. Applicants submit that the
benefits offered to potential investors are varied and useful, and that the
Trusts and the Funds are appropriate candidates for the requested Relief.
Based on the foregoing, Applicants respectfully request the Relief as set
forth below.
IV. REQUEST FOR ORDER
A. Legal Analysis.
1. Exemption from the Provisions of Sections 2(a)(32) and 5(a)(1)
Section 5(a)(1) of the Act defines an "open-end company" as "a management
company which is offering for sale or has outstanding any redeemable security of
which it is the issuer." The term "redeemable security" is defined in Section
2(a)(32) of the Act as:
"any security, other than short-term paper, under the terms of which
the holder, upon its presentation to the issuer or to a person
designated by the issuer, is entitled (whether absolutely or only
out of surplus) to receive approximately his proportionate share of
the issuer's current net assets, or the cash equivalent thereof."
Applicants believe that the Shares could be viewed as satisfying the
Section 2(a)(32) definition of a redeemable security and, consequently, each
Fund could be viewed as satisfying the definitional requirement of an open-end
company offering for sale a redeemable security of which it is the issuer.
Shares are securities "under the terms of which" an owner may receive his
proportionate share of the Fund's current net assets; the unusual aspect of such
Shares is that its terms provide for such a right to redemption only when such
individual Shares are aggregated with a specified number of such other
individual Shares that together constitute a redeemable Creation Unit. Because
the redeemable Creation Units of a Fund can be unbundled into individual Shares
that are not individually redeemable, a possible question arises as to whether
the definitional requirements of a "redeemable security" or an "open-end
company" under the Act would be met if such individual Shares are viewed as
non-redeemable securities. In light of this possible analysis, Applicants
Page 44 of 68
request an order to permit each Fund to register as an open-end management
investment company and issue individual Shares that are redeemable only in
Creation Units as described herein.
Creation Units will always be redeemable in accordance with the provisions
of the Act. Owners of Shares may purchase the requisite number of Shares and
tender the resulting Creation Units for redemption. Moreover, listing and
trading on an Exchange will afford all holders of Shares the benefit of
intra-day liquidity. Because Creation Units may always be purchased and redeemed
at NAV (less certain transactional expenses), the price of Creation Units on the
secondary market and the price of the individual Shares of a Creation Unit,
taken together, should not vary substantially from the NAV of Creation Units.
Moreover, Applicants believe that the existence of Shares does not appear
to thwart the purposes of any other provision of the Act that, but for the
exemption requested herein with respect to Sections 2(a)(32) and 5(a)(1), would
be applicable to each Fund.
Applicants believe that permitting each Fund to register as an open-end
investment company and issue redeemable Creation Units of individual Shares, as
described herein, is 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, and, accordingly, Applicants hereby request that an order
of exemption be granted.
2. Exemption from the Provisions of Section 22(d) and Rule 22c-1
Section 22(d) of the Act provides in part, that:
"no registered investment company shall sell any redeemable security
issued by it to any person except to or through a principal
underwriter for distribution or at a current public offering price
described in the prospectus. . ."
Rule 22c-1 provides that:
"no registered investment company issuing any redeemable security,
no person designated in such issuer's prospectus as authorized to
consummate transactions in any such security, and no principal
underwriter of, or dealer in, any such security shall sell, redeem,
or repurchase any such security except at a price based on the
current net asset value of such security which is next computed
after receipt of a tender of such security for redemption or of an
order to purchase or sell such security."
Shares of each Fund will be listed on a Listing Exchange and the relevant
Market Maker will maintain a market for such Shares. Secondary market
transactions in Shares occurring on any Exchange will be effected at negotiated
prices, not on the basis of per Share NAV next calculated after receipt of any
Page 45 of 68
sale order. The Shares will trade on and away from(43) the Listing Exchange at
all times on the basis of current bid/offer prices. The purchase and sale of
Shares of each Fund will not, therefore, be accomplished at an offering price
described in the Fund's Prospectus, as required by Section 22(d), nor will sales
and repurchases be made at a price based on the current NAV per Share next
computed after receipt of an order, as required by Rule 22c-1.
Applicants believe that the concerns sought to be addressed by Section
22(d) and Rule 22c-1 with respect to pricing are equally satisfied by the
proposed method of pricing of Shares. While there is little legislative history
regarding Section 22(d), its provisions, as well as those of Rule 22c-1, appear
to have been intended to (1) prevent dilution caused by certain riskless-trading
schemes by principal underwriters and contract dealers, (2) prevent unjust
discrimination or preferential treatment among buyers, and (3) ensure an orderly
distribution system of Shares by contract dealers by eliminating price
competition from non-contract dealers who could offer investors shares at less
than the published sales price and who could pay investors a little more than
the published redemption price.(44)
The first two purposes - preventing dilution caused by riskless-trading
schemes and preventing unjust discrimination among buyers - would not seem to be
relevant issues for secondary trading by dealers in Shares of a Fund. Secondary
market transactions in Shares would not cause dilution for owners of such Shares
because such transactions do not directly involve Fund assets. Similarly,
secondary market trading in Shares should not create discrimination or
preferential treatment among buyers. 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, but do not occur as a
result of unjust or discriminatory manipulation.
With respect to the third possible purpose of Section 22(d), Applicants
believe that the proposed distribution system will be orderly. Anyone may sell
or acquire Shares either by purchasing them on the Exchange or by creating one
or more Creation Units; therefore, no dealer should have an advantage over any
other dealer in the sale of such Shares. Indeed, Applicants believe that the
presence of the Market Maker will also help to provide an orderly market. In
addition, secondary market transactions in Shares should generally occur at
prices roughly equivalent to their NAV per Share. If the prices for Shares
should fall below the proportionate NAV per Share of the underlying Fund's
assets, an investor needs only to accumulate enough individual Shares of such
Fund to constitute a Creation Unit in order to redeem such Shares at NAV.
Competitive forces in the marketplace should thus ensure that the margin between
NAV per Share and the price for Shares in the secondary market remains narrow.
Applicants believe that, to date, in general, shares of Prior ETFs have
consistently traded at, or very close to, their respective per share NAVs.
(43) Consistent with Rule 19c-3 under the Exchange Act, Exchange members are
not required to effect transactions in Shares through the facilities of
the Exchange.
(44) See Protecting Investors: A Half Century of Investment Company Regulation
at 299-303 (May 1992); Investment Company Act Release No. 13183 (Apr. 22,
1983).
Page 46 of 68
Applicants have strong reason to believe that the trading experience of Shares
should closely resemble that of shares of Prior ETFs.
On the basis of the foregoing, Applicants believe (i) that the protections
intended to be afforded by Section 22(d) and Rule 22c-1 are adequately addressed
by the proposed methods for creating, redeeming and pricing Creation Units and
pricing and trading Shares, and (ii) that the Relief requested is 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. Accordingly,
Applicants hereby request that an order of exemption be granted in respect of
Section 22(d) and Rule 22c-1.
3. Exemption from the Provisions of Sections 17(a)(1) and 17(a)(2)
Applicants seek an exemption from Sections 17(a)(1) and 17(a)(2) of the
Act pursuant to Sections 6(c) and 17(b) of the Act to permit certain affiliated
persons to effectuate purchases and redemptions "in-kind."
Section 17(a)(1) of the Act makes it unlawful
". . . for any affiliated person or promoter of or principal
underwriter for a registered investment company . . . or any
affiliated person of such a person, promoter, or principal
underwriter, acting as principal - knowingly to sell any security or
other property to such registered company or to any company
controlled by such registered company, unless such sale involves
solely (A) securities of which the buyer is the issuer, (B)
securities of which the seller is the issuer and which are part of a
general offering to the holders of a class of its securities or (C)
securities deposited with a trustee of a unit investment trust . . .
by the depositor thereof."
Section 17(a)(2) of the Act makes it unlawful
". . . for any affiliated person or promoter of or principal
underwriter for a registered investment company. . ., or any
affiliated person of such a person, promoter, or principal
underwriter, acting as principal knowingly to purchase from such
registered company, or from any company controlled by such
registered company, any security or other property except securities
of which the seller is the issuer)."
An "affiliated person" of a fund, pursuant to Section 2(a)(3)(A) of the
Act, includes "any person directly or indirectly owning, controlling, or holding
with the power to vote, 5 per centum or more of the outstanding voting
securities of such other person"; and pursuant to Section 2(a)(3)(C) of the Act
"any person directly or indirectly controlling, controlled by, or under common
control with, such other person."
Page 47 of 68
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, unless such
power is solely the result of an official position with such company, and
provides a rebuttable presumption that any person who owns more than 25% of the
voting securities of a company controls the company.
The Funds may be deemed to be controlled by the Adviser or an entity
controlling, controlled by or under common control with the Adviser and hence
affiliated persons of each other. In addition, the Funds may be deemed to be
under common control with any other registered investment company (or series
thereof) advised by the Adviser or an entity controlling, controlled by or under
common control with the Adviser (each an "Affiliated Fund").
Section 17(b) provides that the Commission will grant an exemption from
the provisions of Section 17(a) if evidence establishes that the terms of the
proposed transaction are reasonable and fair and do not involve overreaching on
the part of any person concerned; that the proposed transaction is consistent
with the policy of each registered investment company concerned; and that the
proposed transaction is consistent with the general purposes of the Act.
Past applications of Prior ETFs have suggested the possibility that
Section 17(b) could be interpreted to exempt only a single transaction from
Section 17(a) and that relief for a series of ongoing transactions, such as the
ongoing sale and redemption of Creation Units, requires an exemption under
Section 6(c) of the Act as well.(45) Accordingly, Applicants are also requesting
an exemption from Section 17(a) under Section 6(c).
To the extent that there are twenty or fewer holders of Creation Units of
all of the Funds or of one or more particular Fund, some or all of such holders
will be at least 5 percent owners of such Funds, and one or more may hold in
excess of 25 percent of such Funds, as the case may be, and would therefore be
deemed to be affiliated persons of such Funds either under Section 2(a)(3)(A) or
Section 2(a)(3)(C). For so long as such holders of Shares were deemed to be
affiliated persons (e.g., so long as twenty or fewer such holders existed),
Section 17(a)(1) could be read to prohibit such persons from depositing the
Portfolio Deposit with a Fund in return for Creation Units (an "in-kind"
purchase), and likewise, Section 17(a)(2) could be read to prohibit such persons
from entering into an "in-kind" redemption procedure with a Fund. Furthermore,
under other circumstances, one or more holders of Shares might each accumulate 5
percent or more of such Fund's securities. Also, the Market Maker for the Shares
of any relevant Fund might accumulate, from time to time, 5 percent or more of
such Fund's securities in connection with such Market Maker's market-making
activities. In addition, one or more holders of Shares, or the Market Maker,
might from time to time accumulate in excess of 25 percent of the Shares of one
or more Funds, and such persons would therefore be deemed to be affiliated
persons of such Funds under Section 2(a)(3)(C). Applicants request an exemption
to permit persons that are affiliated persons of the Funds (or affiliated
persons of such persons (collectively "Second-Tier Affiliates")) solely by
virtue of one or more of the following: (1) holding 5% or more, or in excess of
25%, of the outstanding Shares of one or more Funds; (2) an affiliation with a
(45) See, e.g., Keystone Custodian Funds, Inc., 21 S.E.C. 295 (1945).
Page 48 of 68
person with an ownership interest described in (1); or (3) holding 5% or more,
or more than 25%, of the shares of one or more Affiliated Funds, to effectuate
purchases and redemptions "in-kind."
Applicants assert that no useful purpose would be served by prohibiting
such affiliated persons from making "in-kind" purchases or "in-kind" redemptions
of Shares of a Fund in Creation Units. Both the deposit procedures for "in-kind"
purchases of Creation Units and the redemption procedures for "in-kind"
redemptions of Creation Units will be effected in exactly the same manner for
all purchases and redemptions, regardless of size or number. It is immaterial to
a Fund whether 12 or 1,200 Creation Units exist for such Fund. All will be
issued and redeemed in the same manner. There will be no discrimination between
purchasers or redeemers. Deposit Securities and Redemption Securities will be
valued in the identical manner as those Portfolio Securities currently held by
the relevant Funds and the valuation of the Deposit Securities and Redemption
Securities will be made in an identical manner regardless of the identity of the
purchaser or redeemer.
Applicants also note that the ability to take deposits and make
redemptions "in-kind" will help each Fund to track closely its Underlying Index
and therefore aid in achieving the Fund's objectives. Applicants do not believe
that "in-kind" purchases and redemptions will result in abusive self-dealing or
overreaching, but rather assert that such procedures will be implemented
consistently with each Fund's objectives and with the general purposes of the
Act. Applicants believe that "in-kind" purchases and redemptions will be made on
terms reasonable to Applicants and any affiliated persons because they will be
valued pursuant to verifiable objective standards. The method of valuing
Portfolio Securities held by a Fund is identical to that used for calculating
"in-kind" purchase or redemption values and therefore creates no opportunity for
affiliated persons or Second-Tier Affiliates of Applicants to effect a
transaction detrimental to the other holders of Shares of that Fund. Similarly,
Applicants submit that, by using the same standards for valuing Portfolio
Securities held by a Fund as are used for calculating "in-kind" redemptions or
purchases, the Fund will ensure that its NAV per Share will not be adversely
affected by such securities transactions.
For the reasons set forth above, Applicants believe that: (i) with respect
to the Relief requested pursuant to Section 17(b), the proposed transactions are
reasonable and fair and do not involve overreaching on the part of any person
concerned, the proposed transactions are consistent with the policy of each
Fund, and that the proposed transactions are consistent with the general
purposes of the Act, and (ii) with respect to the Relief requested pursuant to
Section 6(c), the requested exemption for the proposed transactions is
appropriate in the public interest and consistent with the protection of
investors and purposes fairly intended by the policy and provisions of the Act.
4. Exemption from the Provisions of Section 22(e) of the Act
Applicants seek an Order of the Commission under Section 6(c) of the Act
granting an exemption from Section 22(e) of the Act. Applicants acknowledge that
no relief obtained from the requirements of Section 22(e) will affect any
obligations Applicants may otherwise have under Rule 15c6-1 under the Exchange
Page 49 of 68
Act requiring that most securities transactions be settled within three business
days of the trade date.
Section 22(e) of the Act provides that:
"No registered investment company shall suspend the right of
redemption, or postpone the date of payment or satisfaction upon
redemption of any redeemable security in accordance with its terms
for more than seven days after the tender of such security to the
company or its agent designated for that purpose for redemption,
except-
(1) for any period (A) during which the New York Stock Exchange is
closed other than customary weekend and holiday closings or (B) during
which trading on the New York Stock Exchange is restricted;
(2) for any period during which an emergency exists as a result of
which (A) disposal by the company of securities owned by it is not
reasonably practicable or (B) it is not reasonably practicable for such
company fairly to determine the value of its net assets; or
(3) for such other periods as the Commission may by order permit for
the protection of security holders of the company."
Settlement of redemptions for a Foreign Fund will be contingent not only
on the securities settlement cycle of the United States market, but also on the
delivery cycles in local markets for the underlying foreign securities held by a
Foreign Fund. Applicants have been advised that the delivery cycles currently
practicable for transferring Redemption Securities to redeeming investors,
coupled with local market holiday schedules, may require a delivery process
longer than seven calendar days for a Foreign Fund, in certain circumstances.
Accordingly, with respect to Foreign Funds only, Applicants hereby request
Relief from the requirement imposed by Section 22(e) to provide payment or
satisfaction of redemptions within seven calendar days following the tender of a
Creation Unit of such Fund. Applicants request that Relief be granted such that
Foreign Funds holding Redemption Securities which require a delivery process in
excess of seven calendar days may provide payment or satisfaction of redemptions
within not more than the maximum number of calendar days required for such
payment or satisfaction in the principal local foreign market(s) where
transactions in the Portfolio Securities of each such Foreign Fund customarily
clear and settle, but in all cases no later then fifteen calendar days following
the tender of a Creation Unit.(46) With respect to Future Funds that will be
Foreign Funds, Applicants seek the same Relief from Section 22(e) only to the
extent that circumstances exist similar to those described herein.
(46) In the past, settlement in certain countries, including Russia, has
extended to fifteen (15) calendar days.
Page 50 of 68
Based on information available to Applicants, although certain holidays
may occur on different dates in subsequent years, the number of days required to
deliver redemption proceeds in any given year will not exceed fifteen (15)
calendar days for any of the Foreign Funds requiring exemptive relief from the
provisions of Section 22(e). Of course, it is possible that the proclamation of
new or special holidays,(47) the treatment by market participants of certain
days as "informal holidays" (e.g., days on which no or limited securities
transactions occur, as a result of substantially shortened trading hours(48)),
the elimination of existing holidays, or changes in local securities delivery
practices(49) could affect the information set forth herein at some time in the
future, but in all cases redemption proceeds will be delivered within a period
not to exceed fifteen calendar days. The SAIs for the Foreign Funds that may
require this Relief will identify (i) those instances in a given year where, due
to local holidays, more than seven calendar days will be needed to deliver
redemption proceeds and will list such holidays, and (ii) the maximum number of
days needed to deliver the proceeds, up to fifteen (15) calendar days.
Except as set forth herein or as disclosed in the SAI for any Foreign Fund
for analogous dates in subsequent years, deliveries of redemption proceeds by
the Foreign Fund relating to those countries or regions are expected to be made
within seven days.
Applicants believe that Congress adopted Section 22(e) to prevent
unreasonable, undisclosed or unforeseen delays in the actual payment of
redemption proceeds. Applicants propose that allowing redemption payments for
Creation Units of a Foreign Fund to be made within the number of days indicated
above, up to a maximum of fifteen (15) calendar days, would not be inconsistent
with the spirit and intent of Section 22(e). Applicants suggest that a
redemption payment occurring within such number of calendar days following a
redemption request would adequately afford investor protection.
Applicants desire to incorporate the creation and redemption mechanism for
Creation Units as much as possible into the processing cycles for securities
deliveries currently practicable in the principal market(s) for the Portfolio
Securities of a given Foreign Fund. Currently, it is believed that no
significant additional system or operational procedures will be needed to
purchase or redeem Creation Units beyond those already generally in place in the
relevant jurisdiction. Applicants believe that this approach may make creations
and redemptions of Creation Units less costly to administer, enhance the appeal
(47) Applicants have been advised that previously unscheduled holidays are
sometimes added to a country's calendar, and existing holidays are
sometimes moved, with little advance notice. Any such future changes could
impact the analysis of the number of days necessary to satisfy a
redemption request.
(48) A typical "informal holiday" includes a trading day in the relevant market
that is immediately prior to a regularly scheduled holiday; early closures
of the relevant market or of the offices of key market participants may
occur with little advance notice. Any shortening of regular trading hours
on such a day could impact the analysis of the number of days necessary to
satisfy a redemption request.
(49) Applicants observe that the trend internationally in local securities
delivery practices has been a reduction in each market's standard
settlement cycles (e.g., the U.S. markets changed to T+3 in 1995). It
remains possible, if unlikely, that a particular market's settlement
cycles for securities transfers could be lengthened in the future.
Page 51 of 68
of the product to professional participants, and thereby promote the liquidity
of the Shares in the secondary market with benefits to all holders thereof. As
noted above, Applicants intend to utilize in-kind redemptions to the maximum
extent possible principally as a method of assuring the fullest investment of
Fund assets in Portfolio Securities (although cash redemptions, subject to a
somewhat higher redemption transaction fee, are expected to be available or
required in respect of certain Funds). Applicants are only seeking Relief from
Section 22(e) to the extent that the Foreign Funds effect creations and
redemptions of Creation Units in-kind.
If the requested Relief is granted, Applicants intend to disclose in each
Foreign Fund's SAI and all relevant sales literature that redemption payments
will be effected within the specified number of calendar days, up to a maximum
of 15 calendar days, following the date on which a request for redemption in
proper form is made. Given the rationale for what amounts to a delay typically
of a few days in the redemption process on certain occasions and given the facts
as recited above, Applicants believe that the redemption mechanism described
above will not lead to unreasonable, undisclosed or unforeseen delays in the
redemption process. Applicants assert that the request for Relief from the
strict seven-day rule imposed by Section 22(e) is not inconsistent with the
standards articulated in Section 6(c). Given the facts as recited above,
Applicants believe that the granting of the requested Relief is consistent with
the protection of investors and the purposes fairly intended by the policies and
provisions of the Act.
Applicants note that the requested Relief from Section 22(e) is
substantially similar to the relief that was obtained by the Prior ETFs in
orders relating to each of those funds.
On the basis of the foregoing, Applicants believe (i) that the protections
intended to be afforded by Section 22(e) are adequately addressed by the
proposed method and securities delivery cycles for redeeming Creation Units and
(ii) that the Relief requested is 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. Accordingly, Applicants hereby
respectfully request that an order of exemption be granted under Section 6(c) in
respect of Section 22(e).
V. EXPRESS CONDITIONS TO THIS APPLICATION
Applicants agree that any order of the Commission granting the requested
Relief will be subject to the following conditions:
1. The requested Relief will expire on the effective date of any
Commission rule under the Act that provides relief permitting the
operation of index-based ETFs, except with respect to any portion of the
requested Relief that is not granted in such Commission rule.
2. As long as a Fund operates in reliance on the Order, the Shares
of such Fund will be listed on an Exchange.
3. No Fund will be advertised or marketed as an open-end investment
company or mutual fund. Any advertising material that describes the
purchase or sale of Creation Units or refers to redeemability will
prominently disclose that Shares are not individually redeemable and that
Page 52 of 68
owners of Shares may acquire those Shares from the Fund and tender those
Shares for redemption to a Fund in Creation Units only.
4. The website for the Funds, which is and will be publicly
accessible at no charge, will contain, on a per Share basis for each Fund,
the prior Business Day's NAV and the market closing price or the Bid/Ask
Price, and a calculation of the premium or discount of the market closing
price or Bid/Ask Price against such NAV.
VI. NAMES AND ADDRESSES
The following are the names and addresses of Applicants:
First Trust Advisors L.P.
First Trust Portfolios L.P.
First Trust Exchange-Traded Fund
First Trust Exchange-Traded Fund II
First Trust Exchange-Traded Fund III
First Trust Exchange-Traded Fund IV
First Trust Exchange-Traded Fund V
First Trust Exchange-Traded Fund VI
First Trust Exchange-Traded AlphaDEX(R) Fund
First Trust Exchange-Traded AlphaDEX(R) Fund II
120 East Liberty Drive
Suite 400
Wheaton, Illinois 60187
Page 53 of 68
All questions concerning this Application should be directed to the
persons listed on the cover page of this Application.
FIRST TRUST EXCHANGE-TRADED FUND
By: /s/ Mark R. Bradley
-----------------------------------
Name: Mark R. Bradley
Title: President
|
FIRST TRUST EXCHANGE-TRADED FUND II
By: /s/ Mark R. Bradley
-----------------------------------
Name: Mark R. Bradley
Title: President
|
FIRST TRUST EXCHANGE-TRADED FUND III
By: /s/ Mark R. Bradley
-----------------------------------
Name: Mark R. Bradley
Title: President
|
FIRST TRUST EXCHANGE-TRADED FUND IV
By: /s/ Mark R. Bradley
-----------------------------------
Name: Mark R. Bradley
Title: President
|
FIRST TRUST EXCHANGE-TRADED FUND V
By: /s/ Mark R. Bradley
-----------------------------------
Name: Mark R. Bradley
Title: President
|
FIRST TRUST EXCHANGE-TRADED FUND VI
By: /s/ Mark R. Bradley
-----------------------------------
Name: Mark R. Bradley
Title: President
|
Page 54 of 68
FIRST TRUST EXCHANGE-TRADED ALPHADEX(R)
FUND
By: /s/ Mark R. Bradley
-----------------------------------
Name: Mark R. Bradley
Title: President
|
FIRST TRUST EXCHANGE-TRADED ALPHADEX(R)
FUND II
By: /s/ Mark R. Bradley
-----------------------------------
Name: Mark R. Bradley
Title: President
|
FIRST TRUST ADVISORS L.P.
By: /s/ James A. Bowen
-----------------------------------
Name: James A. Bowen
Title: Chief Executive Officer
|
FIRST TRUST PORTFOLIOS L.P.
By: /s/ James A. Bowen
-----------------------------------
Name: James A. Bowen
Title: Chief Executive Officer
Dated: October 25, 2012
|
Page 55 of 68
AUTHORIZATION AND SIGNATURES
In accordance with Rule 0-2(c) under the Act, the Applicants state that
all actions necessary to authorize the execution and filing of this Application
have been taken, and the person signing and filing this document is authorized
to do so on behalf of First Trust Advisors L.P. James A. Bowen is authorized to
sign and file this document on behalf of First Trust Advisors L.P. pursuant to
the general authority vested in him as Chief Executive Officer.
FIRST TRUST ADVISORS L.P.
By: /s/ James A. Bowen
-----------------------------------
Name: James A. Bowen
Title: Chief Executive Officer
|
Dated as of: October 25, 2012
Page 56 of 68
AUTHORIZATION AND SIGNATURES
In accordance with Rule 0-2(c) under the Act, the Applicants state that
all actions necessary to authorize the execution and filing of this Application
have been taken, and the person signing and filing this document is authorized
to do so on behalf of First Trust Exchange-Traded Fund, First Trust
Exchange-Traded Fund II, First Trust Exchange-Traded Fund III, First Trust
Exchange-Traded Fund IV, First Trust Exchange-Traded Fund V ("Trust V"), First
Trust Exchange-Traded Fund VI, First Trust Exchange-Traded AlphaDEX(R) Fund and
First Trust Exchange-Traded AlphaDEX(R) Fund II (collectively, the "Trusts").
Mark R. Bradley is authorized to sign and file this document on behalf of the
Trusts pursuant to (a) the general authority vested in him as President and
(b)(1) for the Trusts other than Trust V, resolutions adopted by the respective
Boards of Trustees, which are attached hereto as Appendix A-1, and (2) for Trust
V, resolutions set forth in the written consent of the initial trustee, which
are attached hereto as Appendix A-2.
FIRST TRUST EXCHANGE-TRADED FUND
FIRST TRUST EXCHANGE-TRADED FUND II
FIRST TRUST EXCHANGE-TRADED FUND III
FIRST TRUST EXCHANGE-TRADED FUND IV
FIRST TRUST EXCHANGE-TRADED FUND V
FIRST TRUST EXCHANGE-TRADED FUND VI
FIRST TRUST EXCHANGE-TRADED ALPHADEX(R)
FUND
FIRST TRUST EXCHANGE-TRADED ALPHADEX(R)
FUND II
By: /s/ Mark R. Bradley
-----------------------------------
Name: Mark R. Bradley
Title: President
|
Dated as of: October 25, 2012
Page 57 of 68
AUTHORIZATION AND SIGNATURES
In accordance with Rule 0-2(c) under the Act, the Applicants state that
all actions necessary to authorize the execution and filing of this Application
have been taken, and the person signing and filing this document is authorized
to do so on behalf of First Trust Portfolios L.P. James A. Bowen is authorized
to sign and file this document on behalf of First Trust Portfolios L.P. pursuant
to the general authority vested in him as Chief Executive Officer.
FIRST TRUST PORTFOLIOS L.P.
By: /s/ James A. Bowen
-----------------------------------
Name: James A. Bowen
Title: Chief Executive Officer
|
Dated as of: October 25, 2012
Page 58 of 68
VERIFICATION OF APPLICATION AND STATEMENT OF FACT
In accordance with Rule 0-2(d) under the Act, the undersigned states that
he has duly executed the attached Application for an order, for and on behalf of
FIRST TRUST ADVISORS L.P.; that he is Chief Executive Officer of such company;
and that all actions taken by the stockholders, directors and other bodies
necessary to authorize the undersigned to execute and file such instrument have
been taken. The undersigned further states that he is familiar with such
instrument, and the contents thereof, and that the facts therein set forth are
true to the best of his knowledge, information and belief.
By: /s/ James A. Bowen
-----------------------------------
Name: James A. Bowen
Title: Chief Executive Officer
|
Page 59 of 68
VERIFICATION OF APPLICATION AND STATEMENT OF FACT
In accordance with Rule 0-2(d) under the Act, the undersigned states that
he has duly executed the attached Application for an order, for and on behalf of
FIRST TRUST EXCHANGE-TRADED FUND, FIRST TRUST EXCHANGE-TRADED FUND II, FIRST
TRUST EXCHANGE-TRADED FUND III, FIRST TRUST EXCHANGE-TRADED FUND IV, FIRST TRUST
EXCHANGE-TRADED FUND V, FIRST TRUST EXCHANGE-TRADED FUND VI, FIRST TRUST
EXCHANGE-TRADED ALPHADEX(R) FUND and FIRST TRUST EXCHANGE-TRADED ALPHADEX(R)
FUND II; that he is President of such companies; and that all actions taken by
the stockholders, directors and other bodies necessary to authorize the
undersigned to execute and file such instrument have been taken. The undersigned
further states that he is familiar with such instrument, and the contents
thereof, and that the facts therein set forth are true to the best of his
knowledge, information and belief.
By: /s/ Mark R. Bradley
-----------------------------------
Name: Mark R. Bradley
Title: President
|
Page 60 of 68
VERIFICATION OF APPLICATION AND STATEMENT OF FACT
In accordance with Rule 0-2(d) under the Act, the undersigned states that
he has duly executed the attached Application for an order, for and on behalf of
FIRST TRUST PORTFOLIOS L.P.; that he is Chief Executive Officer of such company;
and that all actions taken by the stockholders, directors and other bodies
necessary to authorize the undersigned to execute and file such instrument have
been taken. The undersigned further states that he is familiar with such
instrument, and the contents thereof, and that the facts therein set forth are
true to the best of his knowledge, information and belief.
By: /s/ James A. Bowen
-----------------------------------
Name: James A. Bowen
Title: Chief Executive Officer
|
Page 61 of 68
APPENDIX A-1
THE BOARDS OF TRUSTEES OF FIRST TRUST EXCHANGE-TRADED FUND,
FIRST TRUST EXCHANGE-TRADED FUND II,
FIRST TRUST EXCHANGE-TRADED FUND III,
FIRST TRUST EXCHANGE-TRADED FUND IV,
FIRST TRUST EXCHANGE-TRADED FUND VI,
FIRST TRUST EXCHANGE-TRADED ALPHADEX(R) FUND
AND FIRST TRUST EXCHANGE-TRADED ALPHADEX(R) FUND II
EACH ADOPTED THE FOLLOWING RESOLUTIONS
WHEREAS, the First Trust Exchange-Traded Fund, First
Trust Advisors L.P. and First Trust Portfolios L.P.
previously received an order (the "Original Order") from the
Securities and Exchange Commission (the "Commission")
granting an exemption from various provisions of the
Investment Company Act of 1940 (the "1940 Act") to permit,
among other things (a) series of certain open-end management
investment companies (each, a "Fund") to issue shares ("Fund
Shares") redeemable in large aggregations only ("Creation
Unit Aggregations"); (b) secondary market transactions in
Fund Shares to occur at negotiated market prices; and (c)
certain affiliated persons of the Funds to deposit
securities into, and receive securities from, the Funds in
connection with the purchase and redemption of Creation Unit
Aggregations; and
WHEREAS, under the Original Order, the Funds therein
were permitted to invest in equity securities selected to
correspond generally to the price and yield performance of
specified domestic equity indices and to offer
exchange-traded Fund Shares with limited redeemability; and
WHEREAS, the First Trust Exchange-Traded Fund, the
First Trust Exchange-Traded Fund II, the First Trust
Exchange-Traded AlphaDEX(R) Fund, First Trust Advisors L.P.
and First Trust Portfolios L.P. received an order (the
"Amended Order") amending the Original Order, in relevant
part, to extend the relief to permit new exchange-traded
funds based on foreign equity securities indices. The
Original Order as amended by the Amended Order is the
"Equity ETF Order"; and
WHEREAS, the Equity ETF Order granted relief not only
to the trusts named in the application and series thereof,
but also to certain other open-end management investment
companies created in the future and series thereof that may
Page 62 of 68
track the price and yield performance of a domestic or
foreign equity securities index (an "Equity Index"); and
WHEREAS, the Equity ETF Order also requires that the
Funds relying on it ("Equity ETFs") invest primarily in
equity securities traded in the United States markets and/or
foreign equity securities and prohibits an Equity ETF from
tracking an Equity Index that is created, compiled,
sponsored or maintained by an "affiliated person," as
defined in the 1940 Act, or an affiliated person of an
affiliated person, of a Trust (as defined below), First
Trust Advisors L.P., First Trust Portfolios L.P., or a
sub-advisor or promoter of an Equity ETF (an underlying
index created, compiled, sponsored or maintained by any of
the foregoing is referred to as an "Affiliated Index"); and
WHEREAS, the First Trust Exchange-Traded Fund, the
First Trust Exchange-Traded Fund II, the First Trust
Exchange-Traded Fund III, the First Trust Exchange-Traded
Fund IV, the First Trust Exchange-Traded Fund VI, the First
Trust Exchange-Traded AlphaDEX(R) Fund, the First Trust
Exchange-Traded AlphaDEX(R) Fund II (each, a "Trust" and
collectively, the "Trusts"), First Trust Advisors L.P. and
First Trust Portfolios L.P. seek additional exemptive relief
to, among other things: (1) establish one or more existing
or future series that track the price and yield performance
of specified underlying indexes (a) that are comprised of
fixed income securities ("Fixed Income ETFs"), (b) that are
comprised of combinations of fixed income securities and
equity securities ("Blended ETFs"), (c) that include both
long and short positions in securities ("Long-Short ETFs"),
and (d) that use a "130/30" investment strategy ("130/30
ETFs" and, together with Fixed Income ETFs, Blended ETFs and
130/30 ETFs, "Additional ETFs"); and (2) permit existing and
future series of the Trusts to operate as index-based
exchange-traded funds that seek to track Affiliated Indexes
(including without limitation Equity Indexes, indexes
comprised of fixed income securities or combinations of
equity securities and fixed income securities, indexes that
include both long and short positions in securities and
indexes that use a "130/30" investment strategy); and
WHEREAS, the Boards of Trustees of the Trusts other
than First Trust Exchange-Traded Fund VI have previously
authorized the applicable Trusts to seek the Additional ETF
Relief (as defined below) and the Affiliated Index Relief
(as defined below), and the authorizations set forth herein
are intended to supersede such prior authorizations;
Page 63 of 68
NOW THEREFORE BE IT
RESOLVED, that Mark R. Bradley, President of each
Trust, and any other appropriate officer of each Trust be,
and each hereby is, authorized to prepare, execute and
submit to the Commission, on behalf of the respective Trust
and in its name, an Application or Applications in such form
as such officers, or any one of them, deems necessary or
appropriate seeking exemptions from certain provisions of
the 1940 Act to the extent necessary to, among other things,
permit existing and future series of the respective Trust
(1) to operate as Additional ETFs and to permit certain
affiliated persons of the Additional ETFs to deposit
securities into, and receive securities from, the Additional
ETFs in connection with the purchase and redemption of
Creation Unit Aggregations (the "Additional ETF Relief") and
(2) to seek to track Affiliated Indexes and to permit
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 Unit
Aggregations (collectively, the "Affiliated Index Relief");
and it is further
RESOLVED, that Mark R. Bradley and any other
appropriate officer of the respective Trust be, and each
hereby is, authorized and directed to take such additional
actions and to execute and deliver on behalf of the
respective Trust such other documents or instruments as he
or she deems necessary or appropriate in furtherance of the
above resolution, including, without limitation, the
preparation, execution and filing of any necessary or
appropriate amendment(s) or supplement(s) to the
above-described Application or Applications, his or her
authority therefor to be conclusively evidenced by the
taking of any such actions or the execution or delivery of
any such document; and it is further
RESOLVED, that Mark R. Bradley and any other
appropriate officer of the respective Trust be, and each
hereby is, if he or she determines at any time that it is
appropriate, authorized to separate the request to the
Commission for Affiliated Index Relief from the request for
Additional ETF Relief; and it is further
RESOLVED, that upon issuance of an Order of Exemption
by the Commission in accordance with the terms and
conditions of any Application described above, the
respective Trust is authorized to act in accordance with the
provisions of such Application and the related Order of
Exemption.
Page 64 of 68
APPENDIX A-2
THE INITIAL TRUSTEE OF THE FIRST TRUST EXCHANGE-TRADED FUND V ADOPTED
THE FOLLOWING RESOLUTIONS
WHEREAS, the First Trust Exchange-Traded Fund, First
Trust Advisors L.P. and First Trust Portfolios L.P.
previously received an order (the "Original Order") from the
Securities and Exchange Commission (the "Commission")
granting an exemption from various provisions of the
Investment Company Act of 1940 (the "1940 Act") to permit,
among other things (a) series of certain open-end management
investment companies (each, a "Fund") to issue shares ("Fund
Shares") redeemable in large aggregations only ("Creation
Unit Aggregations"); (b) secondary market transactions in
Fund Shares to occur at negotiated market prices; and (c)
certain affiliated persons of the Funds to deposit
securities into, and receive securities from, the Funds in
connection with the purchase and redemption of Creation Unit
Aggregations; and
WHEREAS, under the Original Order, the Funds therein
were permitted to invest in equity securities selected to
correspond generally to the price and yield performance of
specified domestic equity indices and to offer
exchange-traded Fund Shares with limited redeemability; and
WHEREAS, the First Trust Exchange-Traded Fund, the
First Trust Exchange-Traded Fund II, the First Trust
Exchange-Traded AlphaDEX(R) Fund, First Trust Advisors L.P.
and First Trust Portfolios L.P. received an order (the
"Amended Order") amending the Original Order, in relevant
part, to extend the relief to permit new exchange-traded
funds based on foreign equity securities indices. The
Original Order as amended by the Amended Order is the
"Equity ETF Order"; and
WHEREAS, the Equity ETF Order granted relief not only
to the trusts named in the application and series thereof,
but also to certain other open-end management investment
companies created in the future and series thereof that may
track the price and yield performance of a domestic or
foreign equity securities index (an "Equity Index"); and
WHEREAS, the Equity ETF Order also requires that the
Funds relying on it ("Equity ETFs") invest primarily in
equity securities traded in the United States markets and/or
foreign equity securities and prohibits an Equity ETF from
tracking an Equity Index that is created, compiled,
sponsored or maintained by an "affiliated person," as
Page 65 of 68
defined in the 1940 Act, or an affiliated person of an
affiliated person, of a Trust (as defined below), First
Trust Advisors L.P., First Trust Portfolios L.P., or a
sub-advisor or promoter of an Equity ETF (an underlying
index created, compiled, sponsored or maintained by any of
the foregoing is referred to as an "Affiliated Index"); and
WHEREAS, the First Trust Exchange-Traded Fund, the
First Trust Exchange-Traded Fund II, the First Trust
Exchange-Traded Fund III, the First Trust Exchange-Traded
Fund IV, the First Trust Exchange-Traded Fund V ("ETF V"),
the First Trust Exchange-Traded Fund VI, the First Trust
Exchange-Traded AlphaDEX(R) Fund, the First Trust
Exchange-Traded AlphaDEX(R) Fund II (each, a "Trust" and
collectively, the "Trusts"), First Trust Advisors L.P. and
First Trust Portfolios L.P. seek additional exemptive relief
to, among other things: (1) establish one or more existing
or future series that track the price and yield performance
of specified underlying indexes (a) that are comprised of
fixed income securities ("Fixed Income ETFs"), (b) that are
comprised of combinations of fixed income securities and
equity securities ("Blended ETFs"), (c) that include both
long and short positions in securities ("Long-Short ETFs"),
and (d) that use a "130/30" investment strategy ("130/30
ETFs" and, together with Fixed Income ETFs, Blended ETFs and
130/30 ETFs, "Additional ETFs"); and (2) permit existing and
future series of the Trusts to operate as index-based
exchange-traded funds that seek to track Affiliated Indexes
(including without limitation Equity Indexes, indexes
comprised of fixed income securities or combinations of
equity securities and fixed income securities, indexes that
include both long and short positions in securities and
indexes that use a "130/30" investment strategy).
NOW THEREFORE BE IT:
RESOLVED, that Mark R. Bradley, President of ETF V,
and any other appropriate officer of ETF V be, and each
hereby is, authorized to prepare, execute and submit to the
Commission, on behalf of ETF V and in its name, an
Application or Applications in such form as such officers,
or any one of them, deems necessary or appropriate seeking
exemptions from certain provisions of the 1940 Act to the
extent necessary to, among other things, permit series of
ETF V (1) to operate as Additional ETFs and to permit
certain affiliated persons of the Additional ETFs to deposit
securities into, and receive securities from, the Additional
ETFs in connection with the purchase and redemption of
Creation Unit Aggregations (the "Additional ETF Relief") and
Page 66 of 68
(2) to seek to track Affiliated Indexes and to permit
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 Unit
Aggregations (collectively, the "Affiliated Index Relief");
and it is further
RESOLVED, that Mark R. Bradley and any other
appropriate officer of ETF V be, and each hereby is,
authorized and directed to take such additional actions and
to execute and deliver on behalf of ETF V such other
documents or instruments as he or she deems necessary or
appropriate in furtherance of the above resolution,
including, without limitation, the preparation, execution
and filing of any necessary or appropriate amendment(s) or
supplement(s) to the above-described Application or
Applications, his or her authority therefor to be
conclusively evidenced by the taking of any such actions or
the execution or delivery of any such document; and it is
further
RESOLVED, that Mark R. Bradley and any other
appropriate officer of ETF V be, and each hereby is, if he
or she determines at any time that it is appropriate,
authorized to separate the request to the Commission for
Affiliated Index Relief from the request for Additional ETF
Relief; and it is further
RESOLVED, that upon issuance of an Order of Exemption
by the Commission in accordance with the terms and
conditions of any Application described above, ETF V is
authorized to act in accordance with the provisions of such
Application and the related Order of Exemption.
Page 67 of 68
APPENDIX B
DESCRIPTION OF INITIAL FUND AND ITS UNDERLYING INDEX
It is currently intended that the Initial Fund will be named the First
Trust U.S. Large Cap Blend Equity Index Fund, although the name may be changed
in the future. It is currently anticipated that the investment objective of the
Initial Fund will be to seek investment results that correspond generally to the
price and yield (before the Initial Fund's fees and expenses) of an Affiliated
Index created by the Adviser (as the Affiliated Index Provider) and known as the
First Trust U.S. Large Cap Blend Equity Index (the "Initial Index"); the Initial
Index is briefly described below. The Initial Fund is expected to invest at
least 80% of its total assets in securities that comprise the Initial Index.
The Initial Fund may modify its investment objective and the Adviser may
modify its methodology for the Initial Fund as it determines appropriate or
necessary in pursuing the Initial Fund's investment objective.
DESCRIPTION OF INITIAL INDEX
Introduction
The Initial Index will be an equal weighted index representing the 50
largest companies that trade in U.S. dollars on either The NASDAQ Stock Market,
the New York Stock Exchange or the NYSE Amex.
Initial Index Methodology
To be included in the Initial Index, a security must be listed on The
NASDAQ Stock Market, the New York Stock Exchange or the NYSE Amex. Each security
must have a minimum market capitalization of $10 billion and have a minimum
three-month average daily dollar trading volume of $1 million. The eligible
securities will be ranked by market capitalization, and the top 50 securities by
market capitalization will be selected for inclusion in the Initial Index. The
Initial Index will be reconstituted and rebalanced on a quarterly basis, and
each security will receive an equal weighting in the Initial Index at each
quarterly rebalance.
Page 68 of 68
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