As filed with the Securities and Exchange Commission on August 17, 2016 |
File No. 812-XX |
UNITED STATES OF AMERICA |
BEFORE THE |
SECURITIES AND EXCHANGE COMMISSION |
Application for an Order under Section 6(c) of the Investment
Company Act of 1940 (“Act”) for an exemption from Sections 2(a)(32), 5(a)(1), 22(d) and
22(e) of the Act and Rule 22c-1 under the Act, under Sections 6(c) and 17(b) of the Act, for an
exemption from Sections 17(a)(1) and (a)(2) of the Act and under Section 12(d)(1)(J) of the Act,
to amend a prior order for exemptions from Sections 12(d)(1)(A) and 12(d)(1)(B) of the Act.
In the Matter of | |
The Vanguard Group, Inc. | Vanguard Municipal Bond Funds |
Vanguard Marketing Corporation | Vanguard New Jersey Tax-Free Funds |
Vanguard Admiral Funds | Vanguard New York Tax-Free Funds |
Vanguard Bond Index Funds | Vanguard Ohio Tax-Free Funds |
Vanguard California Tax-Free Funds | Vanguard Pennsylvania Tax-Free Funds |
Vanguard Charlotte Funds | Vanguard Quantitative Funds |
Vanguard Chester Funds | Vanguard Scottsdale Funds |
Vanguard Convertible Securities Fund | Vanguard Specialized Funds |
Vanguard Explorer Fund | Vanguard STAR Funds |
Vanguard Fenway Funds | Vanguard Tax-Managed Funds |
Vanguard Fixed Income Securities Funds | Vanguard Trustees’ Equity Fund |
Vanguard Horizon Funds | Vanguard Valley Forge Funds |
Vanguard Index Funds | Vanguard Variable Insurance Funds |
Vanguard International Equity Index Funds | Vanguard Wellesley Income Fund |
Vanguard Malvern Funds | Vanguard Wellington Fund |
Vanguard Massachusetts Tax-Exempt | Vanguard Whitehall Funds |
Funds | Vanguard Windsor Funds and |
Vanguard Money Market Reserves | Vanguard World Fund |
Vanguard Montgomery Funds | |
Vanguard Morgan Growth Fund |
PLEASE SEND ALL COMMUNICATIONS AND ORDERS TO: | |
Brian P. Murphy, Esq. | W. John McGuire, Esq. |
The Vanguard Group, Inc. | Michael Berenson, Esq. |
Mail Stop V26 | Morgan, Lewis & Bockius LLP |
P.O. Box 2600 | 1111 Pennsylvania Ave. N.W. |
Valley Forge, PA 19482-2600 | Washington, D.C. 20004-2541 |
Page 1 of 43 sequentially numbered pages (including exhibits) |
DB3/ 201028270.1
I. | INTRODUCTION | 5 | ||
A. | Summary of the Application | 5 | ||
B. | Comparability to Prior Commission Orders | 6 | ||
II. | THE APPLICANTS | 7 | ||
A. | The Trusts | 7 | ||
B. | The Adviser | 8 | ||
C. | The Distributor | 9 | ||
III. APPLICANTS PROPOSAL | 9 | |||
A. | Operation of the Funds | 9 | ||
1. | Capital Structure and Voting Rights; Book-Entry | 10 | ||
2. | Investment Objectives | 10 | ||
3. | Implementation of Investment Strategy | 11 | ||
4. | Depositary Receipts | 11 | ||
5. | Listing Market | 12 | ||
B. | Purchases and Redemptions of a Fund and Creation Units | 13 | ||
1. | Composition of Creation Baskets | 14 | ||
2. | Clearance and Settlement of Creation and Redemption Transactions | 17 | ||
3. | Pricing of a Fund | 21 | ||
C. | Likely Purchasers of Fund | 21 | ||
D. | Disclosure Documents | 22 | ||
E. | Sales and Marketing Materials | 23 | ||
F. | Availability of Information Regarding a Fund | 23 | ||
G. | Operational Fees and Expenses; Shareholder Transaction Expenses | 25 | ||
H. | Shareholder Reports | 25 | ||
IV. IN SUPPORT OF THE APPLICATION | 26 | |||
V. | REQUEST FOR ORDER | 28 | ||
A. | Exemption from the Provisions of Sections 2(a)(32) and 5(a)(1) | 28 | ||
DB3/ 201028270.1 | 2 |
TABLE OF CONTENTS | |||
(continued) | |||
Page | |||
B. | Exemption from the Provisions of Section 22(d) and Rule 22c-1 | 30 | |
C. | Exemption from the Provisions of Section 22(e) | 33 | |
D. | Exemption from the Provisions of Sections 17(a)(1) and 17(a)(2) | 36 | |
VI. EXPRESS CONDITIONS TO THIS APPLICATION | 39 | ||
VII. NAMES AND ADDRESSES | 40 | ||
VIII. PROCEDURAL MATTERS, CONCLUSION AND SIGNATURES | 41 | ||
DB3/ 201028270.1 | 3 |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION | ||
Washington, D.C. 20549 | ||
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x | ||
In the matter of | : | Application |
: | for an Order under Section 6(c) | |
: | of the Investment Company Act | |
: | of 1940 (“Act”) for an exemption from Sections | |
The Vanguard Group, Inc. | : | 2(a)(32), 5(a)(1), 22(d) and |
Vanguard Marketing Corporation and | : | 22(e) of the Act and Rule 22c-1 under the |
Vanguard Admiral Funds | : | Act, under Sections 6(c) and (17)(b) |
Vanguard Bond Index Funds | : | of the Act, for an exemption from |
Vanguard California Tax-Free Funds | : | Sections 17(a)(1) and (a)(2) of the Act and |
Vanguard Charlotte Funds | : | under Section 12(d)(1)(J) of the Act to amend |
Vanguard Chester Funds | : | a prior order for exemptions from Sections 12(d)(1)(A) |
Vanguard Convertible Securities Fund | : | and 12(d)(1)(B) of the Act. |
Vanguard Explorer Fund | : | |
Vanguard Fenway Funds | : | |
Vanguard Fixed Income Securities Funds | : | File No. 812-XX |
Vanguard Horizon Funds | : | |
Vanguard Index Funds | : | |
Vanguard International Equity Index | ||
Funds | : | |
Vanguard Malvern Funds | : | |
Vanguard Massachusetts Tax-Exempt Funds | : | |
Vanguard Money Market Reserves | : | |
Vanguard Montgomery Funds | : | |
Vanguard Morgan Growth Fund | : | |
Vanguard Municipal Bond Funds | : | |
Vanguard New Jersey Tax-Free Funds | : | |
Vanguard New York Tax-Free Funds | : | |
Vanguard Ohio Tax-Free Funds | : | |
Vanguard Pennsylvania Tax-Free Funds | : | |
Vanguard Quantitative Funds | : | |
Vanguard Scottsdale Funds | : | |
Vanguard Specialized Funds | : | |
Vanguard STAR Funds | : | |
Vanguard Tax-Managed Funds | : | |
Vanguard Trustees’ Equity Fund | : | |
Vanguard Valley Forge Funds | : | |
Vanguard Variable Insurance Funds | : | |
Vanguard Wellesley Income Fund | : | |
Vanguard Wellington Fund | : | |
Vanguard Whitehall Funds | : | |
Vanguard Windsor Funds | : | |
Vanguard World Fund | : | |
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DB3/ 201028270.1 | 4 |
I. INTRODUCTION
A. Summary of the Application
In this application (“Application”), The Vanguard Group, Inc. (“VGI” ), Vanguard Marketing
Corporation (“VMC” or “Distributor”) and the various trusts that are listed as applicants to this
application (“Trusts,” and collectively with VGI and VMC, the “Applicants”) apply for and request an
order under Section 6(c) of the Investment Company Act of 1940 (the “Act”) for an exemption from
Sections 2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act and Rule 22c-1 under the Act, under Sections 6(c)
and 17(b) of the Act, for an exemption from Sections 17(a)(1) and (a)(2) of the Act and under Section
12(d)(1)(J) of the Act for an exemption from Sections 12(d)(1)(A) and 12(d)(1)(B) of the Act (the
“Order”). Applicants are requesting relief with respect to future series of the Trusts or other open-end
management investment companies that may be created in the future and that will offer and operate a
series with an actively-managed portfolio and exchange-traded shares (such series hereafter referred to as
a “Fund” or “Funds”).1 The Order would permit, among other things, (a) an actively-managed open-end
investment company to issue exchange-traded shares (“ETF Shares”) that are redeemable in large
aggregations only (“Creation Units”); (b) secondary market transactions in ETF Shares at negotiated
prices on a national securities exchange (“Listing Market”), as defined in Section 2(a)(26) of the Act,
rather than at net asset value (“NAV”); (c) certain Funds that invest in foreign securities to pay
redemption proceeds more than seven calendar days after Creation Units are tendered for redemption; and
(d) certain affiliated persons of the Funds and affiliated persons of such affiliated persons (“second tier
1 All entities that may rely on the Order are named as Applicants. Any other entity that relies on the Order in the
future will comply with the terms and conditions of the application.
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DB3/ 201028270.1
affiliates”) to buy securities from, and sell securities to, the Funds in connection with the in-kind purchase
and redemption of Creation Units (collectively referred to as the “ETF Relief”).
Applicants also seek to amend a prior order under Section 12(d)(1)(J) of the Act for exemptions from
sections 12(d)(1)(A) and 12(d)(1)(B) of the Act and under sections 6(c) and 17(b) for exemptions from
section 17(a) of the Act (the “Prior 12(d)(1) Order”).2 Specifically, Applicants hereby request that the
Funds be permitted to rely on the Prior 12(d)(1) Order to the same extent as the VIPER Funds (as defined
in the Prior 12(d)(1) Order). Applicants assert that the protective terms and conditions of the Prior
12(d)(1) Order would be as effective with respect to the Funds as with the VIPER Funds notwithstanding
that (a) the Fund would not be known as “VIPER Shares;” (b) the Funds would be actively-managed
rather than index funds; and (c) the Fund would not be offered as a share class of a series offering
multiple share classes. Any Fund that relies on the Prior 12(d)(1) Order will comply with the terms and
conditions therein.
B. Comparability to Prior Commission Orders
The requested relief is very similar to the relief granted by the Securities and Exchange Commission (the
“Commission”) to other actively managed exchange-traded funds (“ETFs”), including New York Alaska
ETF Management LLC, et al., and Nuveen Fund Advisors, LLC, et al. (the “Prior Actively Managed ETF
Orders”).3
II. THE APPLICANTS
2 Vanguard Index Funds, et al. (File No. 812-13157), Investment Company Act Release Nos. 27314 (May 26,
2006) (notice) and 27386 (May 31, 2006) (order).
3 New York Alaska ETF Management LLC, et al., File No. 812-14419, Investment Company Act Release Nos.
31667 (June 12, 2015) (notice) and 31709 (July 8, 2015) (order); Nuveen Fund Advisors, LLC, et. al., 812-14428,
Investment Company Act Release Nos. 31664 (June 8, 2015) (notice) and 31705 (July 6, 2015 (order).
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DB3/ 201028270.1
A. The Trusts
Each of the Trusts is organized as a Delaware statutory trust and is registered under the Act as an open-
end management investment company. Each Trust is authorized to offer an unlimited number of
series/Funds. The Trusts offer and sell their securities pursuant to registration statements on Form N-1A
filed with the Commission under the Act and the Securities Act of 1933 (“Securities Act”). Each Fund
will (a) be advised by VGI or an entity controlling, controlled by or under common control with VGI
(each such entity or any successor thereto, an “Adviser”) and (b) comply with the terms and conditions
stated in this Application.4 Each Fund will operate as an actively-managed ETF.
Applicants propose that the Funds be permitted to issue ETF Shares if so authorized by their respective
boards of trustees (“Boards”). Each Fund will have distinct investment strategies that are different from
those of the other Funds, and each Fund will attempt to achieve its investment objective by utilizing an
“active” management strategy. Each Fund will invest in accordance with its investment objective and the
requirements of the Act and the rules thereunder. Each Fund will consist of a portfolio of securities
(including fixed income securities and/or equity securities), as well as currencies traded in the U.S and/or
non-U.S. markets and other assets and positions (“Portfolio Positions”). If a Fund invests in derivatives,
then (a) the Fund’s Board will periodically review and approve the Fund’s use of derivatives and how the
Fund’s investment adviser assesses and manages risk with respect to the Fund’s use of derivatives and (b)
the Fund’s disclosure of its use of derivatives in its offering documents and periodic reports will be
consistent with relevant Commission and staff guidance.
Each Fund will adopt certain fundamental policies consistent with the Act. It is anticipated that each
4 For the purposes of the Order, “successor” is limited to an entity that would result from reorganization into another
jurisdiction or a change in the type of business organization.
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DB3/ 201028270.1
Fund will be classified as “diversified” under the Act. However, one or more Funds may be classified as
a “non-diversified company” under the Act.5 Each Fund intends to maintain the required level of
diversification and otherwise conduct its operations so as to qualify as a “regulated investment company”
(“RIC”) for purposes of the Internal Revenue Code of 1986, as amended (the “Code”), in order to relieve
each Fund of any liability for federal income tax to the extent that its earnings are distributed to
shareholders.6
B. The Adviser
An Adviser will be the investment adviser to the Funds. VGI is a Pennsylvania corporation registered as
an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and
as a transfer agent under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). VGI is
wholly and jointly owned by 35 investment companies, each of which is a party to this Application. Any
Adviser will be registered under the Advisers Act. An Adviser may enter into a sub-advisory agreement
with one or more affiliated or unaffiliated investment advisers, each of which may serve as a sub-adviser
to a Fund (each, a “Sub-Adviser”). Each Sub-Adviser will be registered with the Commission as an
investment adviser under Section 203 of the Advisers Act or, alternatively, will not be subject to
registration under the Advisers Act. Each Sub-Adviser may have a number of other clients, which may
include open-end management investment companies that are registered under the 1940 Act, separately
managed accounts for institutional investors, privately offered funds that are not deemed to be
“investment companies” in reliance on Sections 3(c)(1), (3)(c)(7) or 3(c)(11) of the 1940 Act, closed-end
5 See Section 5(b) of the Act. To the extent that a Fund is a “non-diversified company,” appropriate risk disclosure
will be included in the Fund’s registration statement.
6 A Fund may invest in a wholly-owned subsidiary organized under the laws of the Cayman Islands or under the
laws of another non-U.S. jurisdiction (a “Wholly-Owned Subsidiary”) in order to pursue its investment objectives
and/or ensure that the Fund remains qualified as a RIC. In addition, each Trust reserves the right to create Funds
which will not operate as RICs
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DB3/ 201028270.1
funds and business development companies.
C. The Distributor
The Distributor is a wholly-owned subsidiary of VGI and a broker-dealer registered under the Exchange
Act. The Distributor will distribute a Fund’s shares on an agency basis. The Listing Market will not be
affiliated with the Distributor, the Adviser, any Sub-Adviser, the Trusts, or any Fund.
III. APPLICANTS’ PROPOSAL
A. Operation of the Funds
1. Capital Structure and Voting Rights; Book-Entry
Shareholders of a Fund will have one vote per ETF Share with respect to matters regarding the Trust or
the respective Fund for which a shareholder vote is required consistent with the requirements of the Act
and the rules promulgated thereunder and state laws applicable to the Trust. A Fund will be registered in
book-entry form only and the Funds will not issue individual share certificates. The Depository Trust
Company, 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
ETF Shares (owners of such beneficial interests referred to herein as “Beneficial Owners”) will be shown
on the records of DTC or DTC participants (e.g., broker-dealers, banks, trust companies and clearing
companies) (“DTC Participants”). Beneficial Owners will exercise their rights in such securities
indirectly through DTC and the DTC Participants. All references herein to owners or holders of such
ETF Shares shall reflect the rights of persons holding an interest in such securities as they may indirectly
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DB3/ 201028270.1
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 ETF Shares. Conveyances of all
notices, statements, shareholder reports and other communications from any Fund to Beneficial Owners
will be at such Fund’s expense through the customary practices and facilities of DTC and the DTC
Participants.
2. Investment Objectives
The Funds may invest in equity securities (“Equity Funds”) or fixed income securities (“Fixed Income
Funds”) traded in the U.S. or non-U.S. markets. The Equity Funds that invest in equity securities traded
in the U.S. market (“Domestic Equity Funds”), Fixed Income Funds that invest in fixed income securities
traded in the U.S. market (“Domestic Fixed Income Funds”) and Funds that invest in equity and fixed
income securities traded in the U.S. market (“Domestic Blend Funds”) together are “Domestic Funds.”
Funds that invest in foreign and domestic equity securities are “Global Equity Funds.” Funds that invest
in foreign and domestic fixed income securities are “Global Fixed Income Funds.” Funds that invest in
equity securities and fixed income securities traded in the U.S. or non-U.S. markets are “Global Blend
Funds” (and collectively with the Global Equity Funds and Global Fixed Income Funds, “Global Funds”).
Funds that invest solely in foreign equity securities are “Foreign Equity Funds,” Funds that invest solely
in foreign fixed income securities are “Foreign Fixed Income Funds,” and Funds that invest in both
foreign equity and foreign fixed income securities are Foreign Blend Funds (and collectively with Foreign
Equity Funds and Foreign Fixed Income Funds, “Foreign Funds”).
3. Implementation of Investment Strategy
An Adviser and any Sub-Adviser(s) will not disclose information concerning the identities and quantities
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DB3/ 201028270.1
of the Portfolio Positions before such information is publicly disclosed and is available to the entire
investing public. Notwithstanding the foregoing, prior to disclosure to the general public of the identities
and quantities of the Portfolio Positions, an Adviser and any Sub-Adviser(s) may disclose such
information solely to the Chief Compliance Officer of the relevant Trust and other compliance personnel
for purposes of such persons’ monitoring of compliance with each entity’s Code of Ethics (as defined
below)7 or other regulatory issues under the “federal securities laws,” as defined in Rule 38a-1 of the Act
and to certain service providers for a Fund with whom the Fund has confidentiality agreements, for
example, a Fund’s custodian.
4. Depositary Receipts
Applicants anticipate that the Funds may invest a portion of their assets in depositary receipts
representing foreign securities in which they seek to invest (“Depositary Receipts”). Depositary Receipts
are typically issued by a financial institution (a “Depositary”) and evidence ownership interests in a
security or a pool of securities (“Underlying Securities”) that have been deposited with the Depositary.8 A
7 The Adviser, any Sub-Adviser(s) and the Distributor, each have adopted a Code of Ethics as required under Rule
17j-1 under the 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. In addition, the Adviser has, and any Sub-Adviser(s)
will have, adopted policies and procedures as required under Section 204A of the Advisers Act, which are
reasonably designed in light of the nature of its business to prevent the misuse, in violation of the Advisers Act or
the Exchange Act or the rules thereunder, of material non-public information by the Adviser, Sub-Adviser or any
associated person, as well as compliance policies and procedures as required under Rule 206(4)-7 under the
Advisers Act. In accordance with the Adviser’s/any Sub-Adviser(s) Code of Ethics and policies and procedures
designed to prevent the misuse of material non-public information, personnel of the Adviser and any Sub-Adviser(s)
with knowledge about the composition of a Creation Deposit (defined below) will be prohibited from disclosing
such information to any other person, except as authorized in the course of their employment, until such information
is made public.
8 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 a Listing Market or off-exchange. Rule 6620 of the Financial Industry Regulatory Authority (“FINRA”) 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 or of an Adviser or any Sub-Adviser(s) or any Fund will serve as the Depositary for
any Depositary Receipts held by a Fund.
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DB3/ 201028270.1
Fund will not acquire any Depositary Receipts that an Adviser and any Sub-Adviser(s) deems to be
illiquid or for which pricing information is not readily available.
5. Listing Market
After receiving authorization from its Board to offer the Fund, the Fund will submit an application to list
ETF Shares on a Listing Market.9 It is expected that one or more member firms of the Listing Market
will maintain a market for the ETF Shares.10 As long as a Fund operates in reliance on the requested
Order, ETF Shares of the Fund will be listed on a Listing Market. The Fund may also be cross-listed on
one or more foreign securities exchanges. Other than a market maker, no affiliated person or affiliated
person of an affiliated person of a Fund will maintain a secondary market in ETF Shares.
B. Purchases and Redemptions of Fund and Creation Units
ETF Shares of each Fund will be issued in Creation Units expected to be of 25,000 or more shares. The
Funds will offer and sell Creation Units of the Fund through the Distributor on a continuous basis at the
NAV per ETF Share next determined after receipt of an order in proper form. The NAV of ETF Shares
will be determined as of the close of regular trading on the New York Stock Exchange (“NYSE”) on each
9 No Market Maker will be an affiliated person, or an affiliated person of an affiliated person, of the Funds, except
within Section 2(a)(3)(A) or (C) of the Act due to ownership of Shares, as described below.
10 If Funds are listed on The NASDAQ Stock Market LLC (“Nasdaq”) or a similar electronic Stock Exchange
(including NYSE Arca), one or more member firms of that Listing Market will act as Market Maker and maintain a
market for the Fund trading on that Listing Market. On Nasdaq, no particular Market Maker would be contractually
obligated to make a market in a Fund’s shares. However, the listing requirements on Nasdaq, for example, stipulate
that at least two Market Makers must be registered in a Fund to maintain a listing. In addition, on Nasdaq and NYSE
Arca, registered Market Makers are required to make a continuous two-sided market or subject themselves to
regulatory sanctions.
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DB3/ 201028270.1
day that the NYSE is open. A “Business Day” is defined as any day that the Fund is open for business,
including as required by Section 22(e) of the Act. The Funds will sell and redeem Creation Units only on
Business Days. Applicants anticipate that the initial price of an ETF Share will range from $20 to $200
and that the initial price of a Creation Unit will range from $1,000,000 to $20,000,000. The ETF Shares
will be listed on the Listing Market and traded in the secondary market in the same manner as other
equity securities. The price of ETF Shares trading on the secondary market will be based on a current
bid-offer market. No secondary sales will be made to brokers or dealers at a concession by the
Distributor or by a Fund. Purchases and sales of ETF Shares in the secondary market, which will not
involve a Fund, will be subject to customary brokerage commissions and charges.
The pricing of an exchange-traded class of shares by means of bids and offers on the Listing Market in
the secondary market is not novel. This is the method by which the shares of closed-end investment
companies are priced and sold after initial issuance. This also is the method employed by other ETFs
whose individual securities all trade on a Listing Market. The price at which ETF Shares will trade will
be disciplined by arbitrage opportunities created by the ability to purchase or redeem Creation Units at
NAV per ETF Share, which should ensure that ETF Shares will not trade at a material premium or
discount in relation to NAV per ETF Share.
1. Composition of Creation Baskets
In order to keep costs low and permit each Fund to be as fully invested as possible, ETF Shares will be
purchased and redeemed in Creation Units and generally on an in-kind basis. The ETF Shares will be
redeemable in Creation Units on any Business Day. Except where the purchase or redemption will
include cash under the limited circumstances specified below, purchasers will be required to purchase
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DB3/ 201028270.1
Creation Units by making an in-kind deposit of specified instruments (“Deposit Instruments”), and
shareholders redeeming their ETF Shares will receive an in-kind transfer of specified instruments
(“Redemption Instruments”).11 On any given Business Day, the names and quantities of the instruments
that constitute the Deposit Instruments and the names and quantities of the instruments that constitute the
Redemption Instruments will be identical, and these instruments may be referred to, in the case of either a
purchase or a redemption, as the “Creation Basket.” In addition, the Creation Basket will correspond pro
rata to the positions in the Fund’s portfolio (including cash positions),12 except:
(a) in the case of bonds, for minor differences when it is impossible to break up bonds beyond
certain minimum sizes needed for transfer and settlement;
(b) for minor differences when rounding is necessary to eliminate fractional shares or lots that are
not tradeable round lots;13 or
(c) TBA Transactions,14 short positions in securities (“Short Positions”), and other positions that
cannot be transferred in kind15 will be excluded from the Creation Basket.16
11 The Funds must comply with the federal securities laws in accepting Deposit Instruments and satisfying
redemptions with Redemption Instruments, including that the Deposit Instruments and Redemption Instruments are
sold in transactions that would be exempt from registration under the Securities Act. In accepting Deposit
Instruments and satisfying redemptions with Redemption Instruments that are restricted securities eligible for resale
pursuant to Rule 144A under the Securities Act, the Funds will comply with the conditions of Rule 144A.
12 The portfolio used for this purpose will be the same portfolio used to calculate the Fund’s NAV for that Business
Day.
13 A tradeable round lot for a security will be the standard unit of trading in that particular type of security in its
primary market.
14 A TBA Transaction is a method of trading mortgage-backed securities. In a TBA Transaction, the buyer and
seller agree upon general trade parameters such as agency, settlement date, paramount and price. The actual pools
delivered generally are determined two days prior to the settlement date.
15 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.
16 Because these instruments will be excluded from the Creation Basket, their value will be reflected in the
determination of the Balancing Amount (defined below).
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DB3/ 201028270.1
If there is a difference between the net asset value attributable to a Creation Unit and the aggregate market
value of the Creation Basket exchanged for the Creation Unit, the party conveying instruments with the
lower value will also pay to the other an amount in cash equal to that difference (the “Balancing
Amount”). A difference may occur where the market value of the Creation Basket changes relative to
the net asset value of the Fund for the reasons identified in clauses (a) through (c) 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;
(c) if, upon receiving a purchase or redemption order from an Authorized Participant,17 the Fund
determines to require the purchase or redemption, as applicable, to be made entirely in cash;18
(d) if, on a given Business Day, the Fund requires all Authorized Participants purchasing or
redeeming ETF Shares on that day to deposit or receive (as applicable) cash in lieu of some or all of the
Deposit Instruments or Redemption Instruments, respectively, solely because: (i) such instruments are not
17 The term “Authorized Participant” is defined below in Part III.B.2.
18 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, an Adviser may be able to obtain better execution than ETF
Share purchasers because of an 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.
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eligible for transfer through either the NSCC Process or DTC Process; or (ii) in the case of Global Funds
or Foreign Funds, such instruments are not eligible for trading due to local trading restrictions, local
restrictions on securities transfers, or other similar circumstances; or
(e) if the Fund permits an Authorized Participant to deposit or receive (as applicable) cash in lieu
of some or all of the Deposit Instruments or Redemption Instruments, respectively, solely because: (i)
such instruments are, in the case of the purchase of a Creation Unit, not available in sufficient quantity;
(ii) such instruments are not eligible for trading by an Authorized Participant or the investor on whose
behalf the Authorized Participant is acting; or (iii) a holder of shares of a Global Fund or Foreign Fund
would be subject to unfavorable income tax treatment if the holder receives redemption proceeds in
kind.19
Each Business Day, before the open of trading on the Listing Market, the Fund will cause to be published
through the NSCC the names and quantities of the instruments comprising the Creation Basket, as well as
the estimated Balancing Amount for that day. The published Creation Basket will apply until a new
Creation Basket is announced on the following Business Day, and there will be no intra-day changes to
the Creation Basket except to correct errors in the published Creation Basket.
2. Clearance and Settlement of Creation and Redemption Transactions
All orders to purchase Creation Units must be placed with the Distributor by or through an “Authorized
Participant,” which is a DTC Participant that has executed a “Participant Agreement” with the Distributor.
Authorized Participants may be, but are not required to be, members of the Listing Market. Investors
may obtain a list of Authorized Participants from the Distributor.
19 A “custom order” is any purchase or redemption of the Fund’s shares made in whole or in part on a cash basis in
reliance on clause (e)(i) or (e)(ii).
16
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Purchase orders for creations and redemptions of a Fund’s Creation Units will be processed either through
a manual clearing process or through an enhanced clearing process. The enhanced clearing process is
available only to those DTC Participants that also are participants in the Continuous Net Settlement
(“CNS”) System of the National Securities Clearing Corporation (“NSCC”), a clearing agency registered
with the Commission and affiliated with DTC. The NSCC/CNS system has been enhanced specifically
to effect purchases and redemptions of exchange-traded investment company securities, such as Creation
Units of Fund. The enhanced clearing process (the “NSCC Process”) simplifies the process of
transferring a basket of securities between two parties by treating all of the securities that comprise the
basket as a single unit. By contrast, the manual clearing process (the “DTC Process”) involves a manual
line-by-line movement of each securities position. Because the DTC Process involves the movement of
hundreds of securities, while the NSCC Process involves the movement of one unitary basket, DTC will
charge a Fund more than NSCC to settle a purchase or redemption of Creation Units. Each Fund recoups
some or all of the settlement costs charged by NSCC and DTC by imposing a “Transaction Fee” on
investors purchasing or redeeming Creation Units. For this reason, investors purchasing or redeeming
Funds through the DTC Process generally will pay a higher Transaction Fee than will investors doing so
through the NSCC Process.
For each Fund, the Transaction Fee will be limited to an amount that has been determined by an Adviser
to be appropriate. The Transaction Fee covers certain expenses, for example, custodial costs and
brokerage expenses. The purpose of the Transaction Fee is to protect the existing shareholders of the
Funds from the dilutive costs associated with the purchase and redemption of Creation Units. With
respect to any Foreign or Global Funds, the clearance and settlement of its Creation Units will depend on
the nature of each security, consistent with the processes discussed below. The NSCC Process is not
currently available for purchases or redemptions of Creation Units of Foreign Funds, Global Funds or
Fixed Income Funds. Accordingly, Authorized Participants making payment for orders of Creation Units
of Foreign Funds or Global Funds must have international trading capabilities and must deposit the
17
DB3/ 201028270.1
Creation Deposit with the Fund “outside” the NSCC Process through the relevant Fund’s custodian and
sub-custodians. Specifically, the purchase of a Creation Unit of a Foreign Fund or a Global Fund will
operate as follows. The Authorized Participant, acting for itself or on another investor’s behalf, must
submit an order to purchase one or more Creation Units to the Fund’s Distributor, in the form required by
the Fund, by the Order Cut-Off Time on the Transmittal Date (as those terms are defined below). Once a
purchase order has been placed with the Distributor, the Distributor will inform the Adviser and the
custodian. Once the custodian has been notified of an order to purchase, it will provide necessary
information to the sub-custodian(s) of the relevant Foreign Fund or Global Fund. The Authorized
Participant will deliver to, in the case of a purchase (receive from, in the case of a redemption), the
appropriate sub-custodians, on behalf of itself or the investor on whose behalf it is acting, the Deposit
Instruments or Redemption Instruments, as applicable, plus in either case any cash as determined in
accordance with the procedures described in Section III.B.1 (a “Creation Deposit”).20
Creation Deposits must be delivered to the accounts maintained at the applicable sub-custodians. All
sub-custodians will comply with Rule 17f-5 under the Act. Once sub-custodians confirm to the
custodian that the required securities and/or cash have been delivered, the custodian will notify the
Adviser and the Distributor. The Distributor will then deliver a confirmation and Prospectus (if required
by law) to the purchaser. In addition, the Distributor will maintain a record of the instructions given to
the Trust to implement the delivery of ETF Shares. Except as described below, shares and Deposit
Instruments of Fixed Income Funds will clear and settle in the same manner as the shares and Deposit
Instruments of Equity Funds. The shares and Deposit Instruments of Fixed Income Funds will clear and
settle in the same manner as the fixed income securities and shares of other ETFs that invest in fixed
income securities. Deposit Instruments that are U.S. government or U.S. agency securities and any cash
20 When redeeming a Creation Unit of a Foreign Fund or a Global Fund and taking delivery of Redemption
Instruments in connection with such redemption into a securities account of the Authorized Participant or investor
on whose behalf the Authorized Participant is acting, the owner of the account must maintain appropriate security
arrangements with a broker-dealer, bank or other custody provider in each jurisdiction in which any of the
Redemption Instruments are customarily traded.
18
DB3/ 201028270.1
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. ETF Shares will settle through the DTC. The custodian will monitor the movement of the
underlying Deposit Instruments and will instruct the movement of a Fund’s shares only upon validation
that such securities have settled correctly. The settlement of a Fund’s shares will be aligned with the
settlement of the underlying Deposit Instruments and will generally occur on a settlement cycle of T+3
Business Days or shorter, at the sole discretion of the Trust on behalf of each Fixed Income Fund.21
Applicants do not believe the issuance and settlement of Creation Units in the manner described above
will have any negative impact on the arbitrage efficiency or the secondary market trading of a Fund’s
shares. Applicants do not believe that the clearing and settlement process will affect the arbitrage of
shares of the Fixed Income Funds.
All orders to purchase Creation Units, whether through the NSCC Process or the DTC Process, must be
received by the Distributor no later than the designated order cut-off time (“Order Cut-Off Time”) on the
date such order is placed (the “Transmittal Date”) in order for the purchaser to receive the NAV per ETF
Share determined on the Transmittal Date. In the case of custom orders, the order must be received by
the Distributor sufficiently in advance of the Order Cut-Off Time in order to help ensure that the order is
effected at the NAV calculated on the Transmittal Date. On days when a Listing Market or the bond
21 Applicants note that ETF 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 ETF Shares of each Fixed Income
Fund will trade in the secondary market at prices that reflect interest and coupon payments on Portfolio Positions
through the Fund’s 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
ETF 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 ETF Shares may trade in the secondary
market at a slight premium to NAV per ETF Share 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.
19
DB3/ 201028270.1
markets close earlier than normal, the Funds may require custom orders to be placed earlier in the day.
The Distributor will maintain a record of Creation Unit purchases and will send out confirmations of such
purchases. The Distributor will transmit all purchase orders to the relevant Fund. The Fund may reject
any order that is not in proper form. After a Fund has accepted a purchase order and received delivery of
the Creation Deposit, NSCC or DTC, as the case may be, will instruct the Fund to initiate “delivery” of
the appropriate number of ETF Shares to the book-entry account specified by the purchaser. The
Distributor will furnish a Prospectus (if required by law) and a confirmation order to those placing
purchase orders. In addition to the information made available by the Adviser, the Listing Market will
disseminate: (i) continuously throughout the regular trading hours (anticipated to be 9:30 a.m. to 4:00
p.m. or 4:15 p.m. ET, as specified by the Listing Market), through the facilities of the consolidated tape,
the market value of an ETF Share, and (ii) every 15 seconds throughout the regular trading hours a
calculation of the estimated NAV of an ETF Share (which estimate is expected to be accurate to within a
few basis points). Comparing these two figures allows an investor to determine whether, and to what
extent, ETF Shares are selling at a premium or a discount to NAV per ETF Share. Neither the Trust nor
any Fund will be involved in, or responsible for, the calculation or dissemination of any such amount and
will make no warranty as to its accuracy.
3. Pricing of Fund
The price of ETF Shares trading on the Listing Market will be based on a current bid/offer market. The
price of shares of any Fund, like the price of all traded securities, is subject to factors such as supply and
demand, as well as the current value of the Portfolio Positions held by such Fund. A Fund, available for
purchase or sale on an intraday basis on the Listing Market, does not have a fixed relationship either to
the previous day’s NAV per ETF Share nor the current day’s NAV per ETF Share. The market price of a
20
DB3/ 201028270.1
Fund’s shares therefore may be below, at, or above the most recently calculated NAV per ETF Share.
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 a Fund’s shares on the Listing Market will be subject to customary
brokerage commissions and charges.
C. Likely Purchasers of Fund
Applicants expect that there will be several categories of market participants who are likely to be
interested in purchasing Creation Units directly from the Funds. One is institutional investors that desire
to keep a portion of their portfolios invested in a professionally managed, diversified portfolio of
securities and that find the Fund a cost effective means to do so. Another is market makers, who will
purchase (and redeem) Creation Units in response to secondary market supply and demand, and for
inventory control. A third category is arbitrageurs (many of whom are market makers), who seek to take
advantage of any slight premium or discount in the market price of shares of a Fund on the Listing Market
versus the cost of depositing (or redeeming) Creation Units. Applicants do not expect that market
makers and arbitrageurs will hold positions in the Fund for any length of time unless the positions are
appropriately hedged. Applicants believe that the purchase and redemption of Creation Units by these
market participants will enhance the liquidity of the secondary market as well as keep the market price of
a Fund’s shares close to their NAV.
Purchasers of a Fund’s shares in Creation Units may hold such Fund’s shares or sell them into the
secondary market. Applicants expect that secondary market purchasers of a Fund’s shares will include
both institutional investors and retail investors for whom such shares provide a useful, retail-priced,
exchange-traded mechanism for investing in a professionally managed, diversified portfolio of securities.
D. Disclosure Documents
21
DB3/ 201028270.1
Section 5(b)(2) of the Securities Act makes it unlawful to carry or cause to be carried through interstate
commerce any security for the purpose of sale or delivery after sale unless accompanied or preceded by a
statutory prospectus. Although Section 4(3) of the Securities Act excepts certain transactions by dealers
from the provisions of Section 5 of the Securities Act,22 Section 24(d) of the Act disallows such
exemption for transactions in redeemable securities issued by a unit investment trust or an open-end
management company if any other security of the same class is currently being offered or sold by the
issuer or by or through an underwriter in a public distribution.
Because Creation Units will be redeemable, will be issued by an open-end management company
and will be continually in distribution, the above provisions require the delivery of a statutory or summary
prospectus prior to or at the time of the confirmation of each secondary market sale involving a dealer.
The Distributor will coordinate the production and distribution of Prospectuses to broker-dealers.
It will be the responsibility of the broker-dealers to ensure that a Prospectus is provided for every
secondary market purchase of a Fund’s shares.23
E. Sales and Marketing Materials
Applicants will take such steps as may be necessary to avoid confusion in the public’s mind between the
Fund and a conventional “open-end investment company” or “mutual fund.” A Fund will not be
advertised or marketed or otherwise “held out” as shares of a traditional open-end investment company or
22 Applicants note that Prospectus delivery is not required in certain instances, including purchases of a Fund by an
investor who has previously been delivered a Prospectus (until such Prospectus is supplemented or otherwise
updated) and unsolicited brokers’ transactions in a Fund (pursuant to Section 4(4) of the Securities Act). Also, firms
that do incur a Prospectus-delivery obligation with respect to a Fund 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 Listing
Market in connection with a sale on such Listing Market, is satisfied by the fact that the Prospectus and SAI (as
defined below) are available at such Listing Market upon request.
23 To the extent that a Fund is using a summary prospectus pursuant to Rule 498 under the Securities Act, the
summary prospectus may be used to meet the prospectus delivery requirements.
22
DB3/ 201028270.1
a mutual fund. To that end, the designation of a Fund in all marketing materials will be limited to the
terms “actively-managed exchange-traded fund,” “ETF,” “investment company,” “fund” and “trust,”
without reference to an “open-end fund” or a “mutual fund.” except to compare and contrast a Fund with
other open-end funds. All marketing materials that describe the features or method of obtaining, buying
or selling Creation Units or a Fund’s shares traded on the Listing Market, or refer to redeemability, will
prominently disclose that ETF Shares are not individually redeemable and will disclose that the owners of
the Fund may acquire those shares from the Fund or tender those shares for redemption to the Fund in
Creation Units only. This type of disclosure also will be provided in the shareholder reports issued or
circulated in connection with the Shares. Applicants also note that Section 24(d) of the Act provides that
the exemption provided by Section 4(3) of the Securities Act shall not apply to any transaction in a
redeemable security issued by an open-end management investment company.
F. Availability of Information Regarding the Fund
The Distributor intends to maintain a website that will include each Fund’s Prospectus, statement of
additional information (“SAI”), and summary prospectus, if used, and additional quantitative information
that is updated on a daily basis, including, for each Fund, the prior Business Day’s NAV per ETF Share
and the market closing price or mid-point of the bid/ask spread at the time of calculation of such NAV per
ETF Share (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 ETF Share. The website and information will be publicly
available at no charge. The Listing Market also is expected to disseminate a variety of data with respect
to each Fund on a daily basis by means of CTA and CQ High Speed Lines; information with respect to
recent NAV per ETF Share, net accumulated dividend, final dividend amount to be paid, shares
outstanding, estimated cash amount and total cash amount per Creation Unit will be made available prior
to the opening of the Listing Market. Each Business Day, before the open of trading on the Listing
Market, each Fund will cause to be published through the NSCC the names and quantities of the
23
DB3/ 201028270.1
instruments comprising the Creation Basket, as well as the estimated Balancing Amount (if any), for that
day. On each Business Day, before commencement of trading in shares of a Fund on a Fund’s Listing
Market, each Fund will disclose on the website the identities and quantities of the Portfolio Positions held
by the Fund that will form the basis for the Fund’s calculation of NAV per ETF Share at the end of the
Business Day. The disclosure will look through any Wholly-Owned Subsidiary and identify the specific
Portfolio Holdings held by that entity. The website and information will be publicly available at no
charge.24
In addition to the list of names and amount of each instrument constituting the current Creation Basket, it
is intended that, on each Business Day, the Balancing Amount effective as of the previous Business Day,
per outstanding ETF Share of each Fund, will be made available. The Listing Market will disseminate,
every 15 seconds during the Listing Market’s regular trading hours, through the facilities of the
Consolidated Tape Association, an estimated NAV, which is an amount per ETF Share representing the
sum of the estimated Balancing Amount effective through and including the previous Business Day, plus
the current value of the Portfolio Positions, on a per ETF Share basis. This amount represents the
estimated NAV of an ETF Share. The Funds will not be involved in, or responsible for, the calculation or
dissemination of any such amount and will make no warranty as to its accuracy.
G. Operational Fees and Expenses; Shareholder Transaction Expenses
All expenses incurred in the operation of the Funds will be allocated among the various Funds in
accordance with the Funds’ Service Agreement.25 No sales charges for purchases of shares of any Fund
24 Under accounting procedures followed by the Funds, trades made on the prior Business Day will be booked and
reflected in NAV on the current Business Day. Accordingly, the Funds will be able to disclose at the beginning of
the Business Day the portfolio that will form the basis for the NAV calculation at the end of the Business Day.
25 In 1975, the Commission granted exemptive relief to certain funds advised and managed by Wellington
Management Company that permitted those funds to internalize their corporate administrative functions by owning
and operating a service company – VGI– that would provide those functions at cost (Refer to Investment Company
Act Release Nos. 8644 (Jan. 17, 1975) (notice) and 8676 (Feb. 18, 1975) (order). The 1975 order was amended in
24
DB3/ 201028270.1
will be imposed. As indicated above, each Fund will charge a Transaction Fee in connection with the
purchase and redemption of Creation Units of its shares.
H. Shareholder Reports
With each distribution, a Fund will furnish to DTC Participants for distribution to Beneficial Owners of
ETF Shares information setting forth the amount being distributed, expressed as a dollar amount per ETF
Share. Beneficial Owners also will receive annually notification as to the tax status of the Fund’s
distributions. After the end of each fiscal year, each Fund will make available to DTC Participants, for
distribution to each person who was a Beneficial Owner of ETF Shares at the end of the fiscal year, an
annual report to shareholders containing financial statements audited by independent accountants of
nationally recognized standing and such other information as may be required by applicable laws, rules
1981, 1983, 1987 and 1992, in each case to increase VGI’s authorized capital. See Investment Company Act
Release Nos. 1176 (May 4, 1981); 13613 (Nov. 3, 1983); 15846 (July 2, 1987); and 19184 (Dec. 29, 1992). None
of the amending orders affected the allocation methodologies). Before granting the 1975 order, the Commission
reviewed a proposed Funds’ Service Agreement under which each Vanguard fund would pay VGI its portion of the
actual cost of operating VGI. After the 1975 order was granted, the Vanguard funds entered into the Funds’ Service
Agreement with VGI, which agreement, as amended, is still in effect. According to the most recent version of the
agreement, each Vanguard fund must pay VGI “its share of the direct and indirect expenses of [VGI’s] providing
corporate management and administrative services, including distribution services of an administrative nature, as
allocated among the funds, with allocation of indirect costs based on one or more of the following methods of
allocation . . .” – those methods being net assets, personnel time of VGI employees, number of shareholder
accounts, and/or such other methods of allocation as may be approved by VGI’s Board of Directors. In 1981, after
several contested administrative hearings, the Commission granted further relief that permitted the Vanguard funds
to internalize the funds’ marketing and distribution through a new subsidiary of VGI – VMC - that would provide
distribution services at cost (Refer to Investment Company Act Release No. 11645 (Feb. 25, 1981) (Opinion of the
Commission and Final Order). The 1981 order concluded that “[t]he proposed plan benefits each fund within a
reasonable range of fairness. Specifically, the plan promotes a healthy and viable mutual fund complex within
which each fund can better prosper; enables the [f]unds to realize substantial savings from advisory fee reductions;
promotes savings from economies of scale; and provides the [f]unds with direct and conflict-free control over
distribution functions). The 1981 order requires that VMC’s expenses be allocated among the Vanguard funds
according to a formula (the “Distribution Formula”) based 50% on a fund’s average month-end net assets during
the preceding quarter relative to the average month-end net assets of the other Vanguard funds, and 50% based on
the fund’s sales of new shares relative to the sales of new shares of the other Vanguard funds during the preceding
24 months. To ensure that a new fund is not unduly burdened, the Distribution Formula includes a ceiling so that
no fund’s payment (expressed as a percentage of its assets) exceeds 125% of the average expenses of the funds as a
group (expressed as a percentage of the group’s total assets). In addition, no fund may pay more than 0.2% of its
average month-end net assets for distribution. After the SEC issued the 1981 order, the Funds’ Service Agreement
was amended to include the Distribution Formula.
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and regulations. Copies of semi-annual shareholder reports will also be made available to DTC
Participants for distribution to Beneficial Owners of ETF Shares.
IV. IN SUPPORT OF THE APPLICATION
Applicants seek an order from the Commission permitting: (1) a Fund to issue ETF Shares that
are redeemable in Creation Units only; (2) secondary market transactions in ETF Shares at negotiated
prices, rather than at the current offering price described in the Fund’s Prospectus; (3) certain Funds that
invest in foreign equity securities to pay redemption proceeds more than seven calendar days after
Creation Units are tendered for redemption, and (4) certain affiliated persons and second tier affiliates of
the Trust to deposit securities into, and receive securities from, the Trust in connection with the purchase
and redemption of Creation Units.
The exemptive 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 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 afford significant benefits in the public interest.
Among other benefits, availability of ETF Shares would: provide increased investment opportunities
which should encourage diversified investment; provide in the case of individual tradable ETF Shares, a
low-cost, market-basket security for small and middle-sized accounts of individuals and institutions that
would be available at intra-day prices reflecting prevailing market conditions rather than only closing
prices; provide a security that should be freely available in response to market demand; provide
competition for comparable products available in U.S. markets; attract capital to the U.S. equity market;
26
DB3/ 201028270.1
and facilitate the implementation of diversified investment management techniques. 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.”26 The ETF Shares proposed to be offered would provide
an exchange-traded investment company product available to both retail and institutional investors. As
such, Applicants believe the ETF Shares are appropriate for exemptive relief under Section 6(c).
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:
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; the proposed transaction is consistent | ||
with the policy of each registered investment company | ||
concerned. ; and 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 the Fund based on
NAV per ETF Share. The Deposit and Redemption Instruments for a Fund are based on a standard
applicable to all persons and valued in the same manner in all cases. Except with respect to cash as
determined in accordance with the procedures described in subsection III.B.1 above, the Deposit
Instruments and Redemption Instruments for a Fund will be the same, and in-kind purchases and
redemptions will be on the same terms, for all persons regardless of the identity of the purchaser or
redeemer. Such transactions do not involve “overreaching” by an affiliated person. Accordingly, the
Applicants believe the proposed transactions described herein meet the Section 17(b) standards for relief
26 Investment Company Act Release No. 17534 (June 15, 1990), at 84.
27
DB3/ 201028270.1
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 are (or will be) consistent with each Fund’s policies and 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 similar to those granted in the Prior Actively Managed ETF Orders.
V. REQUEST FOR ORDER
A. 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 [investment] 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 owner, 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 Fund could be viewed as satisfying the Section 2(a)(32) definition of a
redeemable security. Shares of a Fund 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 Fund’s shares is that they
can be redeemed only in Creation Unit-size aggregations. Because the redeemable Creation Units of a
Fund can be unbundled into individual shares that are not individually redeemable, a question arises as to
whether the definitional requirements of a “redeemable security” or an “open-end company” under the
Act would be met if individual ETF Shares are viewed as non-redeemable securities. In light of this open
question, Applicants request an order to permit each Trust to register or maintain its registration as an
open-end management investment company and issue shares that are redeemable only in Creation Units,
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DB3/ 201028270.1
as described herein.
Although ETF Shares will not be individually redeemable, because of the arbitrage possibilities created
by the redeemability of Creation Units it is expected that the market price of an individual ETF Share will
not differ materially from its NAV. Historical data relating to other ETFs trading on Listing Markets
support this view.
The relief requested and the structure described in this Application are very similar to that granted by the
Commission in the Prior Actively Managed ETF Orders, which permit Creation Units to be separated into
shares that are not individually redeemable. Applicants believe that the issues raised in this Application,
with respect to Sections 2(a)(32) and 5(a)(1) of the Act, are the same issues raised in the applications for
the Prior Actively Managed ETF Orders and merit the same relief.
Creation Units will always be redeemable in accordance with the provisions of the Act. Owners of ETF
Shares may purchase the requisite number of ETF Shares and tender the resulting Creation Unit for
redemption. Moreover, listing on the Listing Market will afford all holders of ETF 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 materially from the NAV of Creation
Units. Also, each investor is entitled to purchase or redeem Creation Units rather than trade the
individual ETF Shares in the secondary market, although in certain cases the brokerage costs incurred to
obtain the necessary number of individual ETF Shares for accumulation into a Creation Unit may
outweigh the benefits of redemption. Applicants believe that the Commission has the authority under
Section 6(c) of the Act to grant the limited relief sought under Sections 2(a)(32) and 5(a)(1) of the Act.
The Commission is authorized by Section 6(c) of the Act to exempt:
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DB3/ 201028270.1
any person, security, or transaction, or any class or classes of persons, securities, or | |
transactions, from any provision or provisions of [the Act] or of any rule or regulation | |
thereunder, if and to the extent that such exemption is necessary or appropriate in the | |
public interest and consistent with the protection of investors and the purposes fairly | |
intended by the policy and provisions of [the Act]. |
As noted above, the Commission has considerable latitude to issue exemptive orders under Section 6(c) of
the Act, which permits the Commission to deal with situations not foreseen when the Act came into effect
in 1940. Applicants believe that each Fund’s shares will be issued and sold on a basis consistent with the
policies of the Act and without risk of the abuses against which the Act was designed to protect.
Applicants further believe that exempting the Funds to permit them to register as open-end investment
companies and issue redeemable Creation Units that can be separated into individual ETF Shares, as
described herein, is appropriate in the public interest and consistent with the protection of investors and
the purposes of the Act. Accordingly, Applicants request that this Application for an order of exemption
be granted.
B. Exemption from the Provisions of Section 22(d) and Rule 22c-1
Section 22(d) of the Act, among other things, prohibits a dealer from selling a redeemable security that is
currently being offered to the public by or through a principal underwriter, except at a current public
offering price described in the prospectus. Rule 22c-1 provides, in relevant part, 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. |
30
DB3/ 201028270.1
Shares of each Fund will be listed on a Listing Market and one or more market makers will maintain a
market for such shares. ETF Shares will trade on and away from the Listing Market at all times on the
basis of current bid/offer prices and not on the basis of NAV per ETF Share next calculated after receipt
of any sale order. Therefore, the purchase and sale of the shares of each Fund arguably will not occur at
an offering price described in the Prospectus, as required by Section 22(d), nor will sales and repurchases
be made at a price based on the current NAV per ETF Share next computed after receipt of an order, as
required by Rule 22c-1.
Based on the facts hereinafter set forth, Applicants respectfully request that the Commission enter an
order under Section 6(c) of the Act exempting them from the provisions of Section 22(d) and Rule 22c-1
to the extent necessary to permit the trading of shares of each Fund on and away from the Listing Market
at prices based on a bid/offer market, rather than the next computed NAV per ETF Share of the relevant
Fund. 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 the shares of each Fund. 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 (1) to prevent dilution caused by certain riskless-trading schemes by principal underwriters
and contract dealers, (2) to prevent unjust discrimination or preferential treatment among buyers, and (3)
to 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.27 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 ETF Shares would not cause dilution for owners of such shares because
such transactions do not directly involve Fund assets. A dilutive effect could occur only where
27 See Protecting Investors: A Half Century of Investment Company Regulation (May 1992), at 299-303;
Investment Company Act Release No. 13183 (April 22, 1983).
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DB3/ 201028270.1
transactions directly involving Fund assets take place.28 Similarly, secondary market trading in ETF
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. Outside market forces do not cause discrimination among buyers by the Funds or any
dealers involved in the sale of ETF Shares.
With respect to the third possible purpose of Section 22(d) – eliminating price competition between
contract and non-contract dealers – Applicants represent that there will be no contract dealers. Moreover,
all dealers will have the ability to acquire shares of a Fund on the same terms (either by purchasing them
on the secondary market or from the issuing Fund as part of a Creation Unit) and can thereafter sell them;
therefore, no dealer should have an advantage over any other dealer in the sale of ETF Shares. With
respect to Rule 22c-1, which requires that dealers sell fund shares based at a price based on the next
computed NAV, Applicants note that secondary market transactions in a Fund’s shares generally should
occur at prices roughly equivalent to their NAV. If the price of a Fund’s shares should fall below the
proportionate NAV per ETF Share of the underlying Fund assets, an investor needs only to accumulate
enough individual ETF Shares to constitute a Creation Unit in order to redeem such Creation Unit at
NAV. Competitive forces in the marketplace should thus ensure that the difference between the NAV
and the secondary market price for ETF Shares is not material. Applicants believe that the nature of the
markets in the Portfolio Positions underlying the investment objective and strategy of each Fund,
including the liquidity and transaction costs associated with such Portfolio Positions, will be the primary
determinant of premiums or discounts.
28 The purchase and redemption mechanisms, which include (i) the Transaction Fees imposed on creating and
redeeming entities, and (ii) in-kind deposits made by creating entities and in-kind distributions made to redeeming
entities, are designed specifically to prevent changes in the Funds’ capitalizations from adversely affecting the
interests of ongoing shareholders.
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DB3/ 201028270.1
Applicants believe that the ability to execute a transaction in ETF Shares at an intra-day trading price has,
and will continue to be, a highly attractive feature to many investors. As has been previously discussed,
this feature would be fully disclosed to investors, and the investors would trade in ETF Shares in reliance
on the efficiency of the market. Although the portfolio of each Fund will be managed actively,
Applicants do not believe such portfolio could be managed or manipulated to produce benefits for one
group of purchasers or sellers to the detriment of others. The identities and quantities of the Portfolio
Positions of each Fund will be disclosed daily. Further, the portfolio could be reconstituted on a daily
basis pursuant to the strategy of the Adviser. Information regarding any reconstitution will be made
available to all market participants. 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 Fund’s
shares, and (ii) that the relief requested is appropriate in the public interest and consistent with the
protection of investors and the purposes of the Act. Accordingly, the Applicants hereby request that an
order of exemption be granted in respect of Section 22(d) and Rule 22(c)-1.
C. Exemption from the Provisions of Section 22(e)
Applicants seek an exemption from the seven-day redemption delivery requirement of Section 22(e) of
the Act for certain Foreign and Global Funds under the circumstances described below.29
Section 22(e) provides that, except under circumstances not relevant to this request:
No registered 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. |
29 Applicants acknowledge that no relief obtained from the requirements of Section 22(e) will affect any obligations
that it may otherwise have under Rule 15c6-1 under the Exchange Act. Rule 15c6-1 requires that most securities
transactions be settled within three business days of the trade date.
33
DB3/ 201028270.1
Applicants observe that the settlement of redemptions of Creation Units of the Foreign Funds and Global
Funds is contingent not only on the settlement cycle of the U.S. securities markets but also on the delivery
cycles present in foreign markets in which those Funds invest. Applicants have been advised that, under
certain circumstances, the delivery cycles for transferring Portfolio Positions to redeeming investors,
coupled with local market holiday schedules, could require a delivery process of up to 14 calendar days,
rather than the 7 calendar days required by Section 22(e). Applicants therefore request relief from
Section 22(e) in order to provide payment or satisfaction of redemptions within the maximum number of
calendar days required for such payment or satisfaction in the principal local markets where transactions
in the Portfolio Positions of each Foreign Fund or Global Fund customarily clear and settle, but in all
cases no later than 14 days following the tender of a Creation Unit. With respect to Funds that are
Foreign Funds or Global Funds, Applicants seek the relief from Section 22(e) only to the extent that
circumstances exist similar to those described herein. The SAI will disclose those local holidays (over the
period of at least one year following the date thereof), if any, that are expected to prevent the delivery of
redemption proceeds in seven calendar days and the maximum number of days, up to 14 calendar days,
needed to deliver the proceeds for each affected Foreign Fund or Global Fund.
Except as disclosed in the SAI for any Fund for analogous dates in subsequent years, deliveries of
redemption proceeds by the Foreign Funds or Global Funds relating to those countries or regions are
expected to be made within 7 days. Applicants submit 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 Fund to be made within 14
calendar days would not be inconsistent with the spirit and intent of Section 22(e). Applicants suggest
that a redemption payment occurring within 14 calendar days following a redemption request would
adequately afford investor protection. Applicants desire to incorporate the creation and redemption
mechanism for Creation Units of each Fund as much as possible into the processing and settlement cycles
for securities deliveries currently practicable in the principal market(s) for the Portfolio Positions of a
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DB3/ 201028270.1
given Fund. Currently, Applicants believe 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 of the product to institutional participants,
and thereby promote the liquidity of ETF Shares in the secondary market with benefits to all holders
thereof. As noted above, Applicants may utilize in-kind redemptions (although, as noted above, cash
redemptions, subject to a somewhat higher redemption Transaction Fee, may be required in respect of
certain Funds). Applicants are not seeking relief from Section 22(e) with respect to Foreign Funds and
Global Funds that do not effect creations or redemptions in-kind.
If the requested relief is granted, Applicants intend to disclose in the SAI that redemption payments will
be effected within the specified number of calendar days, up to a maximum of 14 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 exemptive relief from Section
22(e) substantially identical to the relief sought in this Application was obtained in prior exemptive relief,
including the Prior Actively Managed ETF Orders.
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
35
DB3/ 201028270.1
consistent with the protection of investors and the purposes fairly intended by the policy and provisions of
the Act.
D. Exemption from the Provisions of Sections 17(a)(1) and 17(a)(2)
Applicants seek an exemption from Section 17(a) of the Act pursuant to Section 17(b) and Section 6(c) of
the Act to allow certain affiliated persons or second tier affiliates of the Funds to effectuate purchases and
redemptions of Creation Units in-kind. Section 17(a) of the Act, in general, 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 – | ||||
(1) knowingly to sell any security or other property to such | ||||
registered investment 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; [or] | ||||
(2) knowingly to purchase from such registered company | ||||
any security or other property (except securities of which the | ||||
seller is the issuer) |
Section 17(b) authorizes the Commission to grant an exemption from Section 17(a) upon application if
evidence establishes that the terms of the proposed transaction, including the consideration to be paid or
received, are reasonable and fair and do not involve overreaching on the part of any person concerned;
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.
Because Section 17(b) could be interpreted to exempt only a single transaction from Section 17(a) and, as
discussed below, there may be a number of transactions by persons who may be deemed to be affiliates,
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DB3/ 201028270.1
the Applicants are also requesting an exemption from Section 17(a) under Section 6(c). See, e.g.,
Keystone Custodian Funds, Inc., 21 S.E.C. 295 (1945), where the Commission, under Section 6(c) of the
Act, exempted a series of transactions that otherwise would be prohibited by Section 17(a). Section
2(a)(3) of the Act defines an affiliated person of another person as:
(A) any person directly or indirectly owning, controlling, or | |
holding with power to vote, 5 percentum or more of the | |
outstanding voting securities of such other person; (B) any | |
person 5 percentum or more of whose outstanding voting | |
securities are directly or indirectly owned, controlled, or | |
held with power to vote, by such other person; (C) any | |
person directly or indirectly controlling, controlled by, or | |
under common control with, such other person; (D) any | |
officer, director, partner, copartner or employee of such | |
other person; [and] (E) if such other person is an investment | |
company, any investment adviser thereof or any member of | |
an advisory board thereof. |
Section 2(a)(9) of the Act defines “control” as “the power to exercise a controlling influence over the
management or policies” of a company and provides that “any person who owns beneficially, either
directly or through one or more controlled companies, more than 25 per centum of the voting securities of
a company shall be presumed to control such company.” The Funds may be deemed to be controlled by
its Adviser or an entity controlling, controlled by or under common control with its 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 its Adviser or an entity
controlling, controlled by or under common control with its Adviser (an “Affiliated Fund”).
There exists a possibility that, with respect to one or more Funds, an institutional investor could own 5%
or more of that Fund, or in excess of 25% of the outstanding shares of a Fund, making that investor an
affiliated person of the Fund under Section 2(a)(3)(A) or Section 2(a)(3)(C) of the Act. For so long as
such an investor is deemed to be an affiliated person, Section 17(a)(1) could be read to prohibit that
investor from depositing the Creation Deposit with a Fund in return for a Creation Unit (an in-kind
purchase). Similarly, Section 17(a)(2) could be read to prohibit such an investor from entering into an in-
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DB3/ 201028270.1
kind redemption procedure with a Fund. Since the Section 17(a) prohibitions apply to second tier
affiliates, these prohibitions would also apply to affiliated persons of such investors, as well as persons
holding 5% or more, or more than 25%, of the shares of an Affiliated Fund. Applicants request an
exemption under Sections 6(c) and 17(b) of the Act from Section 17(a) of the Act in order to permit in-
kind purchases and redemptions of Creation Units from the Funds by persons that are affiliated persons or
second tier affiliates of the Funds solely by virtue of one or more of the following: (i) holding 5% or
more, or more than 25%, of the shares of one or more Funds; (ii) an affiliation with a person with an
ownership interest described in (i); or (iii) holding 5% or more, or more than 25%, of the shares of one or
more Affiliated Funds. Applicants assert that no useful purpose would be served by prohibiting the
persons described above from making in-kind purchases or in-kind redemptions of Creation Units. Both
the deposit procedures for in-kind purchases of Creation Units and the redemption procedures for in-kind
redemptions will be effected in exactly the same manner for all purchases and redemptions, regardless of
size or number. There will be no discrimination among purchasers or among redeemers. Deposit
Instruments and Redemption Instruments will be valued in the same manner as those Portfolio Positions
currently held by the relevant Funds and the valuation of the Deposit Instruments and Redemption
Instruments will be made in an identical manner regardless of the identity of the purchaser or redeemer.
Except with respect to cash as determined in accordance with the procedures described in subsection
III.B.1 above, the Deposit Instruments and Redemption Instruments for a Fund will be the same, and in-
kind purchases and redemptions will be on the same terms, for all persons 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
reduce expenses 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 the Funds’ objectives and with the general
purposes of the Act. Applicants believe that in-kind purchases and redemptions will be made on terms
38
DB3/ 201028270.1
reasonable to the Applicants and any affiliated persons or second tier affiliates because they will be
valued pursuant to verifiable objective standards. The method of valuing Portfolio Positions held by a
Fund is the same as that used for calculating in-kind purchase or redemption values and therefore creates
no opportunity for such persons or the 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 Positions held by a Fund as are used for calculating in-kind redemptions or purchases, the Fund
will ensure that its NAV per ETF 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, including the consideration to be paid or received, 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 the purposes fairly intended by the policy and provisions of the Act.
VI. EXPRESS CONDITIONS TO THIS APPLICATION
The Applicants agree that any order of the Commission granting the requested relief will be subject to the
following conditions:
1. The shares of a Fund will not be advertised or marketed or otherwise “held out” as shares of a
traditional 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 ETF Shares
are not individually redeemable and that owners of ETF Shares may acquire those shares from the Fund
and tender those shares for redemption to the Fund in Creation Units only.
39
DB3/ 201028270.1
2. The website for the Funds, which is and will be publicly accessible at no charge, will contain, on a per
ETF Share basis for each Fund, the prior Business Day’s NAV and the market closing price or Bid/Ask
Price, and a calculation of the premium or discount of the market closing price or Bid/Ask Price against
such NAV.
3. As long as a Fund operates in reliance on the Order, its Fund’s shares will be listed on a Listing
Market.
4. On each Business Day, before commencement of trading in ETF Shares on a Fund’s Listing Market,
the Fund will disclose on its website the identities and quantities of the Portfolio Positions held by the
Fund that will form the basis for the Fund’s calculation of NAV per ETF Share at the end of the Business
Day.
5. An Adviser and any Sub-Adviser, directly or indirectly, will not cause any Authorized Participant (or
any investor on whose behalf an Authorized Participant may transact with the Fund) to acquire any
Deposit Instrument for a Fund through a transaction in which the Fund could not engage directly.
7. The relief requested in this Application will expire on the effective date of any Commission rule under
the Act that provides relief permitting the operation and offering of an exchange-traded class of shares of
actively managed funds.
VII. NAMES AND ADDRESSES
Pursuant to Rule 0-2(f) under the Act, the Applicants state that their address is as indicated on the first
page of this Application. The Applicants further state that all written or oral communications concerning
this Application should be directed to:
W. John McGuire, Esq. |
(202) 373-6799 |
Morgan, Lewis & Bockius LLP |
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DB3/ 201028270.1
2020 K Street N.W. |
Washington, D.C. 20006 |
Brian P. Murphy |
The Vanguard Group, Inc. |
Mail Stop V26 |
P.O. Box 2600 |
Valley Forge, PA 19482-2600 |
VIII. PROCEDURAL MATTERS, CONCLUSION AND SIGNATURES
Applicants file this Application in accordance with Rule 0-2 under the Act, and state that their address is
printed on the Application’s facing page, and that they request that all written communications
concerning the Application be directed to the persons and address printed on the Application’s facing
page. Also, Applicants have attached as exhibits to the Application the required verifications.
In accordance with Rule 0-2(c) under the Act, Applicants state that all actions necessary to authorize the
execution and filing of this Application have been taken, and the persons signing and filing this document
are authorized to do so on behalf of the Applicants. Heidi Stam, Secretary, Managing Director, and
General Counsel of VGI, Senior Vice President and Director of VMC, and Secretary of each of the
Trusts, is authorized to sign and file this document on behalf of VGI, VMC, and the Trusts. In
accordance with Rule 0-5 under the Act, Applicants request that the Commission issue the requested
Order without holding a hearing.
Based on the facts, analysis and conditions in the Application, Applicants respectfully request that the
Commission issue an Order under Sections 6(c), 12(d)(1)(J) and 17(b) of the Act granting the Relief
requested by this Application.
Dated: August 17, 2016
Each of the Vanguard Trusts identified as an
Applicant to this Application
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DB3/ 201028270.1
By: /s/ Heidi Stam |
Name: Heidi Stam |
Title: Secretary |
The Vanguard Group, Inc. |
By: /s/ Heidi Stam |
Name: Heidi Stam |
Title: Secretary, Managing Director and |
General Counsel |
Vanguard Marketing Corporation |
By: /s/ Heidi Stam |
Name: Heidi Stam |
Title: Senior Vice President and Director |
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DB3/ 201028270.1
Verifications
The undersigned states that she has duly executed the attached Application dated
August 17, 2016 for and on behalf of The Vanguard Group, Inc., Vanguard Marketing
Corporation, and each of the Vanguard funds identified on the cover page as an Applicant
to this Application (the “Trusts”); that she is an officer and/or a director of each of those
entities; and that all actions necessary to authorize deponent to execute and file such
instrument have been taken. The undersigned further states that she is familiar with such
instrument, and the contents thereof, and that the facts therein set forth are true to the best
of her knowledge, information and belief.
The Vanguard Group, Inc. |
By: /s/Heidi Stam |
Name: Heidi Stam |
Title: Secretary, Managing Director, and |
Counsel |
Vanguard Marketing Corp. |
By: /s/Heidi Stam |
Name: Heidi Stam |
Title: Senior Vice President and Director |
The Trusts |
By: /s/Heidi Stam |
Name: Heidi Stam |
Title: Secretary |
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