Daily Rules, Proposed Rules, and Notices of the Federal Government
The following is a summary of the application. The complete application may be obtained via the Commission's Web site by searching for the file number, or an applicant using the Company name box, at
1. The Trust is registered as an open-end management investment company under the Act and organized as a Maryland statutory trust. Northern Trust Investments, Inc., an investment adviser registered under the Investment Advisers Act of 1940 (“Advisers Act”), serves as investment adviser to the Trust. Any Adviser (as defined below) will be registered as an adviser under the Advisers Act. The Adviser may retain sub-advisers (“Sub-Advisers”) to manage the assets of one or more Funds. Any Sub-Adviser will be registered or not subject to registration as an adviser under the Advisers Act. The Trust will enter into a distribution agreement with one or more distributors (each, a “Distributor”). Foreside is, and any other Distributor will be, a broker-dealer registered under the Securities Exchange Act of 1934 (“Exchange Act”).
2. The applicants are currently permitted to offer open-end management investment companies that are exchange traded funds (each, a “Fund”) tracking the performance of equity and fixed income indexes developed by third parties that are not “affiliated persons” (as such term is defined in section 2(a)(3) of the Act), or affiliated persons of affiliated persons, of the Trust, the Adviser, any Sub-Adviser, the Distributor or a promoter of a Fund. Applicants seek an order amending the Prior Order (“Amended Order”) that would allow them to offer Funds based on equity and/or fixed income securities indexes for which the Adviser or an affiliated person, or an affiliated person of an affiliated person, of the Trust, the Adviser, the Distributor, promoter, or any Sub-Adviser to the Fund (each other than the Adviser, an “Affiliated Person”) is an index provider (as defined below) (each, a “Self Indexing Fund”). Applicants request that the order apply to any Self Indexing Funds that are advised by the Adviser or an entity controlling, controlled by or under common control with the Adviser (with the Adviser, each an “Adviser”) and operate pursuant to the terms and conditions of the Prior Order, as amended.
3. Each underlying index for a Self Indexing Fund (“Underlying Index”) will be a rules based index comprised of equity and/or fixed income securities (including depositary receipts). The Adviser or an Affiliated Person, in its capacity as the index provider of an Underlying Index (the “Index Provider”), will create and/or own a proprietary, rules based methodology (“Rules-Based Process”) to create indexes for use by the Self Indexing Funds and other investors.
4. Applicants contend that any potential conflicts of interest arising from the fact that the Index Provider will be the Adviser or an Affiliated Person will not have any impact on the operation of the Self Indexing Funds because the Underlying Indexes will maintain transparency, the Self Indexing Funds' Deposit Securities and Fund Securities will be transparent, and the Adviser, or any Affiliated Person who is an Index Provider, any Sub-Adviser and the Self Indexing Funds each will adopt policies and procedures to address any potential conflicts of interest (“Policies and Procedures”). The Index Provider will publish in the public domain, including on its Web site and/or the Self Indexing Funds' Web site (“Web site”), the rules that govern the construction and maintenance of each of its Underlying Indexes. Applicants believe that this public disclosure will prevent the Adviser from possessing any advantage over other market participants by virtue of being the Index Provider or being affiliated with an Index Provider. Applicants note that the identity and Underlying Index weightings of the securities that meet the criteria of the Rules-Based Process, including the selection criteria, will be freely available.
5. Like other index providers, the Index Provider may modify the Rules-Based Process in the future. The Rules-Based Process could be modified, for example, to reflect changes in the underlying market tracked by an Underlying Index, the way in which the Rules-Based Process takes into account market events or to change the way a corporate action, such as a stock split, is handled. Such changes would not take effect until the Index Provider has given (a) the Calculation Agent (defined below) reasonable prior written notice of such rule changes, and (b) the investing public at least sixty (60) days
6. As owner of the Underlying Indexes, the Index Provider will enter into an agreement (“Calculation Agent Agreement”) with a third party to act as “Calculation Agent.” The Calculation Agent will be solely responsible for the calculation and maintenance of each Underlying Index, as well as the dissemination of the values of each Underlying Index. The Calculation Agent will not be an affiliated person, as such term is defined in the Act, or an affiliated person of an affiliated person, of the Self Indexing Funds, the Adviser, any Sub-Adviser, any promoter of a Fund or the Distributor.
7. The Adviser, any Affiliated Person who is an Index Provider, any Sub-Adviser and the Self Indexing Funds each will adopt and implement Policies and Procedures to address any potential conflicts of interest. Among other things, the Policies and Procedures will be designed to limit or prohibit communication with respect to issues/information related to the maintenance, calculation and reconstitution of the Underlying Indexes between the personnel of the Index Provider who have responsibility for the Underlying Indexes and Rules-Based Process (“Index Personnel') and the personnel who have responsibility for the management of the Self Indexing Funds or any Affiliated Accounts. The Index Personnel (i) will not have any responsibility for the management of Self Indexing Funds or any Affiliated Account, (ii) will be expressly prohibited from sharing this information with any employees of the Adviser or those of any Sub-Adviser, that have responsibility for the management of the Self Indexing Funds or any Affiliated Account until such information is publicly announced, and (iii) will be expressly prohibited from sharing or using this non-public information in any way except in connection with the performance of their respective duties. In addition, the Adviser has, and any Sub-Adviser will have, pursuant to Rule 206(4)-7 under the Advisers Act, written policies and procedures designed to prevent violations of the Advisers Act and the rules under the Advisers Act. Also, the Adviser has adopted a code of ethics pursuant to rule 17j-1 under the Act and rule 204A-1 under the Advisers Act (“Code of Ethics”). Any Sub-Adviser will be required to adopt a Code of Ethics and provide the Trust with the certification required by rule 17j-1 under the Act.
8. The Self Indexing Funds, except as otherwise noted herein, will operate in a manner identical to the operation of the other Funds. Applicants agree that any order of the Commission granting the requested relief will be subject to all of the terms and conditions in the Prior Order, except as described in the application.
1. Applicants also seek to amend the Prior Order to revise the terms and conditions concerning the purchase and redemption of shares of the Funds. Under the Amended Order, the discussion of purchases and redemptions of Creation Units in paragraphs 1-9 under Section IV.C. of the Prior Application, as well as the last two sentences of the first paragraph and the second paragraph under Section IV.E, is replaced with the following:
Each Fund will sell Shares to investors in Creation Units through the Distributor on a continuous basis at net asset value (“NAV”) per share next determined after an order in proper form is received. For Funds utilizing an in-kind purchase process shares will be purchased in Creation Units in exchange for the deposit, by the purchaser, of a particular portfolio of specified instruments,
In order to keep costs low and permit each Fund to be as full 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 Deposit Securities and shareholders redeeming their shares will receive an in-kind transfer of specified instruments (“Fund Securities”).
Purchases and redemptions of Creation Units may be made in whole or in part on a cash basis, rather than in kind, solely under the following circumstances: (a) To the extent there is a Cash Component, as described above; (b) if, on a given Business Day, the Fund announces before the open of trading that all purchases, all redemptions, or all purchases and redemptions on that day will be made entirely in cash; (c) if, upon receiving a purchase or redemption order from an Authorized Participant,
Each Business Day, before the open of trading on a national securities exchange as defined in Section 2(a)(26) of the Act on which the Shares are listed (“Listing Exchange'), the Fund will cause to be published through the NSCC the names and quantities of the instruments comprising the Deposit Securities and the Fund Securities, as well as the estimated Cash Component (if any), for that day.
In order to defray the transaction expenses, including brokerage costs, that will be incurred by a Fund when investors purchase or redeem Creation Units, and other expenses, such as custody fees and stamp taxes, each Fund will impose purchase or redemption transaction fees (“Transaction Fees”) to be borne only by such purchasers or redeemers. Where a Fund permits an in-kind purchaser to substitute cash in lieu of depositing a portion of the Deposit Securities, the purchaser may be assessed a higher Transaction Fee to cover the cost of purchasing those securities. The exact amounts of such Transaction Fees will be determined separately for each Fund. The Transaction Fee is designed to protect the continuing shareholders of a Fund against the dilutive costs associated with the transfer or purchase of Portfolio Securities in connection with the purchase of Creation Units and with the transfer or sale of Portfolio Securities in connection with the redemption of Creation Units.
Transaction Fees will be limited to amounts that have been determined by the Adviser to be appropriate and will take into account transaction costs and associated with the relevant Deposit Securities of the Funds. In all cases, such Transaction Fee will be limited in accordance with requirements of the Commission applicable to management investment companies offering redeemable securities.
Creation Units will be issued in aggregations of at least 25,000 Shares. Applicants recognize that each Share is issued by an investment company and, accordingly, the acquisition of any Shares by an investment company, whether acquired from the Fund or in the secondary market, shall be subject to the restrictions of Section 12(d)(1) of the Act except as permitted by an exemptive order that permits investment companies to invest in a Fund beyond those limitations.
2. Finally, Applicants also seek to make certain conforming changes to the Prior Application related to the changes set forth above.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.