May 14, 2013, 8:30AM-10:00AM
Speakers: Jay G. Baris, Morrison & Foerster Kelley A. Howes, Morrison & FoersterLauren C. Mullen, Bank of America Merrill Lynch
1. Presentation
2. Staff No-Action Position Regarding ETF Use of Derivatives
3. Exemptive Application: Fidelity Merrimack Street Trust 4. Exemptive Application: Eaton Vance ETMF Trust 5. Proposed ETF Exemptive Rules
©2013
Mor
ri
s
on
&
F
oer
s
ter
LLP
|
A
ll
R
ight
s
R
es
er
v
ed |
m
May 14, 2013
Presented By
Jay G. Baris, Morrison & Foerster LLP
Kelley A. Howes, Morrison & Foerster LLP
Lauren C. Mullen, Bank of America Merrill Lynch
Attorney Advertisinglegal advice or create an attorney-client relationship
•
Consult your own attorney for legal advice on the issues discussed in
this outline
•
IRS Circular 230 Disclosure
This is MoFo.
2
•
An ETF is a pooled investment vehicle whose shares are listed and traded on a
stock exchange
•
Shares are traded intra-day
•
Shares trade at the market price, which may differ from the ETF’s net asset
value (NAV)
•
Investors can buy and sell ETF shares through a broker, just like they would
shares of any publicly traded company
•
How are ETFs structured?
•
ETFs typically are structured as open-end investment companies or unit
investment trusts
•
ETFs that invest primarily in futures contracts, currencies and commodities are not
•
Open-end investment companies (mutual funds) and ETFs are companies that invest in
securities and other assets
•
Investors own a proportionate share of the pool of assets
•
Mutual funds and ETFs are subject to the investor protections of the Investment
Company Act of 1940 (“1940 Act”)
•
Differences between ETFs and mutual funds
•
ETFs may be structured as open-end investment companies but operate differently
•
Mutual funds continuously offer and redeem shares to the public
This is MoFo.
4
•
The first ETFs held baskets of securities that replicated the securities of
broad-based stock market indices (e.g., S&P 500)
•
As their popularity grew, ETFs tracked more narrow indices
•
In the past 10 years, geared (leveraged) ETFs gained popularity
•
Geared ETFs track a positive or negative multiple of the performance of a
reference index
•
2008: Bear Stearns launches the first actively managed ETF: The
Bear Stearns Current Yield Fund (symbol: YYY)*
•
After a slight delay, YYY began trading a week after JP Morgan bought Bear
Stearns
•
YYY closed a year later
•
Recently, several new actively-managed ETFs have obtained SEC
exemptive relief
•
ETFs offer investors access to a wide range of sectors, geographies and
strategies, including, for example, health care, leisure and entertainment,
inflation-protected treasuries, sovereign debt, covered bonds and foreign currencies
•
Many ETFs have lower expenses than mutual funds, but brokerage commissions
may offset these lower expenses
•
ETFs have lower tracking errors than mutual funds because they do not manage
daily cash flow into and out of the portfolio
This is MoFo.
6
1 Data for ETFs that invest primarily in other ETFs are excluded from the totals; net assets as of December 31, 2012.2 The funds in this category are not registered under the 1940 Act and invest primarily in commodities, currencies, and
futures.
3 The funds in this category are registered under the 1940 Act.
Note: Components may not add to the total because of rounding.
SOURCE: 2013 Investment Company Fact Book (Investment Company Institute)
•
In 20 years of existence, ETFs have attracted more than $1.337 trillion of net
•
Mutual funds establish their NAV once a day, as of the close of business
•
ETF share prices fluctuate all day according to market demand
•
Investors may buy at a premium or discount to NAV
•
Investors selling or buying ETF shares throughout the day may receive
different prices
•
ETFs have daily transparency
This is MoFo.
8
•
Sponsor selects reference index and creates corporate structure
•
ETF replicates index by investing in each underlying security, a sample of
securities, or through derivatives
•
Frequent portfolio rebalancing
•
Sponsor establishes a “creation basket” or “purchase basket”
•
“Creation basket” or “purchase basket”
•
Lists specific securities and quantities
•
Serves as a basis for creation units
•
APs buy and sell creation units from ETFs
•
APs are financial institutions, typically broker-dealers, who make a market in
ETFs
•
APs contribute cash and/or assets in creation basket to an ETF
•
ETFs issue one creation unit to an AP (typically 25,000 to 200,000 shares)
•
APs hold shares in inventory or sell them on the exchange to investors
•
When investors demand more shares, APs will sell on the market from inventory
This is MoFo.
10
Source: Investment Company Institute
Fund or trust
Authorized
participant
Hold shares
Trade on an
exchange
Investors
Creation basket
and/or cash
•
Index components are fully transparent
•
Actively managed ETFs pursue an investment objective (much like a
mutual fund)
•
Portfolio managers select securities based on research
•
Portfolios must be transparent
•
Website identifies securities and weightings
This is MoFo.
12
of the 1940 Act and its rules
•
Sections 2(a)(32) and 5(a)(1) require shares of an open-end fund to be redeemable
daily
•
The holder of redeemable securities may present the security to the issuer in
exchange for the holder’s proportionate share of the issuer’s net assets
•
Creation units are redeemable securities, but holders of individual shares
cannot present them to the issuer (
i.e.
, the ETF), they can only sell them on the
exchange
•
Section 22(d) and Rule 22c-1 require issuers to sell redeemable
securities only at the current offering price, and to redeem only at the
current NAV
•
Section 22(e) prohibits a fund from suspending the right of redemption,
or postponing the date of satisfaction of redemption requests for more
than seven days
persons, principal underwriters or promoters of a fund (or affiliated
persons of such persons) from selling a security or other property to,
or purchasing a security or other property from, a fund
•
Section 12(d)(1) limits the amount of shares that a registered
investment company may hold of another registered investment
company, and the amount of shares that one investment company
may sell to another as an investment
This is MoFo.
14
them from these prohibitions before commencing operations
•
Exemptive orders allow ETFs to
•
Buy and sell creation units at NAV only with APs
•
Buy and sell shares on exchanges with investors at the current market prices
•
Engage in in-kind transactions with certain affiliates
•
In certain circumstances, delay payment of the proceeds from the redemption of
shares beyond seven days (e.g., when portfolio security trades are settled on
foreign markets)
•
Allow funds to buy ETF shares in excess of the limitations contained in Section
•
Section 19(b) of the Securities Exchange Act of 1934 (“Exchange
Act”) requires an exchange to obtain SEC approval for any “proposed
change in, addition to, or deletion from” existing rules of the
exchange
•
Rule 19b-4(e) under the Exchange Act allows ETF shares that meet
generic listing requirements to be listed without approval
This is MoFo.
16
•
ETFs registered under the 1940 Act must comply with the
requirements of Form N-1A
•
Form N-1A was amended in 2009 to include new requirements for ETFs
operate without the need to obtain individual exemptive orders
•
Proposed Rule 6c-11 would codify most of the exemptions previously granted by
the SEC to index-based ETFs and to fully transparent actively managed ETFs
•
ETFs must be transparent by either:
•
Disclosing on their website each business day the identities and weightings of
the component securities and other assets held by the fund; or
•
Having a stated investment objective of obtaining returns that correspond to
the returns of a securities index whose provider discloses daily on its website
the identities and weightings of the component securities and other assets of
This is MoFo.
18
larger investments in ETFs than currently permitted under the 1940 Act
•
Currently, Section 12(d)(1) limits an investment company to acquiring no more than
three percent of another investment company’s shares
•
The proposed rule would be subject to several conditions designed to address
“pyramiding” schemes
•
An acquiring fund could not “control” an ETF, as defined in Section 2(a)(9) of the
1940 Act
•
An acquiring fund would be prohibited from redeeming shares it acquired in
reliance on the proposed rule
•
An acquired ETF could not itself be a fund of funds
•
Sales charges and service fees charged by the acquiring fund would be limited
to those allowed in Rule 2830 of the NASD Conduct Rules
•
Proposed amendments to Form N-1A would require funds to include in
their registration statements key information to investors who purchase
ETF shares in secondary market transactions
•
Comments were due on May 19, 2008, but the SEC appears to have continued to
accept comment letters as late as September 10, 2009
•
NYSE Arca, Inc. supports the proposal, and particularly the proposed extension of
relief for a broader range of affiliates – and not just to “first-tier” or “second-tier”
affiliates – including broker-dealers affiliated with an ETF’s adviser, to purchase
and redeem creation units through in-kind transactions
This is MoFo.
20
“make significant investments in derivatives”
•
In December 2012, the SEC staff announced a partial lifting of the
moratorium
•
The staff will no longer defer consideration of exemptive requests relating to
actively managed ETFs that make use of derivatives, provided:
•
The ETF’s board will periodically review and approve the ETF’s use of
derivatives and how the ETF’s investment adviser assesses and manages
risk with respect to the ETF’s use of derivatives; and
•
The ETF’s disclosure of its use of derivatives in its offering documents and
periodic reports is consistent with relevant SEC and staff guidance
•
The staff continues to oppose applications of geared ETFs
•
The FSOC, in its most recent annual report, noted that this might
•
Negotiation of contracts
•
Status as “issuers”
•
Operational issues
This is MoFo.
22
issuer (usually a bank) designed to track the return of an underlying index or
other benchmark
•
ETNs are not pooled investment vehicles and are not registered under the
1940 Act, but ETNs must be registered under the Securities Act
•
Like ETFs, ETNs trade on an exchange and can be bought and sold by
individual investors during the trading day
•
ETNs are debt securities and do not trade at NAV
•
ETN prices are based solely on supply and demand in the market
•
ETNs must have a repurchase feature that gives investors the ability to
redeem notes of a specified minimum value or denomination on a minimum
weekly (usually daily) basis at a predetermined price
•
The creditworthiness of an ETN itself is not rated, but is based on the
creditworthiness of the issuer
that invests directly in underlying commodities
•
Because the underlying assets are not securities, exchange traded
commodity pools do not have to register under the 1940 Act
•
Exchange traded commodity pools give investors exposure to
commodities without taking physical delivery of a commodity
•
Shares of exchange traded commodity pools can be bought and sold
This is MoFo.
24
requirements of Form S-1
•
Exchange traded commodity pools do not meet the definition of an “investment
company” and cannot register under the 1940 Act
•
Subject to review by the Division of Corporate Finance
•
Exchange traded commodity pools are subject to regulation by CFTC
•
Investment advisers may have to register as commodity pool operator
derivatives to register as commodity pool operators (CPOs)
•
CFTC recently narrowed exemption for investment companies
•
CPO status will increase compliance and disclosure costs
•
Revising investment strategies to avoid CPO status may increase trading costs
•
SEC staff is not likely to lift the moratorium on new geared ETFs until
the SEC or the staff resolves issues raised in the SEC’s August 31,
2011 Concept Release on fund use of derivatives
This is MoFo.
26
•
In Q1 2013, a suit was filed by two pension funds against several ETFs, their
advisor, an advisory affiliate that provided securities lending services and the
trustees of the ETFs challenging the split between the securities lending revenue
paid to the ETFs and that paid to the adviser and its affiliates under Section 36(b)
of the 1940 Act
•
In March, Eaton Vance filed an application for a new type of
exchange-traded product: an exchange traded managed fund
(ETMF)
•
The application describes it as an actively managed open-end fund whose shares
trade on an exchange at prices directly linked to the fund’s next-determined NAV
•
The product is designed to provide the cost and tax efficiencies or ETFs while
maintaining confidentiality of portfolio holdings
Office of Exemptive Applications/Office of Investment Company Regulation Division of Investment Management
In March of 2010, the Commission announced in a press release that the staff was conducting a review to evaluate the use of derivatives by mutual funds, exchange-traded funds (“ETFs”), and other investment companies.1 The press release also indicated that, pending completion of this review, the staff would defer consideration of exemptive requests under the 1940 Act (the “Act”) relating to, among others, actively-managed ETFs that would make significant investments in derivatives.
The staff announced today that it will no longer defer consideration of exemptive requests under the Act relating to actively-managed ETFs that make use of derivatives provided that they include representations to address some of the concerns expressed in the March 2010 press release.2 These representations are: (i) that the ETF’s board periodically will review and approve the ETF’s use of derivatives and how the ETF’s investment adviser assesses and manages risk with respect to the ETF’s use of derivatives; and (ii) that the ETF’s disclosure of its use of derivatives in its offering documents and periodic reports is consistent with relevant Commission and staff guidance.
The Commission issued the orders listed on Attachment A based on, among other representations, a representation that no actively-managed ETF relying on the relief would invest in options contracts, futures contracts or swap agreements. Consistent with today’s statement, we would not recommend enforcement action to the Commission under sections 2(a)(32), 5(a)(1), 17(a), 22(d), and 22(e) of the Act, or rule 22c-1 under the Act if actively-managed ETFs operating in reliance on such orders invest in options contracts, futures contracts or swap agreements provided that they comply with the representations stated above.
This position is provided to actively-managed ETFs relying on the orders listed on Attachment A for enforcement purposes only and does not express any position with respect to any other representation or condition of those orders, or application of the federal securities laws.
(11/16/2012) (order).
IndexIQ Advisors LLC, et al., Investment Company Act Release Nos. 30166 (8/13/2012) (notice) and 30198 (9/10/2012) (order).
Arrow Investment Advisers, LLC, et al., Investment Company Act Release Nos. 30100 (6/7/2012) (notice) and 30127 (7/3/2012) (order).
Federated Investment Management Company and Federated ETF Trust, Investment Company Act Release Nos. 30093 (6/1/2012) (notice) and 30123 (6/26/2012) (order).
Northern Trust Investments, Inc., et al., Investment Company Act Release Nos. 30045 (4/24/2012) (notice) and 30068 (5/22/2012) (order).
Huntington Asset Advisors, Inc., et al., Investment Company Act Release Nos. 30032 (4/10/2012) (notice) and 30061 (5/8/2012) (order).
First Trust Exchange-Traded Fund, et al., Investment Company Act Release Nos. 29983 (3/15/2012) (notice) and 30029 (4/10/2012) (order).
RiverPark Advisors, LLC, et al., Investment Company Act Release Nos. 29840 (10/19/2011) (notice) and 29863 (11/17/2011) (order).
Russell Exchange Traded Funds Trust, et al., Investment Company Act Release Nos. 29706 (6/22/2011) (notice) and 29727 (7/19/2011) (order).
Eaton Vance Management, et al., Investment Company Act Release Nos. 29591 (3/1/2011) (notice) and 29620 (3/30/2011) (order).
iShares Trust, et al., Investment Company Act Release Nos. 29543 (12/27/2010) (notice) and 29571 (1/24/2011) (order). SSgA Funds Management, Inc., et al., Investment Company Act Release Nos. 29499 (11/17/2010) (notice) and 29524 (12/13/2010) (order).
Van Eck Associates Corporation, et al., Investment Company Act Release Nos. 29459 (10/7/2010) (notice) and 29496 (11/3/2010) (order).
AdvisorShares Investment, Investment Company Act Release Nos. 29264 (5/6/2010) (notice) and 29291 (5/28/2010) (order).
Claymore Exchange-Traded Fund Trust 3, Investment Company Act Release Nos. 29256 (4/23/2010) (notice) and 29271 (5/18/2010) (order).
U.S. One, Inc., Investment Company Act Release Nos. 29128 (2/2/2010) (notice) and 29164 (3/1/2010) (order). Pacific Investment Management Company LLC and PIMCO ETF Trust, Investment Company Act Release Nos. 28948 (10/20/2009) (notice) and 28993 (11/10/2009) (order).
Second Amended and Restated 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) and 22(e) of the Act and Rule 22c-1 under the Act, under Sections 6(c) and 17(b) of the Act for an exemption from Sections 17(a)(1) and 17(a)(2) of the Act and under Section 12(d)(1)(J) of the
Act for an exemption from Sections 12(d)(1)(A) and 12(d)(1)(B) of the Act
Please send all communications and orders to:
Page 1 of 74 sequentially numbered pages (including exhibits). As filed with the Securities and Exchange Commission on April 22, 2013 Fidelity Distributors Corporation
Fidelity Management & Research Company Fidelity Merrimack Street Trust
: : : X
Scott C. Goebel, Esq. General Counsel
Fidelity Management & Research Company 82 Devonshire Street, V10E Boston, Massachusetts 02109
With a copy to: Stuart M. Strauss, Esq.
Dechert LLP
1095 Avenue of the Americas New York, New York 10036
Page I. ACTIVELY-MANAGED EXCHANGE TRADED FUNDS 8
A. Applicants and Other Entities 8
1. The Trust 8
2. The Adviser 8
3. The Distributor 9
B. The Funds 10
1. The Initial Fund and its Investment Objective 10 2. All Funds and their Investment Objectives 10
3. Benefits of Funds to Investors 12
4. Benefits of Fund of Funds Relief 13 C. Capital Structure and Voting Rights; Book Entry 13
D. Exchange Listing 14
E. Purchases and Redemptions of Shares and Creation Units 14 1. Placement of Orders to Purchase Creation Units 15
(a) General 15
(b) NSCC Process, DTC Process and Process for the Funds 19
(c) Transaction Fees 21
(d) Timing and Transmission of Purchase Orders 22
2. Payment for Creation Units 23
(a) General 23
(b) Global Funds 23
3. Rejection of Creation Unit Purchase Orders 24
4. Redemption 25
5. Pricing of Shares 27
F. Shareholder Transaction and Operational Fees and Expenses 28
G. Dividend Reinvestment Service 28
5/9/2013 http://www.sec.gov/Archives/edgar/data/35336/000094562113000152/fidelity40appa04161...
K. Master-Feeder Structure 32 1. In-Kind Transactions in a Master-Feeder Structure 32
Page
2. No Senior Securities 33
II. FUNDS OF ACTIVELY-MANAGED EXCHANGE-TRADED
FUNDS 33
A. The Investing Funds 33
B. Proposed Transactions 34
C. Fees and Expenses 34
D. Conditions and Disclosure Relating to Fund of Funds Relief 35 III. REQUEST FOR EXEMPTIVE RELIEF AND LEGAL ANALYSIS 35 A. Sections 2(a)(32) and 5(a)(1) of the Act 36 B. Section 22(d) of the Act and Rule 22c-1 under the Act 38
C. Section 22(e) of the Act 40
D. Sections 17(a)(1) and 17(a)(2) of the Act 44 E. Sections 12(d)(1)(A) and 12(d)(1)(B) of the Act 49 F. Sections 17(a)(1) and 17(a)(2) of the Act Relating to Fund of
Funds Relief 57
IV. CONDITIONS 60
A. ETF Relief 60
B. Fund of Funds Relief 62
V. NAMES AND ADDRESSES 67
3
5/9/2013 http://www.sec.gov/Archives/edgar/data/35336/000094562113000152/fidelity40appa04161...
SUMMARY OF APPLICATION
In this second amended and restated application (“Application”), Fidelity Management & Research Company (“Adviser”),1 Fidelity Distributors Corporation (“Distributor”) and Fidelity Merrimack Street Trust (“Trust” and, collectively with the Adviser and the Distributor, “Applicants”)2 request an order under Section 6(c) of the Act, for an exemption from Sections 2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act and Rule 22c-1 under the Act, under Sections 6(c) and 17(b) of the Act for an exemption from Sections 17(a)(1) and 17(a)(2) of the Act and under Section 12(d)(1)(J) of the Act for an exemption from Sections 12(d)(1)(A) and 12(d)(1)(B) of the Act.
Applicants are seeking an order under Sections 6(c) and 17(b) for an exemption from Sections 2(a)(32), 5(a) (1), 17(a), 22(d) and 22(e) of the Act and Rule 22c-l under the Act (“ETF Relief”) to permit the Trust to create and operate an actively-managed investment series of the Trust (“Initial Fund,” and together with Future Funds (defined below), the “Funds”) that offers exchange-traded shares (“Shares”). Each Fund will operate as an actively-managed exchange-traded fund (“ETF”). Shares of each Fund will be purchased from the Trust only in large aggregations (e.g., at least 25,000 Shares) of a specified number referred to as “Creation Units.” Creation Units will be separable upon issue into individual Shares, which will be listed and traded at negotiated prices on a national securities exchange as defined in Section 2(a)(26) of the Act (“Stock Exchange”). The Shares themselves will not be redeemable to the Trust unless
1 All references herein to the term “Fidelity Management & Research Company” include any successor to Fidelity Management & Research Company. For purposes of the requested Order, a “successor” is limited to an entity or entities that result from a reorganization into another jurisdiction or a change in the type of business organization.
2 As used herein, “Trust” shall also include any other open-end series management investment company registered with the Commission (as defined herein) and advised by the Adviser or an entity controlling, controlled by or under common control with the Adviser that complies with the terms and conditions of this Application (any such entity is included in the term Adviser).
to any other open-end management companies or series thereof that utilize active management investment strategies (“Future Funds”). Any Future Fund will (a) be advised by the Adviser, and (b) comply with the terms and conditions of the Application.
The order would permit (i) Shares of the Funds to trade on a Stock Exchange at prices set by the market rather than at net asset value per Share (“NAV”); (ii) certain Funds that make foreign investments to pay redemption proceeds more than seven calendar days after Shares are tendered for redemption; (iii) Shares to be redeemable in Creation Units only; (iv) certain affiliated persons of the Funds and affiliated persons of such affiliated persons (“second-tier affiliates”), to buy securities from, and sell securities to, the Funds in connection with the purchase and redemption of Creation Units; (v) Investing Funds (as defined below) to acquire Shares of the Funds in reliance on Fund of Funds Relief (as defined below); (vi) a Fund to sell its Shares to and redeem its Shares from an Investing Fund of which the Fund is an affiliated person or a second-tier affiliate; and (vii) a Feeder Fund (as defined below) to acquire shares of a Master Fund (as defined below) in reliance on Master-Feeder Relief (as defined below).
Applicants are requesting that the order permit certain investment companies registered under the Act to acquire Shares beyond the limitations in Section 12(d)(1)(A) and permit the Funds, and any principal underwriter for the Funds, and any broker or dealer registered under the Securities Exchange Act of 1934 (“Exchange Act” and such persons registered under the Exchange Act, “Brokers”), to sell Shares beyond the limitations in Section 12(d)(1)(B). Applicants request that any exemption under Section 12(d)(1)(J) from Sections 12(d)(1)(A) and (B) apply to: (1) any Fund that is currently or subsequently part of the same “group of investment companies” as the Initial Fund within the meaning of Section
5
5/9/2013 http://www.sec.gov/Archives/edgar/data/35336/000094562113000152/fidelity40appa04161...
12(d)(1)(G)(ii) of the Act as well as any principal underwriter for the Fund and any Brokers selling Shares of a Fund to an Investing Fund, as defined below; and (2) each management investment company or unit investment trust registered under the Act that is not part of the same “group of investment companies” as the Funds, and that enters into an FOF Participation Agreement (as defined herein) with a Fund (such management investment companies are referred to herein as “Investing Management Companies,” such unit investment trusts are referred to herein as “Investing Trusts,” and Investing Management Companies and Investing Trusts together are referred to herein as “Investing Funds”). Investing Funds do not include the Funds. This relief would permit the Investing Funds to acquire Shares of the Funds beyond the limitations set forth in Section 12(d)(1)(A), and the Funds, their principal underwriters and any Brokers to sell Shares of the Funds to Investing Funds beyond the limitations set forth in Section 12(d)(1)(B) (“Fund of Funds Relief”).3
In addition, Applicants are also requesting relief to permit a Fund that is advised by the Adviser to operate as a feeder fund (“Feeder Fund”) to acquire shares of another registered investment company in the same group of investment companies having the identical investment objectives as the Feeder Fund (“Master Fund”) beyond the limitations in Section 12(d)(1)(A) of the Act and the Master Fund, and any principal underwriter for the Master Fund, to sell shares of the Master Fund to the Feeder Fund beyond the limitations in Section 12(d)(1)(B) of the Act. As discussed in more detail below, Applicants believe that the Feeder Funds may rely on the exemption provided in Section 12(d)(1)(E) of the Act; however, this exemption may be unavailable to the Feeder Funds should the Feeder Funds engage in in-kind
3 Certain Future Funds may invest in other open-end and/or closed-end investment companies and/or ETFs in excess of the limits in Section 12(d)(1)(A) (each such Fund, an “FOF ETF”). In no case will a Fund that is an FOF ETF rely on the Fund of Funds Relief.
12(d)(1)(A) and 12(d)(1)(B) to the extent necessary to perform in-kind transactions in a master-feeder structure (“Master-Feeder Relief”). Applicants request that any exemption under Section 12(d)(1)(J) from Sections 12(d)(1)(A) and 12(d)(1)(B) for Master-Feeder Relief apply to any registered investment company or unit investment trust that is currently or subsequently part of the same “group of investment companies” as the Feeder Funds within the meaning of Section 12(d)(1)(G)(ii) of the Act as well as any principal underwriter for the Master Funds selling shares of a Master Fund to a Feeder Fund.
All entities that currently intend to rely on the order are named as Applicants. Any entity that relies on the order in the future will comply with the terms and conditions of the Application. An Investing Fund may rely on the order only to invest in Funds and not in any other registered investment company. In connection with the Fund of Funds Relief, Applicants are further requesting relief under Sections 6(c) and 17(b) from Sections 17(a)(1) and (2) to permit a Fund to sell its shares to and redeem its Shares from, and engage in the in-kind transactions that would accompany such sales and redemptions with, certain Investing Funds of which the Funds are affiliated persons or affiliated persons of affiliated persons. In addition, this relief would permit a Feeder Fund that is an affiliated person of a Master Fund to sell portfolio securities to the Master Fund in exchange for shares of the Master Fund and redeem Master Fund shares for portfolio securities, both in connection with in-kind sales and redemptions of Shares, as discussed herein.
The Securities and Exchange Commission (“Commission”) has issued orders on exemptive applications that involve actively-managed ETFs seeking relief substantially identical
7
5/9/2013 http://www.sec.gov/Archives/edgar/data/35336/000094562113000152/fidelity40appa04161...
T. Rowe Price Associates, Inc.5
No form having been specifically prescribed for this Application, Applicants proceed under Rule 0-2 of the General Rules and Regulations of the Commission.
I. Actively-Managed Exchange Traded Funds. A. Applicants and Other Entities.
1. The Trust. The Trust is a business trust organized under the laws of the State of Massachusetts, and is registered with the Commission as an open-end management investment company.6 Currently, the Trust is comprised of one Fund, the Initial Fund, the Fidelity Corporate Bond ETF. The Trust is overseen by a board of trustees (“Board”) which meets the composition requirements of Section 10 of the Act.7 Each Fund will adopt fundamental policies consistent with the Act and be classified as “diversified” or “non-diversified” under the Act. Each Fund that intends to qualify as a regulated investment company (“RIC”) will maintain the required level of diversification, and otherwise conduct its operations, so as to meet the RIC diversification requirements of the Internal Revenue Code of 1986, as amended (“Code”).
2. The Adviser. Fidelity Management & Research Company will be the investment adviser to the Initial Fund. Fidelity Management & Research Company is a
4 See, e.g., RiverPark Advisors, LLC, et al., Investment Company Act Release Nos. 29840 (Oct. 19, 2011) (notice) and 29863 (Nov. 17, 2011) (order); Russell Exchange Traded Funds Trust, et al., Investment Company Act Release Nos. 29706 (Jun. 22, 2011) (notice) and 29727 (Jul. 19, 2011) (order); Eaton Vance Management, et al., Investment Company Act Release Nos. 29591 (Mar. 1, 2011) (notice) and 29620 (Mar. 30, 2011) (order).
5 See T. Rowe Price Associates, Inc., et al., Investment Company Act Release Nos. 30299 (Dec. 7, 2012) (notice) and 30336 (Jan. 2, 2013) (order).
6 Applicants have filed a registration statement to register the Initial Fund as a new series of the Trust. 7 The term “Board” includes any board of directors or trustees of a Future Fund, if different.
Management & Research Company. Each Adviser is or will be registered as an “investment adviser” under Section 203 of the Investment Advisers Act of 1940 (“Advisers Act”) and, subject to the oversight and authority of the Board, will develop the overall investment program for each Fund. The Adviser will arrange and oversee the provision of necessary services for each Fund (including custodial, transfer agency and administration services) and furnish office facilities, equipment, services and executive and administrative personnel necessary for managing the investment program of the Fund. The Adviser may enter into sub-advisory agreements with one or more investment advisers to act as sub-advisers with respect to particular Funds, or their respective Master Funds (each a “Sub-Adviser” and collectively, the “Sub-Advisers”). Any Sub-Adviser will be registered, or not subject to registration, as an investment adviser under the Advisers Act.
3. The Distributor. The Trust will enter into a distribution agreement with the Distributor. The Distributor, a Massachusetts corporation, is a broker-dealer registered under the Exchange Act. The Distributor is an affiliate of the Adviser. The Distributor will act as distributor and principal underwriter of the Funds. Applicants request that the order apply to the Distributor, any successor to the Distributor, and to any other entity hired by a Fund as a future distributor (each, a “Future Distributor”) that complies with the terms and conditions of this Application.
No Distributor, Future Distributor, Adviser, Sub-Adviser, Trust, or Fund is, or will be, affiliated with any Stock Exchange.
9
5/9/2013 http://www.sec.gov/Archives/edgar/data/35336/000094562113000152/fidelity40appa04161...
B. The Funds.
1. The Initial Fund and its Investment Objective. The name of the Initial Fund is the Fidelity Corporate Bond ETF. The Initial Fund will seek a high level of current income. The Initial Fund will normally invest at least 80% of the Fund’s assets in investment-grade corporate bonds and other corporate debt securities and repurchase agreements for those securities. The Initial Fund may invest its assets in securities of foreign issuers in addition to securities of domestic issuers. Applicants expect the Board to approve the investment advisory agreement with Fidelity Management & Research Company and any sub-advisory agreements for the Initial Fund prior to the launch of the Initial Fund, which Applicants anticipate will be shortly after receipt of all required regulatory approvals.
2. All Funds and their Investment Objectives. Each Fund will invest in accordance with its investment objective and the requirements of the Act and rules thereunder. A Feeder Fund will pursue its investment objective by investing in a Master Fund with an identical investment objective. Applicants have designed this “master-feeder” structure because it is anticipated that, in addition to the Funds, other feeder funds will be created in the future and hold shares of each respective Master Fund. Such other feeder funds could be traditional mutual funds, the shares of which would be individually redeemable, other ETFs or other pooled investment vehicles. Creating an exchange-traded feeder fund is preferable to creating entirely new series for several reasons. First, creating separate funds would create additional overhead costs. Also, assets held in other feeder funds, through increased assets in the Master Fund, should provide economies of scale for the Feeder Funds.8 While certain costs may be higher in a
master-8 In a master-feeder structure, the Master Fund, rather than the Feeder Fund, would invest its portfolio in compliance with the order. There would be no ability by Fund shareholders to exchange shares of Feeder Funds for shares of another feeder series of the Master Fund.
any such potential disadvantages against the benefits of economies of scale and other benefits of operating within a master-feeder structure.
Each Fund, or its respective Master Fund, will consist of a portfolio of securities, and other assets and positions (“Portfolio Positions”). To the extent consistent with other investment limitations, the Funds, or their respective Master Funds, may invest assets in mortgage- or asset-backed securities, including “to-be-announced transactions” or “TBA Transactions”,9 and may engage in short sales and forward commitment transactions.10 Further, Funds, or their respective Master Funds, may invest in depositary receipts (“Depositary Receipts”). Depositary Receipts are typically issued by a financial institution (“Depositary”) and evidence ownership in a security or pool of securities that have been deposited with the Depositary.11 A Fund, or its respective Master Fund, will not invest in any Depositary Receipts that the Adviser or Sub-Adviser, as applicable, deems to be illiquid or for which pricing information is not readily available. If a Fund (or its respective Master Fund) invests in
9 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, par amount and price. The actual pools delivered generally are determined two days prior to the settlement date.
10 In a forward commitment transaction, the buyer/seller enters into a contract to purchase/sell, for example, specific securities for a fixed price at a future date beyond normal settlement time.
11 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 of 1933 (“Securities Act”), on Form F-6. ADR trades occur either on a Stock Exchange or off-exchange. The Financial Industry Regulatory Authority (“FINRA”) Rule 6620 requires all off-exchange transactions in ADRs to be reported within 90 seconds and ADR trade reports to be disseminated on a real-time basis. With respect to GDRs, the Depositary may be 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 any other Fund, Adviser or Sub-Adviser will serve as the depositary bank for any Depositary Receipts held by a Fund (or its respective Master Fund), except a depositary bank that is deemed to be affiliated solely because a Fund owns greater than 5% of the outstanding voting securities of such depositary bank.
11
5/9/2013 http://www.sec.gov/Archives/edgar/data/35336/000094562113000152/fidelity40appa04161...
derivatives and how the Fund’s investment adviser assesses and manages risk with respect to the Fund’s (or its respective Master Fund’s) use of derivatives; and (ii) the Fund’s disclosure of its (or its respective Master Fund’s) use of derivatives in its offering documents and periodic reports will be consistent with relevant Commission and Commission staff guidance. In addition, to the extent required by then-current Commission positions regarding open-end companies, and as necessary for the arbitrage process, each Fund’s, or its respective Master Fund’s, Portfolio Positions will be liquid. Each Fund’s investment objective will not be considered to be fundamental and can be changed without a vote of its shareholders.
3. Benefits of Funds to Investors. Applicants expect that there will be several categories of market participants who are likely to be interested in purchasing Creation Units. One is the arbitrageur, who stands ready to take advantage of any slight premium or discount in the market price of Shares on the Stock Exchange versus the cost of depositing a Creation Deposit (as defined below) and creating a Creation Unit to be broken down into individual Shares. As described below, Applicants believe that arbitrageurs will purchase or redeem Creation Units in pursuit of arbitrage profit, and in so doing will enhance the liquidity of the secondary market. Applicants expect that arbitrage opportunities created by the ability to continually purchase or redeem Creation Units at their NAV should ensure that the Shares will not trade at a material discount or premium in relation to their NAV. Applicants also expect that the Stock Exchange specialists (“Specialists”) or market makers (“Market Makers”), acting in their unique role to provide a fair and orderly secondary market for Shares, also may purchase Creation Units for use in their own market making activities.
Applicants expect that secondary market purchasers of Shares will include both institutional and retail investors. As in the case of other active ETFs, the Funds can be bought or sold like stocks any time throughout each trading day at market prices that are normally close to NAV; may be relatively tax-efficient investment vehicles to the extent that certain Funds, or their respective Master Funds, can minimize capital gains by eliminating from the portfolio low cost basis securities through the in-kind redemption process; publish the composition of their, or their respective Master Funds’, portfolios every day, giving them largely transparent investment portfolios; and immediately reinvest interest received on Portfolio Positions.
4. Benefits of Fund of Funds Relief. If Fund of Funds Relief is granted, the Funds will offer the Investing Funds the benefits noted above.
C. Capital Structure and Voting Rights; Book Entry.
Shareholders of a Fund will have one vote per Share or one vote per dollar with respect to matters regarding the Trust or the respective Fund for which a shareholder vote is required consistent with the requirements of the Act, the rules promulgated thereunder and applicable state law.
Shares will be registered in book-entry form only and the Funds will not issue 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 Shares will be shown on the records of DTC or DTC participants (“DTC Participants”). Shareholders will exercise their rights in such securities indirectly through the DTC and DTC Participants. The references herein to owners or holders of such Shares shall reflect the rights of persons holding an interest in such securities as they may indirectly exercise such rights through the DTC and DTC Participants,
13
5/9/2013 http://www.sec.gov/Archives/edgar/data/35336/000094562113000152/fidelity40appa04161...
notices, statements, shareholder reports and other communications will be at the Funds’ expense through the customary practices and facilities of the DTC and DTC Participants.
D. Exchange Listing.
Shares will be listed on the Stock Exchange and traded in the secondary market in the same manner as other equity securities and ETFs. Except as permitted by the relief requested from Section 17(a), no promoter, principal underwriter (e.g., Distributor) or affiliated person of the Fund, or any affiliated person of such person, will be an Authorized Participant, as defined below, or make a market in Shares. Neither the Adviser nor the Distributor or any affiliated person of the Adviser, its promoter or principal underwriter will maintain a secondary market in Shares. One or more Specialists or Market Makers will be assigned to the Shares.12 As long as the Funds operate in reliance on the requested order, the Shares will be listed on a Stock Exchange.
E. Purchases and Redemptions of Shares and Creation Units.
The Trust will offer, issue and sell Shares of each Fund to investors only in Creation Units through the Distributor on a continuous basis at the NAV per Share next determined after an order in proper form is received. The NAV of each Fund is expected to be
12 If Shares are listed on NYSE Arca, Nasdaq or a similar electronic Stock Exchange, one or more member firms of that Stock Exchange will act as Market Maker and maintain a market for Shares trading on the Stock Exchange. On Nasdaq, no particular Market Maker would be contractually obligated to make a market in Shares. However, the listing requirements on Nasdaq, for example, stipulate that at least two Market Makers must be registered in Shares to maintain a listing. In addition, on Nasdaq and NYSE Arca, registered Market Makers are required to make a continuous two-sided market or subject themselves to regulatory sanctions. If Shares are listed on a Stock Exchange such as the New York Stock Exchange, one or more member firms will be designated to act as a Specialist and maintain a market for the Shares trading on the Stock Exchange. No Market Maker or Specialist 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.
open for business as required by Section 22(e) of the Act. The Trust will sell and redeem Creation Units of each Fund only on a Business Day. Applicants expect that the initial price of a Creation Unit will be a minimum of $625,000 and will fall in the range of $625,000 to $10 million, and that the initial trading price per individual Share of each Fund will fall in the range of $25 to $100.
The price of Shares trading on the Stock Exchange will be based on a current bid-offer market. No secondary sales will be made to Brokers at a concession by the Distributor or by a Fund. Purchases and sales of Shares on the Stock Exchange, which will not involve a Fund, will be subject to customary brokerage commissions and charges.
1. Placement of Orders to Purchase Creation Units.
(a) General. In order to keep costs low and permit each Fund to be as fully invested as possible, Shares will be purchased and redeemed in Creation Units and generally on an in-kind basis. Accordingly, except where the purchase or redemption will include cash under the limited circumstances specified below, purchasers will be required to purchase Creation Units by making an in-kind deposit of specified instruments (“Deposit Instruments”), and shareholders redeeming their Shares will receive an in-kind transfer of specified instruments (“Redemption Instruments”).13 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
13 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.
15
5/9/2013 http://www.sec.gov/Archives/edgar/data/35336/000094562113000152/fidelity40appa04161...
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, or its respective Master Fund’s, portfolio (including cash positions),14 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;15 or
c. TBA Transactions, short positions and other positions that cannot be transferred in-kind16 will be excluded from the Creation Basket.17
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 (“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;
14 The portfolio used for this purpose will be the same portfolio used to calculate the Fund’s NAV for that Business Day. 15 A tradeable round lot for a security will be the standard unit of trading in that particular type of security in its primary
market.
16 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.
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 (as defined below), 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 Shares on that day to deposit or receive (as applicable) cash in lieu of some or all of the Deposit Instruments or Redemption Instruments, respectively, solely because: (i) such instruments are not eligible for transfer through either the NSCC Process or DTC Process (each process, defined below); or (ii) in the case of Funds holding non-U.S. investments (“Global Funds”), such instruments are not eligible for trading due to local trading restrictions, local restrictions on securities transfers or other similar circumstances; or
e. if 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
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. 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.
17
5/9/2013 http://www.sec.gov/Archives/edgar/data/35336/000094562113000152/fidelity40appa04161...
(iii) a holder of Shares of a Global Fund would be subject to unfavorable income tax treatment if the holder receives redemption proceeds in-kind.19
Each Business Day, before the open of trading on the Stock Exchange where the Shares are listed, 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 (if any), for that day. The published Creation Basket will apply until a new Creation Basket is announced on the following Business Day, and there will be no intra-day changes to the Creation Basket except to correct errors in the published Creation Basket. The “Creation Deposit” consists of the instruments and cash that the purchaser is required to deliver in exchange for the Creation Units it is purchasing as described above.20
All orders to purchase Creation Units must be placed with the Distributor by or through an “Authorized Participant,” which is either: (1) a “participating party,”i.e., a Broker or other participant, 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, or (2) a DTC Participant, which in any case has executed a participant
19 A “custom order” is any purchase or redemption of Shares made in whole or in part on a cash basis in reliance on clause (e)(i) or (e)(ii).
20 Pursuant to Rule 206(4)-7 under the Advisers Act, the Adviser and any Sub-Adviser or any other investment adviser to a Fund have or, prior to acting as investment adviser to a Fund, will have adopted written policies and procedures designed to prevent violations of the Advisers Act and the rules thereunder. The Adviser and any Sub-Adviser or any other investment adviser to a Fund have also adopted or will adopt policies and procedures as required under Section 204A of the Advisers Act, that, taking into account the nature of their business, are reasonably designed to prevent and detect the misuse of material nonpublic information in violation of the Advisers Act, Exchange Act and the rules thereunder by such investment adviser or any person associated with such investment adviser (its “Inside Information Policy”). In addition, like the Adviser, Sub-Advisers, and any other investment advisers, the Distributor has adopted or will adopt a Code of Ethics as required by Rule 17j-1 under the Act that contains provisions reasonably necessary to prevent Access Persons (as defined in Rule 17j-1) from engaging in any conduct prohibited by the Rule. In accordance with the Code of Ethics and Inside Information Policy of the Adviser, Sub-Advisers, or any other investment adviser to a Fund, personnel of those entities with knowledge about the composition of a Creation Deposit 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.
agreement with the Distributor and the transfer agent with respect to the creation and redemption of Creation Units (“Participant Agreement”). An investor does not have to be an Authorized Participant, but must place an order through, and make appropriate arrangements with, an Authorized Participant.
(b) NSCC Process, DTC Process and Process for the Funds. Purchase orders for creations and redemptions of each Fund’s Creation Units will be processed either through an enhanced clearing process or through a manual clearing process as described immediately below. Settlement and clearing of foreign securities presently cannot be made using either the NSCC or DTC clearing processes (“NSCC Process” and “DTC Process”, respectively). This is true for current ETFs which hold foreign securities (see international iShares and the international Vanguard ETFs, for example).
For Global Funds, once a purchase order has been placed with the Distributor, the Distributor will inform the Adviser and the Fund’s custodian (“Custodian”). The Custodian will then inform the appropriate sub-custodians. The Authorized Participant will deliver to the appropriate sub-custodians, on behalf of itself or the beneficial owner, the relevant Creation Deposit. The Creation Deposit must be delivered to the accounts maintained at the Custodian or applicable sub-custodians. If applicable, the sub-custodians will confirm to the Custodian that the required Creation Deposit has been delivered, and the Custodian will notify the Adviser and Distributor that the required Creation Deposit has been delivered. The Distributor will then furnish the purchaser with a confirmation and the Fund’s prospectus (“Prospectus”).
The Shares will clear and settle in the same manner as the shares of other ETFs and Deposit Instruments will settle in the same manner as other relevant instruments. Deposit Instruments that are U.S. government or U.S. agency securities and any cash will settle via free
19
5/9/2013 http://www.sec.gov/Archives/edgar/data/35336/000094562113000152/fidelity40appa04161...
delivery through the Federal Reserve System. Other fixed income instruments will settle in accordance with the normal rules for settlement of such instruments in the applicable market.
Equity securities will be processed either through an enhanced clearing process or through a manual clearing process. The enhanced clearing process is available only to those DTC Participants that also are participants in the CNS System of the NSCC. The NSCC/CNS system has been enhanced specifically to effect purchases and redemptions of domestic ETF securities. This enhanced clearing 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 (i.e., the DTC Process), which is available to all DTC participants, involves a manual line-by-line movement of each securities position. Because the DTC Process involves the movement of hundreds of securities individually, while the NSCC Process can act on instructions regarding the movement of one unitary basket which automatically processes the movement of hundreds of securities, DTC typically will charge a Fund more than NSCC to manually settle a purchase or redemption of Creation Units.
The Shares will typically settle through the DTC. The Custodian will monitor the movement of the Creation Deposit and will instruct the movement of Shares only upon validation that such instruments have settled correctly. The settlement of Shares will be aligned with the settlement of the Creation Deposit and will generally occur on a settlement cycle of T+3 Business Days or shorter.21 Applicants do not believe the issuance and settlement of Creation
21 Applicants note that Shares of the Funds typically will trade and settle on a trade date plus three business days (“T+3”) basis. Where this occurs, Applicants believe that Shares of each fixed income fund will trade in the secondary market at prices that reflect interest and coupon payments on Portfolio Positions through the Shares’ T+3 settlement date. As with other investment companies, the Act requires the Funds to calculate NAV based on the current market value of Portfolio Positions, and does not permit the Funds to reflect in NAV interest and coupon payments not due and payable. Therefore, to the extent that Shares of the fixed income funds may trade in the secondary market at a price that reflects interest and coupon payments due on a T+3 settlement date, Applicants anticipate that such Shares may trade in the secondary market at a slight premium to NAV that reflects these interest and coupon payments. Applicants do not believe that this apparent premium will have any impact on arbitrage activity or the operations of the Funds. The Specialists, 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.
Units in the manner described above will have any material impact on the arbitrage efficiency or the secondary market trading of Shares.
Each Fund may recoup the settlement costs charged by NSCC and DTC by imposing a transaction fee on investors purchasing or redeeming Creation Units (“Transaction Fee”). For this reason, investors purchasing or redeeming through the DTC process may pay a higher Transaction Fee than will investors doing so through the NSCC Process.
(c) Transaction Fees. The Transaction Fee will be borne only by purchasers and redeemers of Creation Units and will be limited to amounts that have been determined appropriate by the Adviser to defray the transaction expenses that will be incurred by a Fund when an investor purchases or redeems Creation Units.22 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.23 Transaction Fees will differ for each Fund, depending on the transaction expenses related to each Fund’s Portfolio Positions. From time to time and for such periods as the Adviser in its sole discretion may determine, the Transaction
22 In a master-feeder structure, the Transaction Fees would be paid indirectly to the Master Fund. Applicants are not requesting relief from Section 18 of the Act. Accordingly, a Master Fund may require a Transaction Fee payment to cover expenses related to purchases or redemptions of the Master Fund’s shares by a Feeder Fund only if it requires the same payment for equivalent purchases or redemptions by any other feeder fund. Thus, for example, a Master Fund may require payment of a Transaction Fee by a Feeder Fund for transactions for 20,000 or more shares so long as it requires payment of the same Transaction Fee by all feeder funds for transactions involving 20,000 or more shares. In all cases, the Transaction Fee will be limited in accordance with the requirements of the Commission applicable to open-end management investment companies offering redeemable securities.
23 Where a Fund permits an in-kind purchaser to deposit cash in lieu of depositing one or more Deposit Instruments, the purchaser may be assessed a higher Transaction Fee to offset the transaction cost to the Fund, or its respective Master Fund, of buying those particular Deposit Instruments.
21
5/9/2013 http://www.sec.gov/Archives/edgar/data/35336/000094562113000152/fidelity40appa04161...
Fee for the purchase or redemption of Shares of any Fund may be increased, decreased or otherwise modified, not to exceed amounts approved by the Board.
(d) Timing and Transmission of Purchase Orders. 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 NAV calculation time (“NAV Calculation Time”), generally 4:00 p.m. ET on the date the order is placed (“Transmittal Date”) in order for the purchaser to receive the NAV determined on the Transmittal Date. In the case of custom orders, the order must be received by the Distributor no later than 3:00 p.m. ET. On days when a Stock Exchange or the bond markets close earlier than normal, the Funds may require custom orders to be placed earlier in the day.
The Distributor will transmit all purchase orders to the relevant Fund. The Fund and/or the Distributor 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 Shares to the book-entry account specified by the purchaser. The Distributor will furnish a Prospectus and a confirmation to those placing purchase orders.
A Creation Unit of a Fund will not be issued until the transfer of the good title to the Trust of the Deposit Instruments and/or any cash has been completed. Notwithstanding the foregoing, to the extent contemplated by a Participant Agreement, Creation Units will be issued to an Authorized Participant notwithstanding the fact that the corresponding Creation Deposit has not been received in part or in whole, in reliance on the undertaking of such Authorized Participant to deliver the missing Deposit Instruments or cash payment as soon as possible, which undertaking shall be secured by such Authorized Participant’s delivery and maintenance
