[Federal Register: September 16, 2008 (Volume 73, Number 180)]
[Notices]
[Page 53460-53467]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16se08-92]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 28378; 812-13517]
Global X Funds and Global X Management Company LLC; Notice of
Application
September 10, 2008.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (the ``Act'') for an exemption from
sections 2(a)(32), 5(a)(1), 22(d), 22(e), and 24(d) of the Act and rule
22c-1 under the Act, under section 12(d)(1)(J) for an exemption from
sections 12(d)(1)(A) and (B) of the Act, and under sections 6(c) and
17(b) of the Act for an exemption from sections 17(a)(1) and (a)(2) of
the Act.
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Summary of Application: Applicants request an order that would permit
(a) certain open-end management investment companies and their series,
to issue shares (``Shares'') that can be redeemed only in large
aggregations (``Creation Units''); (b) secondary market transactions in
Shares to occur at negotiated prices; (c) dealers to sell Shares to
purchasers in the secondary market unaccompanied by a prospectus when
prospectus delivery is not required by the Securities Act of 1933
(``Securities Act''); (d) certain series to pay redemption proceeds,
under certain circumstances, more than seven days after the tender of
Shares for redemption; (e) certain affiliated persons of the series to
deposit securities into, and receive securities from, the series in
connection with the purchase and redemption of Creation Units; and (f)
certain registered management investment companies and unit investment
trusts outside of the same group of investment companies as the series
to acquire Shares.
Applicants: Global X Funds and Global X Management Company LLC
(``Adviser'').
[[Page 53461]]
Filing Dates: The application was filed on April 14, 2008 and amended
on May 23, 2008, August 8, 2008 and August 20, 2008.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
and serving applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on October 2, 2008 and should be accompanied by proof of service
on applicants, in the form of an affidavit, or for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street,
NE., Washington, DC 20549-1090; Applicants, 220 Fifth Avenue, 20th
Floor, New York, NY 10001.
FOR FURTHER INFORMATION CONTACT: Barbara T. Heussler, Senior Counsel at
(202) 551-6990, or Michael W. Mount, Assistant Director, at (202) 551-
6820 (Division of Investment Management, Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
Public Reference Room, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-1520, telephone (202) 551-5850.
Applicants' Representations
1. Global X Funds is registered as an open-end management
investment company and is organized as a Delaware statutory trust that
will offer multiple series. Global X Funds will initially offer one
series (``Initial Fund''), which will track a foreign equity securities
index (``Underlying Index'').\1\ Applicants may offer additional
registered open-end investment companies in the future, as well as any
series of any existing or future open-end investment company registered
under the Act (``Future Funds'' and together with the Initial Funds,
the ``Funds'').\2\
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\1\ The Initial Fund is Global X FTSE Nordic 30 ETF.
\2\ All existing entities that intend to rely on the requested
order have been named as applicants. Any other existing or future
entity that subsequently relies on the order will comply with the
terms and conditions of the application. Any Future Fund will be
advised by the Adviser or an entity controlled by or under common
control with the Adviser.
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2. The Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the ``Advisers Act'') and
will serve as the investment adviser to the Initial Fund. In the
future, the Adviser may enter into sub-advisory agreements with other
investment advisers to act as sub-advisers to particular Funds (``Sub-
Advisers''). Each Sub-Adviser will be registered under the Advisers
Act. SEI Investments Distribution Company (``Distributor'') is a
broker-dealer registered under the Securities Exchange Act of 1934 (the
``Exchange Act'') and will act as the principal underwriter and
distributor for the Creation Units of Shares. The Distributor is not
affiliated with the Adviser or any Sub-Adviser.
3. Each Fund will hold certain equity securities (``Portfolio
Securities'') selected to correspond, before fees and expenses,
generally to the price and yield performance of an Underlying Index.
Certain of the Underlying Indices may be composed of equity securities
of domestic issuers and non-domestic issuers meeting the requirements
for trading in U.S. markets (``Domestic Indices''). Other Underlying
Indices may be composed of foreign equity securities (``Foreign
Indices''). Funds which track Domestic Indices are referred to as
``Domestic Funds'' and Funds which track Foreign Indices are referred
to as ``Foreign Funds.'' No entity that creates, compiles, sponsors or
maintains an Underlying Index (``Index Provider'') is or will be an
affiliated person, as defined in section 2(a)(3) of the Act, or an
affiliated person of an affiliated person, of Global X Funds or a Fund,
the Adviser, any Sub-Adviser to or promoter of a Fund, or the
Distributor.
4. The investment objective of each Fund will be to provide
investment results that correspond, before fees and expenses, generally
to the price and yield performance of its Underlying Index. Intra-day
values of the Underlying Index will be disseminated every 15 seconds
throughout the trading day. A Fund will utilize either a replication or
representative sampling strategy which will be disclosed with regard to
each Fund in its prospectus.\3\ A Fund using a replication strategy
will invest in the Component Securities in its Underlying Index in
approximately the same proportions as in the Underlying Index. In
certain circumstances, such as when there are practical difficulties or
substantial costs involved in holding every security in an Underlying
Index or when a Component Security is less liquid, illiquid or
unavailable, a Fund may use a representative sampling strategy pursuant
to which it will invest in some, but not all of the Component
Securities of its Underlying Index.\4\ Applicants anticipate that a
Fund that utilizes a representative sampling strategy will not track
the performance of its Underlying Index with the same degree of
accuracy as an investment vehicle that invests in every Component
Security of the Underlying Index with the same weighting as the
Underlying Index. Applicants expect that each Fund will have a tracking
error relative to the performance of its Underlying Index of less than
5 percent.
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\3\ Applicants represent that each Fund will invest at least 80%
of its total assets in the component securities that comprise its
Underlying Index (``Component Securities'') or, in the case of
Foreign Funds, Component Securities and depositary receipts
representing such securities. ``Depositary Receipts'' will typically
be American Depositary Receipts, but may include Global Depositary
Receipts and Euro Depositary Receipts. Each Fund also may invest up
to 20% of its assets in certain futures, options and swap contracts,
cash and cash equivalents, as well as in stocks not included in its
Underlying Index, but which the Adviser or Sub-Adviser believes will
help the Fund track its Underlying Index.
\4\ Under the representative sampling strategy, the Adviser will
seek to construct a Fund's portfolio so that its market
capitalization, industry weightings, fundamental investment
characteristics (such as return variability, earnings valuation and
yield) and liquidity measures perform like those of the Underlying
Index.
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5. Creation Units are expected to range between 25,000 to 100,000
Shares as will be clearly stated in the relevant Fund's prospectus
(``Prospectus''). Applicants expect that the initial price of a
Creation Unit will fall in the range of $1,000,000 to $10,000,000. All
orders to purchase Creation Units must be placed with the Distributor,
by or through a party that has entered into an agreement with the
Distributor (``Authorized Participant''). The Distributor will be
responsible for transmitting the orders to the Funds. An Authorized
Participant must be either: (a) A broker-dealer or other participant in
the continuous net settlement system of the National Securities
Clearing Corporation, a clearing agency registered with the Commission,
or (b) a participant in the Depository Trust Company (``DTC'', and such
participant, ``DTC Participant''). Shares of the Fund generally will be
sold in Creation Units in exchange for an in-kind deposit by the
purchaser of a portfolio of securities designated by the Adviser or
Sub-Adviser to correspond generally to the price and yield performance
of the relevant Underlying Index (the ``Deposit
[[Page 53462]]
Securities''), together with the deposit of a specified cash payment
(``Balancing Amount''). The Balancing Amount is an amount equal to the
difference between (a) the net asset value (``NAV'') (per Creation
Unit) of a Fund and (b) the total aggregate market value (per Creation
Unit) of the Deposit Securities.\5\ Each Fund may permit a purchaser of
Creation Units to substitute cash in lieu of depositing some or all of
the Deposit Securities if the Adviser or Sub-Adviser believes such
method would reduce the Fund's transaction costs or enhance the Fund's
operating efficiency.\6\
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\5\ Each Fund will sell and redeem Creation Units only on a
``Business Day'' which is defined as any day that the New York Stock
Exchange, the Listing Exchange (defined below), and the custodian of
a Fund are open for business, and includes any day that a Fund is
required to be open under section 22(e) of the Act. Each Business
Day, prior to the opening of trading on the Listing Exchange
(defined below), the list of names and amount of each security
constituting the current Deposit Securities and the Balancing Amount
will be made available. Any national securities exchange (as defined
in section 2(a)(26) of the Act) (``Exchange'') on which Shares are
listed (``Listing Exchange'') will disseminate, every 15 seconds
during its regular trading hours, through the facilities of the
Consolidated Tape Association, an amount per individual Share
representing the sum of the estimated Balancing Amount and the
current value of the Deposit Securities.
\6\ Applicants state that in some circumstances or in certain
countries, it may not be practicable or convenient, or permissible
under the laws of certain countries or the regulations of certain
foreign stock exchanges, for a Foreign Fund to operate exclusively
on an ``in-kind'' basis. Applicants also note that when a
substantial rebalancing of a Fund's portfolio is required, the
Adviser or Sub-Adviser might prefer to receive cash rather than
stocks so that the Fund may avoid transaction costs involved in
liquidating part of its portfolio to achieve the rebalancing.
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6. An investor purchasing or redeeming a Creation Unit from a Fund
will be charged a fee (``Transaction Fee'') to prevent the dilution of
the interests of the remaining shareholders resulting from costs in
connection with the purchase or redemption of Creation Units.\7\ The
maximum Transaction Fees relevant to each Fund and the method of
calculating such Transaction Fees will be fully disclosed in the
Prospectus of such Fund or statement of additional information
(``SAI''). The Distributor also will be responsible for delivering the
Fund's Prospectus to those persons purchasing Shares in Creation Units
and for maintaining records of both the orders placed with it and the
confirmations of acceptance furnished by it. In addition, the
Distributor will maintain a record of the instructions given to the
applicable Fund to implement the delivery of its Shares.
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\7\ Where a Fund permits a purchaser to substitute cash in lieu
of depositing a portion of the requisite Deposit Securities, the
purchaser may be assessed a higher Transaction Fee to cover the cost
of purchasing such Deposit Securities, including operational
processing and brokerage costs, and part or all of the spread
between the expected bid and the offer side of the market relating
to such Deposit Securities.
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7. Purchasers of Shares in Creation Units may hold such Shares or
may sell such Shares into the secondary market. Shares will be listed
and traded on an Exchange. It is expected that one or more member firms
of a Listing Exchange will be designated to act as a specialist
(``Specialist'') or a market maker (``Market Maker'') and maintain a
market for Shares trading on the Listing Exchange. Prices of Shares
trading on an Exchange will be based on the current bid/ask market.
Shares sold in the secondary market will be subject to customary
brokerage commissions and charges.
8. Applicants expect that purchasers of Creation Units will include
institutional investors and arbitrageurs (which could include
institutional investors). A Specialist or Market Maker, in providing a
fair and orderly secondary market for the Shares, also may purchase
Creation Units for use in its market-making activities. Applicants
expect that secondary market purchasers of Shares will include both
institutional investors and retail investors.\8\ Applicants expect that
the price at which Shares trade will be disciplined by arbitrage
opportunities created by the option to continually purchase or redeem
Creation Units at their NAV, which should ensure that Shares will not
trade at a material discount or premium in relation to their NAV.
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\8\ Shares will be registered in book-entry form only. DTC or
its nominee will be the registered owner of all outstanding Shares.
DTC or DTC Participants will maintain records reflecting beneficial
owners of Shares.
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9. Shares will not be individually redeemable, and owners of Shares
may acquire those Shares from the Fund, or tender such Shares for
redemption to the Fund, in Creation Units only. To redeem, an investor
will have to accumulate enough Shares to constitute a Creation Unit.
Redemption orders must be placed by or through an Authorized
Participant. An investor redeeming a Creation Unit generally will
receive (a) Portfolio Securities designated to be delivered for
Creation Unit redemptions (``Fund Securities'') on the date that the
request for redemption is submitted \9\ and (b) a ``Cash Redemption
Payment,'' consisting of an amount calculated in the same manner as the
Balancing Amount, although the actual amount of the Cash Redemption
Payment may differ if the Fund Securities are not identical to the
Deposit Securities on that day. An investor may receive the cash
equivalent of a Fund Security in certain circumstances, such as if the
investor is constrained from effecting transactions in the security by
regulation or policy.
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\9\ As a general matter, the Deposit Securities and Fund
Securities will correspond pro rata to the Portfolio Securities held
by each Fund, but Fund Securities received on redemption may not
always be identical to Deposit Securities deposited in connection
with the purchase of Creation Units for the same day. The Funds will
comply with the federal securities laws in accepting Deposit
Securities and satisfying redemptions with Fund Securities,
including that the Deposit Securities and Fund Securities are sold
in transactions that would be exempt from registration under the
Securities Act.
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10. No Fund will be marketed or otherwise held out as a traditional
open-end investment company or a mutual fund. Instead, each Fund will
be marketed as an ``ETF,'' an ``investment company,'' a ``fund,'' or a
``trust.'' All marketing materials that describe the features or method
of obtaining, buying or selling Creation Units or Shares traded on an
Exchange, or refer to redeemability, will prominently disclose that
Shares are not individually redeemable and that the owners of Shares
may purchase or redeem Shares from the Fund in Creation Units only. The
same approach will be followed in the SAI, shareholder reports and
investor educational materials issued or circulated in connection with
the Shares. The Funds will provide copies of their annual and semi-
annual shareholder reports to DTC Participants for distribution to
shareholders.
Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the Act for an
exemption from sections 2(a)(32), 5(a)(1), 22(d), 22(e), and 24(d) of
the Act and rule 22c-1 under the Act, under section 12(d)(1)(J) of the
Act for an exemption from sections 12(d)(1)(A) and (B) of the Act, and
under sections 6(c) and 17(b) of the Act for an exemption from sections
17(a)(1) and 17(a)(2) of the Act.
2. Section 6(c) of the Act provides that the Commission may exempt
any person, security or transaction, or any class of persons,
securities or transactions, from any 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.
Section 17(b) of the Act authorizes the Commission to exempt a proposed
transaction from section 17(a) of the Act if evidence establishes that
the terms of the transaction, including the consideration
[[Page 53463]]
to be paid or received, are reasonable and fair and do not involve
overreaching on the part of any person concerned, and the proposed
transaction is consistent with the policies of the registered
investment company and the general provisions of the Act. Section
12(d)(1)(J) of the Act provides that the Commission may exempt any
person, security, or transaction, or any class or classes of persons,
securities or transactions, from any provisions of section 12(d)(1) if
the exemption is consistent with the public interest and the protection
of investors.
Sections 5(a)(1) and 2(a)(32) of the Act
3. Section 5(a)(1) of the Act defines an ``open-end company'' as a
management investment company that is offering for sale or has
outstanding any redeemable security of which it is the issuer. Section
2(a)(32) of the Act defines a redeemable security as any security,
other than short-term paper, under the terms of which the owner, upon
its presentation to the issuer, is entitled to receive approximately
his proportionate share of the issuer's current net assets, or the cash
equivalent. Because Shares will not be individually redeemable,
applicants request an order that would permit the Funds to register as
open-end management investment companies and issue Shares that are
redeemable in Creation Units only. Applicants state that investors may
purchase Shares in Creation Units and redeem Creation Units from each
Fund. Applicants state that because Creation Units may always be
purchased and redeemed at NAV, the market price of the Shares should
not vary substantially from their NAV.
Section 22(d) of the Act and Rule 22c-1 under the Act
4. Section 22(d) of the Act, among other things, prohibits a dealer
from selling a redeemable security, which is currently being offered to
the public by or through a principal underwriter, except at a current
public offering price described in the prospectus. Rule 22c-1 under the
Act generally requires that a dealer selling, redeeming or repurchasing
a redeemable security do so only at a price based on its NAV.
Applicants state that secondary market trading in Shares will take
place at negotiated prices, not at a current offering price described
in a Fund's Prospectus, and not at a price based on NAV. Thus,
purchases and sales of Shares in the secondary market will not comply
with section 22(d) of the Act and rule 22c-1 under the Act. Applicants
request an exemption under section 6(c) from these provisions.
5. Applicants assert that the concerns sought to be addressed by
section 22(d) of the Act and rule 22c-1 under the Act with respect to
pricing are equally satisfied by the proposed method of pricing Shares.
Applicants maintain that while there is little legislative history
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to (a) prevent dilution caused by
certain riskless-trading schemes by principal underwriters and contract
dealers, (b) prevent unjust discrimination or preferential treatment
among buyers, and (c) ensure an orderly distribution of investment
company shares by eliminating price competition from dealers offering
shares at less than the published sales price and repurchasing shares
at more than the published redemption price.
6. Applicants believe that none of these purposes will be thwarted
by permitting Shares to trade in the secondary market at negotiated
prices. Applicants state that (a) secondary market trading in Shares
does not involve a Fund as a party and will not result in dilution of
an investment in Shares, and (b) to the extent different prices exist
during a given trading day, or from day to day, such variances occur as
a result of third-party market forces, such as supply and demand.
Therefore, applicants assert that secondary market transactions in
Shares will not lead to discrimination or preferential treatment among
purchasers. Finally, applicants contend that the proposed distribution
system will be orderly because competitive forces will ensure that the
difference between the market price of Shares and their NAV remains
narrow.
Section 24(d) of the Act
7. Section 24(d) of the Act provides, in relevant part, that the
prospectus delivery exemption provided to dealer transactions by
section 4(3) of the Securities Act does not apply to any transaction in
a redeemable security issued by an open-end investment company.
Applicants seek relief from section 24(d) to permit dealers selling
Shares in the secondary markets to rely on the prospectus delivery
exemption provided by section 4(3) of the Securities Act.\10\
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\10\ Applicants state that they are not seeking relief from the
prospectus delivery requirement for non-secondary market
transactions, such as transactions in which an investor purchases
Shares from the Fucghnds or an underwriter. Applicants further state
that each Fund's Prospectus will caution broker-dealers and others
that some activities on their part, depending on the circumstances,
may result in their being deemed statutory underwriters and subject
them to the prospectus delivery and liability provisions of the
Securities Act. For example, a broker-dealer firm and/or its client
may be deemed a statutory underwriter if it purchases Creation Units
from a Fund, breaks them down into the constituent individual
Shares, and sells those Shares directly to customers, or if it
chooses to couple the creation of a supply of new Shares with an
active selling effort involving solicitation of secondary market
demand for Shares. Each Fund's Prospectus will state that whether a
person is an underwriter depends upon all of the facts and
circumstances pertaining to that person's activities. Each Fund's
Prospectus will caution dealers who are not ``underwriters'' but are
participating in a distribution (as contrasted to ordinary secondary
market trading transactions), and thus dealing with Shares that are
part of an ``unsold allotment'' within the meaning of section
4(3)(C) of the Securities Act, that they would be unable to take
advantage of the prospectus delivery exemption provided by section
4(3) of the Securities Act.
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8. Applicants state that Shares are bought and sold in the
secondary market in the same manner as closed-end fund shares.
Applicants note that transactions in closed-end fund shares are not
subject to section 24(d), and thus closed-end fund shares are sold in
the secondary market without a prospectus. Applicants contend that
Shares likewise merit a reduction in the unnecessary compliance costs
and regulatory burdens resulting from the imposition of the prospectus
delivery obligations in the secondary market. Because Shares will be
listed on an Exchange, prospective investors will have access to
information about the product over and above what is normally available
about an open-end security. Applicants state that information regarding
market price and volume will be continually available on a real time
basis throughout the day on brokers' computer screens and other
electronic services. The previous day's closing price and volume
information for Shares will be published daily in the financial section
of newspapers. In addition, a Web site will be maintained that will
include each Fund's Prospectus and SAI, the Portfolio Securities and
relevant Underlying Index for each Fund, and additional quantitative
information that is updated on a daily basis, including the mid-point
of the bid-ask spread at the time of the calculation of NAV (``Bid/Ask
Price''),\11\ the NAV for each Fund, and information about the premiums
and discounts at which the Shares have traded.
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\11\ The Bid-Ask Price per individual Share of a Fund is
determined using the highest bid and the lowest offer on the Listing
Exchange.
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9. Applicants will arrange for broker-dealers selling Shares in the
secondary market to provide purchasers with a product description
(``Product Description'') that describes, in plain English, the
relevant Fund and the Shares it issues. Applicants state that a Product
Description is not intended to substitute for a full Prospectus.
[[Page 53464]]
Applicants state that the Product Description will be tailored to meet
the information needs of investors purchasing Shares in the secondary
market.
Section 22(e)
10. Section 22(e) of the Act generally prohibits a registered
investment company from suspending the right of redemption or
postponing the date of payment of redemption proceeds for more than
seven days after the tender of a security for redemption. Applicants
state that settlement of redemptions for the Foreign Fund is contingent
not only on the settlement cycle of the United States market, but also
on current delivery cycles in local markets for underlying foreign
securities held by the Foreign Fund. Applicants state that delivery
cycles for transferring Fund Securities to redeeming investors, coupled
with local market holiday schedules, will require a delivery process
longer than seven calendar days for the Foreign Fund. Applicants
request relief under section 6(c) of the Act from section 22(e) to
allow the Foreign Fund to pay redemption proceeds up to 14 calendar
days after the tender of any Creation Units for redemption. Except as
disclosed in the relevant Foreign Fund's Prospectus and/or SAI,
applicants expect that each Foreign Fund will be able to deliver
redemption proceeds within seven days.\12\ With respect to future
Foreign Funds, applicants seek the same relief from section 22(e) only
to the extent that circumstances similar to those described in the
application exist.
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\12\ Rule 15c6-1 under the Exchange Act requires that most
securities transactions be settled within three business days of the
trade. Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations applicants
may have under rule 15c6-1.
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11. Applicants state that section 22(e) was designed to prevent
unreasonable, undisclosed and unforeseen delays in the payment of
redemption proceeds. Applicants assert that the requested relief will
not lead to the problems that section 22(e) was designed to prevent.
Applicants state that the SAI will disclose those local holidays (over
the period of at least one year following the date of the SAI), if any,
that are expected to prevent the delivery of redemption proceeds in
seven calendar days, and the maximum number of days needed to deliver
the proceeds for the relevant Foreign Fund. Applicants are not seeking
relief from section 22(e) with respect to Foreign Funds that do not
effect creations and redemptions of Creation Units in-kind.
Section 12(d)(1)
12. Section 12(d)(1)(A) of the Act, in relevant part, prohibits a
registered investment company from acquiring securities of an
investment company if such securities represent more than 3% of the
total outstanding voting stock of the acquired company, more than 5% of
the total assets of the acquiring company, or, together with the
securities of any other investment companies, more than 10% of the
total assets of the acquiring company. Section 12(d)(1)(B) of the Act
prohibits a registered open-end investment company, its principal
underwriter and any other broker-dealer from selling the investment
company's shares to another investment company if the sale will cause
the acquiring company to own more than 3% of the acquired company's
voting stock, or if the sale will cause more than 10% of the acquired
company's voting stock to be owned by investment companies generally.
13. Applicants request an exemption to permit management investment
companies (``Purchasing Management Companies'') and unit investment
trusts (``Purchasing Trusts'') registered under the Act that are not
sponsored or advised by the Adviser or any entity controlling,
controlled by, or under common control with the Adviser and are not
part of the same ``group of investment companies,'' as defined in
section 12(d)(1)(G)(ii) of the Act, as Global X Funds (collectively,
``Purchasing Funds'') to acquire shares of a Fund beyond the limits of
section 12(d)(1)(A). Purchasing Funds do not include the Funds. In
addition, applicants seek relief to permit a Fund or broker-dealer
(``Broker'') that is registered under the Exchange Act to sell Shares
to a Purchasing Fund in excess of the limits of section 12(d)(1)(B).
14. Each Purchasing Management Company will be advised by an
investment adviser within the meaning of section 2(a)(20)(A) of the Act
(the ``Purchasing Fund Adviser'') and may be sub-advised by one or more
investment advisers within the meaning of section 2(a)(20)(B) of the
Act (each a ``Purchasing Fund Sub-Adviser''). Any investment adviser to
a Purchasing Fund will be registered under the Advisers Act. Each
Purchasing Trust will be sponsored by a sponsor (``Sponsor'').
15. Applicants submit that the proposed conditions to the requested
relief adequately address the concerns underlying the limits in section
12(d)(1)(A) and (B), which include concerns about undue influence by a
fund of funds over underlying funds, excessive layering of fees and
overly complex fund structures. Applicants believe that the requested
exemption is consistent with the public interest and the protection of
investors.
16. Applicants believe that neither the Purchasing Funds nor a
Purchasing Fund Affiliate would be able to exert undue influence over
the Funds.\13\ To limit the control that a Purchasing Fund may have
over a Fund, applicants propose a condition prohibiting a Purchasing
Fund Adviser or a Sponsor, any person controlling, controlled by, or
under common control with a Purchasing Fund Adviser or Sponsor, and any
investment company and any issuer that would be an investment company
but for sections 3(c)(1) or 3(c)(7) of the Act that is advised or
sponsored by a Purchasing Fund Adviser or Sponsor, or any person
controlling, controlled by, or under common control with a Purchasing
Fund Adviser or Sponsor (``Purchasing Fund Advisory Group'') from
controlling (individually or in the aggregate) a Fund within the
meaning of section 2(a)(9) of the Act. The same prohibition would apply
to any Purchasing Fund Sub-Adviser, any person controlling, controlled
by or under common control with the Purchasing Fund Sub-Adviser, and
any investment company or issuer that would be an investment company
but for sections 3(c)(1) or 3(c)(7) of the Act (or portion of such
investment company or issuer) advised or sponsored by the Purchasing
Fund Sub-Adviser or any person controlling, controlled by or under
common control with the Purchasing Fund Sub-Adviser (``Purchasing Fund
Sub-Advisory Group''). Applicants propose other conditions to limit the
potential for undue influence over the Funds, including that no
Purchasing Fund or Purchasing Fund Affiliate (except to the extent it
is acting in its capacity as an investment adviser to a Fund) will
cause a Fund to purchase a security in any offering of securities
during the existence of any underwriting or selling syndicate of which
a principal underwriter is an Underwriting Affiliate (``Affiliated
Underwriting''). An
[[Page 53465]]
``Underwriting Affiliate'' is a principal underwriter in any
underwriting or selling syndicate that is an officer, director, member
of an advisory board, Purchasing Fund Adviser, Purchasing Fund Sub-
Adviser, employee or Sponsor of a Purchasing Fund, or a person of which
any such officer, director, member of an advisory board, Purchasing
Fund Adviser, Purchasing Fund Sub-Adviser, employee, or Sponsor is an
affiliated person (except that any person whose relationship to the
Fund is covered by section 10(f) of the Act is not an Underwriting
Affiliate).
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\13\ A ``Purchasing Fund Affiliate'' is a Purchasing Fund
Adviser, Purchasing Fund Sub-Adviser, Sponsor, promoter, and
principal underwriter of a Purchasing Fund, and any person
controlling, controlled by, or under common control with any of
those entities. A ``Fund Affiliate'' is an investment adviser,
promoter, or principal underwriter of a Fund and any person
controlling, controlled by or under common control with any of these
entities.
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17. Applicants assert that the proposed conditions address any
concerns regarding excessive layering of fees. The board of directors
or trustees of any Purchasing Management Company, including a majority
of the directors or trustees who are not ``interested persons'' within
the meaning of section 2(a)(19) of the Act (``disinterested directors
or trustees''), will find that the advisory fees charged to the
Purchasing Management Company are based on services provided that will
be in addition to, rather than duplicative of, services provided under
the advisory contract(s) of any Fund in which the Purchasing Management
Company may invest. In addition, except as provided in condition 13, a
Purchasing Fund Adviser or a trustee (``Trustee'') or Sponsor of a
Purchasing Trust will, as applicable, waive fees otherwise payable to
it by the Purchasing Fund in an amount at least equal to any
compensation (including fees received pursuant to any plan adopted by a
Fund under rule 12b-1 under the Act) received by the Purchasing Fund
Adviser or Trustee or Sponsor or an affiliated person of the Purchasing
Fund Adviser, Trustee or Sponsor, from the Funds in connection with the
investment by the Purchasing Fund in the Fund. Applicants state that
any sales loads or service fees charged with respect to shares of a
Purchasing Fund will not exceed the limits applicable to a fund of
funds set forth in NASD Conduct Rule 2830.
18. Applicants submit that the proposed arrangement will not create
an overly complex fund structure. Applicants note that no Fund may
acquire securities of any investment company or company relying on
sections 3(c)(1) or 3(c)(7) of the Act in excess of the limits
contained in section 12(d)(1)(A) of the Act. To ensure that Purchasing
Funds comply with the terms and conditions of the requested relief from
section 12(d)(1), any Purchasing Fund that intends to invest in a Fund
in reliance on the requested order will enter into an agreement
(``Purchasing Fund Agreement'') between the Fund and the Purchasing
Fund requiring the Purchasing Fund to adhere to the terms and
conditions of the requested order. The Purchasing Fund Agreement also
will include an acknowledgment from the Purchasing Fund that it may
rely on the requested order only to invest in the Funds and not in any
other investment company. The Purchasing Fund Agreement will further
require any Purchasing Fund that exceeds the 5% or 10% limitations in
section 12(d)(1)(A)(ii) and (iii) to disclose in its prospectus that it
may invest in the Funds, and to disclose, in ``plain English,'' in its
prospectus the unique characteristics of the Purchasing Funds investing
in the Funds, including but not limited to the expense structure and
any additional expenses of investing in the Funds.
19. Applicants also note that a Fund may choose to reject a direct
purchase of Shares in Creation Units by a Purchasing Fund. To the
extent that a Purchasing Fund purchases Shares in the secondary market,
a Fund would still retain its ability to reject initial purchases of
Shares made in reliance on the requested order by declining to enter
into the Purchasing Fund Agreement prior to any investment by a
Purchasing Fund in excess of the limits of section 12(d)(1)(A).
Sections 17(a)(1) and (2) of the Act
20. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such a person (``Second-Tier Affiliate''), from selling any security to
or purchasing any security from the company. Section 2(a)(3) of the Act
defines ``affiliated person'' to include (a) any person directly or
indirectly owning, controlling or holding with power to vote 5% or more
of the outstanding voting securities of the other person, (b) any
person 5% or more of whose outstanding voting securities are directly
or indirectly owned, controlled or held with the power to vote by the
other person, and (c) any person directly or indirectly controlling,
controlled by or under common control with the other person. Section
2(a)(9) of the Act provides that a control relationship will be
presumed where one person owns more than 25% of another person's voting
securities.
21. Applicants request an exemption from section 17(a) of the Act
pursuant to sections 17(b) and 6(c) of the Act to permit persons to
effectuate in-kind purchases and redemptions with a Fund when they are
affiliated persons of the Fund or Second-Tier Affiliates solely by
virtue of one or more of the following: (a) Holding 5% or more, or in
excess of 25%, of the outstanding Shares of one or more Funds; (b)
having an affiliation with a person with an ownership interest
described in (a); or (c) holding 5% or more, or more than 25%, of the
shares of one or more other registered investment companies (or series
thereof) advised by the Adviser.
22. Applicants assert that no useful purpose would be served by
prohibiting these types of affiliated persons from purchasing or
redeeming Creation Units through ``in-kind'' transactions. The deposit
procedures for both in-kind purchases and in-kind redemptions of
Creation Units will be the same for all purchases and redemptions.
Deposit Securities and Fund Securities will be valued in the same
manner as Portfolio Securities. Therefore, applicants state that in-
kind purchases and redemptions will afford no opportunity for the
specified affiliated persons, or Second-Tier Affiliates, of a Fund to
effect a transaction detrimental to other holders of Shares. Applicants
also believe that in-kind purchases and redemptions will not result in
self-dealing or overreaching of the Fund.
23. Applicants also seek relief from section 17(a) to permit a Fund
that is an affiliated person of a Purchasing Fund because the
Purchasing Fund holds 5% or more of the Shares of the Fund to sell its
Shares to and redeem its Shares from a Purchasing Fund, and to engage
in the accompanying in-kind transactions with the Purchasing Fund.\14\
Applicants state that the terms of the transactions are fair and
reasonable and do not involve overreaching. Applicants note that any
consideration paid by a Purchasing Fund for the purchase or redemption
of Shares directly from a Fund will be based on the NAV of the
Fund.\15\ Applicants believe that any proposed transactions directly
between the Funds and Purchasing Funds will be consistent with the
policies of each Purchasing Fund. The purchase of Creation Units
[[Page 53466]]
by a Purchasing Fund directly from a Fund will be accomplished in
accordance with the investment restrictions of any such Purchasing Fund
and will be consistent with the investment policies set forth in the
Purchasing Fund's registration statement. The Purchasing Fund Agreement
will require any Purchasing Fund that purchases Creation Units directly
from a Fund to represent that the purchase of Creation Units from a
Fund by a Purchasing Fund will be accomplished in compliance with the
investment restrictions of the Purchasing Fund and will be consistent
with the investment policies set forth in the Purchasing Fund's
registration statement.
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\14\ Applicants acknowledge that receipt of compensation by (a)
an affiliated person of a Purchasing Fund, or an affiliated person
of such person, for the purchase by the Purchasing Fund of Shares of
a Fund or (b) an affiliated person of a Fund, or an affiliated
person of such person, for the sale by the Fund of its Shares to a
Purchasing Fund may be prohibited by section 17(e)(1) of the Act.
The Purchasing Fund Agreement also will include this acknowledgment.
\15\ Applicants believe that a Purchasing Fund will purchase
Shares in the secondary market and will not purchase or redeem
Creation Units directly from a Fund. Nonetheless, a Purchasing Fund
that owns 5% or more of a Fund could seek to transact in Creation
Units directly with a Fund pursuant to the section 17(a) relief
requested.
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Applicants' Conditions
Applicants agree that any order of granting the requested relief
will be subject to the following conditions:
ETF Relief
1. As long as the Funds operate in reliance on the requested order,
the Shares will be listed on an Exchange.
2. Neither Global X Funds nor any Fund will be advertised or
marketed as an open-end investment company or a mutual fund. Each
Fund's Prospectus will prominently disclose that Shares are not
individually redeemable shares and will disclose that the owners of
Shares may acquire those Shares from the Fund and tender those Shares
for redemption to the Fund in Creation Units only. Any advertising
material that describes the purchase or sale of Creation Units or
refers to redeemability will prominently disclose that Shares are not
individually redeemable, and that owners of Shares may acquire those
Shares from the Fund and tender those Shares for redemption to the Fund
in Creation Units only.
3. The Web site maintained for each Fund, which will be publicly
accessible at no charge, will contain the following information, on a
per individual Share basis, for each Fund: (a) The prior Business Day's
NAV and the Bid/Ask Price, and a calculation of the premium or discount
of the Bid/Ask Price at the time of calculation of the NAV against such
NAV; and (b) data in chart format displaying the frequency distribution
of discounts and premiums of the daily Bid/Ask Price against the NAV,
within appropriate ranges, for each of the four previous calendar
quarters. In addition, the Product Description for each Fund will state
that the Web site for the Fund has information about the premiums and
discounts at which the Shares have traded.
4. The Prospectus and annual report for each Fund also will
include: (a) The information listed in condition 3(b), (i) in the case
of the Fund's Prospectus, for the most recently completed year (and the
most recently completed quarter or quarters, as applicable) and (ii) in
the case of the annual report, for the immediately preceding five
years, as applicable; and (b) the following data, calculated on a per
individual Share basis for one, five and ten year periods (or life of
the Fund): (i) The cumulative total return and the average annual total
return based on NAV and Bid/Ask Price, and (ii) the cumulative total
return of the relevant Underlying Index.
5. Before a Fund may rely on the order, the Commission will have
approved, pursuant to rule 19b-4 under the Exchange Act, an Exchange
rule requiring Exchange members and member organizations effecting
transactions in Shares to deliver a Product Description to purchasers
of Shares.
6. Each Fund's Prospectus and Product Description will clearly
disclose that, for purposes of the Act, Shares are issued by the Fund,
which is a registered investment company, and that the acquisition of
Shares by investment companies is subject to the restrictions of
section 12(d)(1) of the Act, except as permitted by an exemptive order
that permits registered investment companies to invest in a Fund beyond
the limits in section 12(d)(1), subject to certain terms and
conditions, including that the registered investment company enter into
a Purchasing Fund Agreement with the Fund regarding the terms of the
investment.
7. The requested relief to permit ETF operations will expire on the
effective date of any Commission rule under the Act that provides
relief permitting the operation of index-based exchange-traded funds.
Section 12(d)(1) Relief
8. The members of a Purchasing Fund's Advisory Group will not
control (individually or in the aggregate) a Fund within the meaning of
section 2(a)(9) of the Act. The members of a Purchasing Fund's Sub-
Advisory Group will not control (individually or in the aggregate) a
Fund within the meaning of section 2(a)(9) of the Act. If as a result
of a decrease in the outstanding Shares of a Fund, a Purchasing Fund's
Advisory Group or a Purchasing Fund's Sub-Advisory Group, each in the
aggregate, becomes a holder of more than 25% of the outstanding Shares
of a Fund, it will vote its Shares in the same proportion as the vote
of all other holders of the Shares. This condition does not apply to
the Purchasing Fund's Sub-Advisory Group with respect to a Fund for
which the Purchasing Fund's Sub-Adviser or a person controlling,
controlled by, or under common control with the Purchasing Fund Sub-
Adviser acts as the investment adviser within the meaning of section
2(a)(20)(A) of the Act.
9. No Purchasing Fund or Purchasing Fund Affiliate will cause any
existing or potential investment by the Purchasing Fund in a Fund to
influence the terms of any services or transactions between the
Purchasing Fund or Purchasing Fund Affiliate and the Fund or a Fund
Affiliate.
10. The board of directors or trustees of a Purchasing Management
Company, including a majority of the disinterested directors or
trustees, will adopt procedures reasonably designed to ensure that the
Purchasing Fund Adviser and Purchasing Fund Sub-Adviser are conducting
the investment program of the Purchasing Management Company without
taking into account any consideration received by the Purchasing
Management Company or a Purchasing Fund Affiliate from a Fund or a Fund
Affiliate in connection with any services or transactions.
11. No Purchasing Fund or Purchasing Fund Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Fund)
will cause a Fund to purchase a security in any Affiliated
Underwriting.
12. Before investing in the Shares of a Fund in excess of the
limits in section 12(d)(1)(A), each Purchasing Fund and the Fund will
execute a Purchasing Fund Agreement stating, without limitation, that
their boards of directors or trustees and their investment advisers or
Sponsors or Trustees, as applicable, understand the terms and
conditions of the order, and agree to fulfill their responsibilities
under the order. At the time of its investment in Shares of a Fund in
excess of the limit in section 12(d)(1)(A)(i), a Purchasing Fund will
notify such Fund of the investment. At such time, the Purchasing Fund
will also transmit to the Fund a list of names of each Purchasing Fund
Affiliate and Underwriting Affiliate. The Purchasing Fund will notify
the Fund of any changes to the list of names as soon as reasonably
practicable after a change occurs. The relevant Fund and the Purchasing
Fund will maintain and preserve a copy of the order, the Purchasing
Fund Agreement, and the list with any updated information for the
duration of the investment and for a period of not less than six years
[[Page 53467]]
thereafter, the first two years in an easily accessible place.
13. The Purchasing Fund Adviser, Trustee or Sponsor, as applicable,
will waive fees otherwise payable to it by the Purchasing Fund in an
amount at least equal to any compensation (including fees received
under any plan adopted by a Fund under rule 12b-1 under the Act)
received from a Fund by the Purchasing Fund Adviser, Trustee or
Sponsor, or an affiliated person of the Purchasing Fund Adviser,
Trustee or Sponsor, other than any advisory fees paid to the Purchasing
Fund Adviser, Trustee or Sponsor, or its affiliated person by a Fund,
in connection with the investment by the Purchasing Fund in the Fund.
Any Purchasing Fund Sub-Adviser will waive fees otherwise payable to
the Purchasing Fund Sub-Adviser, directly or indirectly, by the
Purchasing Management Company in an amount at least equal to any
compensation received from a Fund by the Purchasing Fund Sub-Adviser,
or an affiliated person of the Purchasing Fund Sub-Adviser, other than
any advisory fees paid to the Purchasing Fund Sub-Adviser or its
affiliated person by the Fund, in connection with any investment by the
Purchasing Management Company in a Fund made at the direction of the
Purchasing Fund Sub-Adviser. In the event that the Purchasing Fund Sub-
Adviser waives fees, the benefit of the waiver will be passed through
to the Purchasing Management Company.
14. Any sales charges and/or service fees charged with respect to
shares of a Purchasing Fund will not exceed the limits applicable to a
fund of funds as set forth in NASD Conduct Rule 2830.
15. Once an investment by a Purchasing Fund in the securities of a
Fund exceeds the limit in section 12(d)(1)(A)(i) of the Act, the board
of directors or trustees of a Fund (``Board''), including a majority of
the directors or trustees that are not ``interested persons'' within
the meaning of section 2(a)(19) of the Act (``disinterested Board
members''), will determine that any consideration paid by the Fund to a
Purchasing Fund or Purchasing Fund Affiliate in connection with any
services or transactions: (a) Is fair and reasonable in relation to the
nature and quality of the services and benefits received by the Fund;
(b) is within the range of consideration that the Fund would be
required to pay to another unaffiliated entity in connection with the
same services or transactions; and (c) does not involve overreaching on
the part of any person concerned. This condition does not apply with
respect to any services or transactions between a Fund and its
investment adviser(s), or any person controlling, controlled by, or
under common control with such investment adviser(s).
16. The Board, including a majority of the disinterested Board
members, will adopt procedures reasonably designed to monitor any
purchases of securities by a Fund in an Affiliated Underwriting once an
investment by the Purchasing Fund in the securities of the Fund exceeds
the limit of section 12(d)(1)(A)(i) of the Act, including any purchases
made directly from an Underwriting Affiliate. The Board will review
these purchases periodically, but no less frequently than annually, to
determine whether the purchases were influenced by the investment by
the Purchasing Fund in a Fund. The Board will consider, among other
things: (a) Whether the purchases were consistent with the investment
objectives and policies of the Fund; (b) how the performance of
securities purchased in an Affiliated Underwriting compares to the
performance of comparable securities purchased during a comparable
period of time in underwritings other than Affiliated Underwritings or
to a benchmark such as a comparable market index; and (c) whether the
amount of securities purchased by a Fund in Affiliated Underwritings
and the amount purchased directly from an Underwriting Affiliate have
changed significantly from prior years. The Board will take any
appropriate actions based on its review, including, if appropriate, the
institution of procedures designed to assure that purchases of
securities in Affiliated Underwritings are in the best interest of
shareholders of the Fund.
17. Each Fund will maintain and preserve permanently in an easily
accessible place a written copy of the procedures described in the
preceding condition, and any modifications to such procedures, and will
maintain and preserve for a period not less than six years from the end
of the fiscal year in which any purchase in an Affiliated Underwriting
occurred, the first two years in an easily accessible place, a written
record of each purchase of securities in Affiliated Underwritings, once
an investment by a Purchasing Fund in the Shares of the Fund exceeds
the limit of section 12(d)(1)(A)(i) of the Act, setting forth from whom
the securities were acquired, the identity of the underwriting
syndicate's members, the terms of the purchase, and the information or
materials upon which the Board's determinations were made.
18. Before approving any advisory contract under section 15 of the
Act, the board of directors or trustees of each Purchasing Management
Company, including a majority of the disinterested directors or
trustees, will find that the advisory fees charged under such contract
are based on services provided that will be in addition to, rather than
duplicative of, the services provided under the advisory contract(s) of
any Fund in which the Purchasing Management Company may invest. These
findings and their basis will be recorded fully in the minute books of
the appropriate Purchasing Management Company.
19. No Fund will acquire securities of any investment company or
companies relying on sections 3(c)(1) or 3(c)(7) of the Act in excess
of the limits contained in section 12(d)(1)(A) of the Act.
For the Commission, by the Division of Investment Management,
under delegated authority.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-21545 Filed 9-15-08; 8:45 am]
BILLING CODE 8010-01-P