File No. 812- [   ]

Aisha J. Hunt, Esquire Ryan M. Charles, Esquire Kelley Hunt & Charles, LLC 1630 Welton Street Denver, CO 80202 aisha@khc.law, (720) 850-8531 ryan@khc.law, (602) 877-7926

Jillian L. Bosmann, Esquire Faegre Drinker Biddle & Reath LLP One Logan Square, Suite 2000 Philadelphia, PA 19103-6996 jillian.bosmann@faegredrinker.com, (215) 988-3307

 

UNITED STATES OF AMERICA

BEFORE THE

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

I.	INTRODUCTION

 

The RBB Fund, Inc. (the “Company”) and F/m Investments LLC (the “Adviser”) (the Company and Adviser together are the “Applicants”) hereby file this application (the “Application”), for an order (“Order”) of the U.S. Securities and Exchange Commission (the “Commission”) under Section 6(c) of the Investment Company Act of 1940, as amended (the “Act”), for an exemption from Sections 2(a)(32), 5(a)(1), 18(f)(1), 18(i) and 22(d) of the Act and Rule 22c-1 under 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.¹  Applicants are requesting relief with respect to the following series of the Company:  US Treasury 3 Month Bill ETF (“TBIL”), US Treasury 6 Month Bill ETF (“XBIL”), US Treasury 12 Month Bill ETF (“OBIL”), US Treasury 2 Year Note ETF (“UTWO”), US Treasury 3 Year Note ETF (“UTRE”), US Treasury 5 Year Note ETF (“UFIV”), US Treasury 7 Year Note ETF (“USVN”), US Treasury 10 Year Note ETF (“UTEN”), US Treasury 20 Year Bond ETF (“UTWY”) and US Treasury 30 Year Bond ETF (“UTHY”) (each a “Fund,” and together, the “Funds” or the “US Benchmark Series”).

No form having been specifically prescribed for this Application, the Applicants proceed under Rule 0-2 under the Act.

A.	Summary of Requested Relief

Applicants request an Order that would permit each Fund in the US Benchmark Series to offer a class of mutual fund shares (each such class, a “Mutual Fund Class,” and such shares, “Mutual Fund Shares”) in addition to the Fund’s existing class of exchange-traded shares (each such class, an “ETF Class,” and such shares, “ETF Shares”).  The Order would provide each of the Funds with two broad categories of relief: 1) the relief necessary to continue standard exchange-traded fund (“ETF”) operations consistent with Rule 6c-11 under the Act (“ETF Operational Relief”) and 2) the relief necessary to offer a Mutual Fund Class (“Share Class Relief”).

B.	Scope of Requested Relief

Applicants request that the Order be limited to the US Benchmark Series.

C.

Precedent

In 2000, the Commission granted an exemptive order to The Vanguard Group, Inc. (“Vanguard”) to permit Vanguard to offer certain index-based open-end management investment companies with mutual fund classes and exchange-traded classes.² In 2003, the Commission amended that original exemptive order to expand the relief to cover additional domestic equity index funds.³ Also in 2003, the Commission granted an exemptive order to permit Vanguard to offer international equity index funds with mutual fund classes and exchange-traded classes.⁴ Finally, in 2007, the Commission granted an exemptive order to permit Vanguard’s bond index funds to offer mutual fund classes and exchange-traded classes.⁵ Collectively, the aforementioned orders are hereinafter referred to as the “Vanguard Orders”.

 

In 2019, the Commission adopted Rule 6c-11 under the Act to provide the exemptive relief necessary under the Act to permit ETF operations.⁶ However, the Commission determined not to provide blanket exemptive relief to allow for ETF classes as part of Rule 6c-11. The Adopting Release explains that multi-class relief for ETFs raises policy considerations that are different from those that the Commission intended to address in Rule 6c-11. The Adopting Release specifically notes that an ETF class that transacts with “Authorized Participants,” as defined in Rule 6c-11, on an in-kind basis and a mutual fund class that transacts with shareholders on a cash basis may give rise to differing costs to the portfolio.  As a result, certain costs may result from transactions through one class, but all shareholders would generally bear the costs.⁷

The Commission concluded that a fund wishing to offer both an ETF and mutual fund share class should request relief through the exemptive application process so that the Commission may assess all relevant policy considerations in the context of the facts and circumstances of the particular applicant.⁸

The relief requested in this Application is similar to relief previously granted by the Commission pursuant to the Vanguard Orders except that (i) the ETF Operational Relief would permit each Fund to continue standard ETF operations consistent with Rule 6c-11; (ii) the Share Class Relief would permit each Fund to add a Mutual Fund Class; and (iii) each Fund would be permitted to implement an exchange privilege that would allow shareholders to exchange bilaterally between the Fund’s Mutual Fund Class and ETF Class (“Exchange Privilege”).

II.	THE APPLICANTS

A.	The Company

The RBB Fund, Inc. is an open-end management investment company that is registered under the Act.  The Company was organized as a Maryland corporation on February 29, 1988.  The offerings of the Company’s shares are registered pursuant to the Securities Act of 1933, as amended (the “Securities Act”).

___________________________ 2 Vanguard Index Funds, Investment Company Act Release Nos. 24680 (Oct. 6, 2000) (notice) and 24789 (Dec. 12, 2000) (order). The Commission itself, as opposed to the Commission staff acting under delegated authority, considered the original Vanguard application and determined that the relief was 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. In the process of granting the order, the Commission also considered and denied a hearing request on the original application, as reflected in the final Commission order. 3 The Vanguard Group, Inc., Investment Company Act Release Nos. 26282 (Dec. 2, 2003) (notice) and 26317 (Dec. 30, 2003) (order). 4 Vanguard International Equity Index Funds, Investment Company Act Release Nos. 26246 (Nov. 3, 2003) (notice) and 26281 (Dec. 1, 2003) (order). 5 Vanguard Bond Index Funds, Investment Company Act Release Nos. 27750 (Mar. 9, 2007) (notice) and 27773 (April 2, 2007) (order). 6 Exchange-Traded Funds, Release No. IC-33646 (Sept. 25, 2019). 7 Adopting Release at 122-123. 8 Adopting Release at 124.

The US Benchmark Series are passively-managed ETFs that are each a series of the Company. The first ETFs of the US Benchmark Series commenced investment operations in August 2022, and the combined assets of the US Benchmark Series are approximately $2.2 billion as of the date of this Application. Each Fund is structured to provide Fund shareholders with exposure to an on-the-run U.S. Treasury security with the targeted duration indicated in the respective name of the Fund. For example, the investment objective of TBIL, as stated in its current prospectus, is to seek investment results that correspond (before fees and expenses) generally to the price and yield performance of the ICE BofA US 3-Month Treasury Bill Index (G0O1) (the “Underlying Index”).⁹  The Underlying Index was established December 31, 1977, by ICE Data Services. The Underlying Index is comprised of a single issue purchased at the beginning of the month and held for a full month. At the end of the month, that issue is sold and rolled into a newly selected issue. Each of the other Funds in the US Benchmark Series has a substantially similar investment objective to TBIL that only materially differs with respect to tracking a different index established by ICE Data Services comprised of U.S. Treasury issues that correspond with the targeted duration indicated in the respective name of the Fund. The shareholder base for the Funds is comprised primarily of shareholders represented by independent financial advisers, broker-dealers, or other intermediaries (“Financial Intermediaries”) and institutional investors.

 

F/m Investments LLC is a Delaware limited liability company and is registered with the Commission as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”).  The Adviser serves as the investment adviser to each Fund pursuant to an investment management agreement with the Company.

In the Adopting Release of Rule 6c-11 (“Adopting Release”), the Commission stated that it believed that an ETF multi-class structure raises policy considerations – including potentially differential treatment among share classes – that were unresolved at the time Rule 6c-11 was adopted and different from those that the Commission sought to address in Rule 6c-11.¹⁰  The Commission then requested that any potential sponsor of an ETF multi-class structure request exemptive relief individually, where it could address outstanding issues and concerns on an individual basis.¹¹  This Application uniquely addresses on an individual basis outstanding issues and concerns expressed in the Adopting Release and potential additional issues and concerns regarding the relief requested in this Application.  Specifically, such issues and concerns are uniquely addressed as follows: (i) the Mutual Fund Class that would be added to each Fund of the US Benchmark Series would have the same unitary management fee as the corresponding ETF Class; (ii) each Fund of the US Benchmark Series is fully transparent and its portfolio consists of U.S. Treasury securities, cash and cash equivalents, which would mitigate the potential of front running; (iii) concerns relating to the cash drag associated with holding the cash necessary to satisfy Mutual Fund Class redemptions would not be applicable given that the underlying portfolio holdings of the US Benchmark Series consist of highly-liquid U.S. Treasury securities, cash and cash equivalents; (iv) the implicit brokerage costs associated with buying and selling U.S. Treasury securities in response to Mutual Fund Class inflows and outflows would be nominal due to the highly-liquid nature of the U.S. Treasury market;¹² (v) the US Benchmark Series investment strategies provide for greater flexibility and efficiencies with respect to portfolio tax management thereby mitigating concerns related to distributable capital gains associated with portfolio transactions; and (vi) the liquidity profile of each Fund in the US Benchmark Series is better suited to address concerns discussed in the Commission’s release proposing amendments to its current rules regarding liquidity risk management programs and swing pricing (e.g., dilution, “first-mover” advantage).

 

ETFs are generally excluded from the approximately $6.6 trillion 401(k) marketplace primarily due to technology limitations of 401(k) recordkeeping systems.  If the relief sought by this Application were granted, the Mutual Fund Class could be made available to investors on 401(k) platforms.  All US Benchmark Series shareholders would benefit from the potential significant asset growth and economies of scale from the addition of the 401(k) distribution channel. Significant asset growth would also make it possible for each Fund to spread fixed costs over a larger asset base, thereby helping the Fund realize further economies of scale and benefitting all shareholders.

__________________________

9 The principal investment strategies of TBIL are that under normal market conditions, the Adviser seeks to achieve the UST 3 Month Bill Fund’s investment objective by investing at least 80% of the UST 3 Month Bill Fund’s net assets (plus any borrowings for investment purposes) in the component securities of the Underlying Index. TBIL may enter into reverse repurchase agreements in amounts not exceeding one-third of the TBIL’s total assets (including the amount borrowed). 10 In the Adopting Release, the Commission notes that the cash flows associated with other classes could impact a fund’s portfolio, generating costs that shareholders of all classes would share. With respect to the potential consequences of cash flows, the Commission identifies three categories of costs:  1) brokerage and other costs associated with buying and selling portfolio securities in response to mutual fund share class inflows and outflows; 2) cash drag associated with holding the cash necessary to satisfy mutual fund share class redemptions; and 3) distributable capital gains associated with portfolio transactions.   11 See supra footnote 8. 12 See Gary Gensler, “The Next 'Century of Progress': Remarks before the International Swaps and Derivatives Association Annual Meeting" (May 10, 2023), available at https://www.sec.gov/news/speech/gensler-remarks-isda-051023 and Gary Gensler, “Statement on Proposed Rules Regarding Treasury Clearing” (Sept. 14, 2022), available at https://www.sec.gov/news/statement/gensler-statement-treasury-clearing-0914222.

Additionally, the ability of each Fund to add a Mutual Fund Class would benefit all shareholders of the Fund by providing them with the option to access the US Benchmark Series in a share class structure with the characteristics that are most important to them.

Section 6(c) 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 the Act, or any rule thereunder, if such relief 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 provides that the Commission will grant an exemption from the provisions of Section 17(a) of the Act if evidence establishes that the terms of the proposed transaction are reasonable and fair, including the consideration to be paid or received, and do not involve overreaching on the part of any person concerned, that the proposed transaction is consistent with the policy of each registered investment company concerned, and that the proposed transaction is consistent with the general purposes of the Act.

 

Applicants believe that the requested relief described in this Application meets these standards.

With respect to the ETF Operational Relief, Applicants seek the same exemptive relief as provided by Rule 6c-11, subject to the same conditions contained in Rule 6c-11. Applicants believe that they are technically unable to rely on Rule 6c-11 because “exchange-traded fund” is defined, in part, to mean a registered open-end management investment company “whose shares are listed on an Exchange and traded at market-determined prices.” To the extent that this definition suggests that all of the investment company’s shares must be listed on an Exchange, a Fund with ETF Shares in addition to Mutual Fund Shares would not meet this definition.

 

In addition, the each Fund may offer an Exchange Privilege that would permit shareholders to exchange bilaterally between the Fund’s Mutual Fund Class and ETF Class. The Exchange Privilege will conform with Section 11(a) of the Act. In particular, any exchange would occur at the relative net asset values of the respective securities. To the extent a Fund imposes any administrative fee on the exchange, the fee will be applied in compliance with Rule 11a-3 under the Act. ETF Shares issued to a shareholder as part of the Exchange Privilege will be newly issued ETF Shares, and not ETF Shares purchased in the secondary market.  The issuance of Mutual Fund Shares and ETF Shares in connection with the Exchange Privilege will comply with the Securities Act.  Because the definition of “exchange-traded fund” in Rule 6c-11 requires that the ETF “issues (and redeems) creation units to (and from) authorized participants in exchange for a basket and a cash balancing amount if any,” a Fund that permits a shareholder of Mutual Fund Shares to acquire individual ETF Shares directly from the Fund through the Exchange Privilege may not satisfy this definition.

 

Although Applicants otherwise would comply with Rule 6c-11 as required by condition 1 below, because the Funds could not rely on Rule 6c-11, Applicants request the ETF Operational Relief described below.

 

1.	Sections 2(a)(32) and 5(a)(1) of the Act

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 holder, 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 ETF shares are not individually redeemable, a possible question arises as to whether the definitional requirements of a “redeemable security” or an “open-end company” under the Act are met. Rule 6c-11(b)(1) resolves this issue for ETFs relying on Rule 6c-11 by specifically providing that an ETF share is considered a redeemable security within the meaning of Section 2(a)(32). Because the operations of an ETF Class would adhere to all of the requirements of Rule 6c-11, Applicants request an Order under Section 6(c) granting an exemption from Sections 2(a)(32) and 5(a)(1) to permit a Fund to register as an open-end management investment company and redeem ETF Shares in Creation Units only.

 

Section 22(d) of the Act, among other things, prohibits investment companies, their principal underwriters, and dealers from selling a redeemable security to the public 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.

Because investors may purchase and sell individual ETF shares from and to dealers on the secondary market at market-determined prices (i.e., at prices other than those described in the prospectus or based on NAV), Rule 6c-11 provides exemptions from these provisions. As noted, the operations of an ETF Class, including the ways in which the ETF Shares trade at market-determined prices, would be the same as for ETFs relying on Rule 6c-11. Accordingly, Applicants seek the same relief pursuant to Section 6(c) as provided by Rule 6c-11.

 

Section 17(a) of the Act generally prohibits an affiliated person of a registered investment company, or an affiliated person of such person, from knowingly selling any security or other property to or purchasing any security or other property from the company. Rule 6c-11 provides an exemption from these provisions to permit purchases and redemptions of Creation Units through Basket transactions between exchange-traded funds and certain types of affiliated persons as described in Rule 6c-11. Applicants seek an exemption from Sections 17(a)(1) and 17(a)(2) of the Act pursuant to Sections 6(c) and 17(b) of the Act to permit the Funds to engage in the same types of Basket transactions through the ETF Class, subject to the requirements of Rule 6c-11.

In addition to the ETF Operational Relief that parallels the exemptive relief provided by Rule 6c-11, Applicants request an order under Section 6(c) for relief from Sections 18(f)(1) and 18(i) of the Act in order for the Funds to offer a Mutual Fund Class.

Section 18(f)(1) of the Act provides that “it shall be unlawful for any registered open-end investment company to issue any class of senior security or to sell any senior security of which it is the issuer” with exceptions not here relevant. The term “senior security” is defined in Section 18(g) to mean “any stock of a class having priority over any other class as to distribution of assets or payment of dividends.” Section 18(i) provides that every share of stock issued by an open-end investment company “shall be a voting stock and have equal voting rights with every other outstanding voting stock.”

 

Section 18(f)(1) was enacted to protect investors from abuses associated with complex investment company capital structures, including excessive leverage, conflicts of interest among classes, and investor confusion, while Section 18(i) was intended to prevent inequitable and discriminatory shareholder voting provisions.¹³ The Commission generally takes the position that an open-end investment company that issues multiple classes could raise issues under Sections 18(f)(1) and 18(i) because differences in the rights accorded to, or expenses paid by, different shareholders of the same investment company may raise senior security issues under Section 18.

In 1995, the Commission adopted Rule 18f-3, which provides an exemption from Sections 18(f)(1) and 18(i) for any open-end investment company (or series thereof) with a multi-class structure, provided that the company complies with the requirements of the rule.¹⁴ Although Applicants will comply substantially with the requirements of Rule 18f-3, the Funds would not be able to comply with the requirement in Rule 18f-3(a)(4) that, aside from the differences permitted by the rule, the ETF Class and the Mutual Fund Class will have the same rights and obligations.

_______________________

13 See Exemption for Open-End Management Investment Company Issuing Multiple Classes of Shares; Disclosure by Multiple Class and Master-Feeder Funds, Investment Company Act Release No. 19955 (Dec. 13, 1993) (proposing release) (citing Investment Trusts and Investment Company Hearings on S.3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess. 265-75, 1025-37 (1940)). 14 See supra footnote 13.

Applicants have identified six ways in which ETF Shares and Mutual Fund Shares will have different rights. First, Mutual Fund Shares will be individually redeemable while ETF Shares will be redeemable only in Creation Units. Second, ETF Shares will be tradable on an Exchange while Mutual Fund Shares will not. Third, dividends of Mutual Fund Shares may be automatically reinvested in additional Mutual Fund Shares issued by a Fund at its NAV, while holders of ETF Shares may only participate in a dividend reinvestment plan to the extent their broker-dealers make available the DTC book-entry and/or broker-dealer sponsored dividend reinvestment service. Fourth, although all share classes of a Fund will declare dividends on the same schedule (e.g., monthly, quarterly, annually), it is currently expected that the dividend declaration date for Mutual Fund Shares will be the ex-dividend date, whereas due to Exchange requirements, the declaration date for ETF Shares is expected to be one business day before the ex-dividend date. Fifth, while all share classes of a Fund will pay dividends on the same schedule (e.g., monthly, quarterly, annually), the payment date for the Mutual Fund Shares is expected to be the same as the ex-dividend date, whereas the payment date for ETF Shares is expected to be several days after the ex-dividend date.

Applicants do not believe that the differences in class rights noted above implicate the concerns at which Section 18 is directed – i.e., excessive leverage, conflicts of interest, and investor confusion.

 

(ii)

Potential conflicts of interest resulting from different classes paying/reinvesting dividends on different days.

Although Mutual Fund Shares and ETF Shares may both pay dividends, the payment date for Mutual Fund Shares is expected to be the ex-dividend date while the payment date for ETF Shares is expected to be several days after the ex-dividend date. Thus, while shareholders in the Mutual Fund Class who wish to reinvest their dividends will be able to do so on the ex-dividend date, shareholders in the ETF Class who wish to reinvest their dividends will not be able to reinvest their dividends until several days later. The delay between the ex-dividend date and the payment/reinvestment date occurs for all ETFs, whether they are stand-alone ETFs or part of a multi-class structure, and regardless of whether an ETF shareholder elects to reinvest dividends.

As a result of the difference in when dividends are paid, Mutual Fund Class shareholders who reinvest dividends will be continuously invested, while ETF Class shareholders who reinvest will be “out of the market” for several days with respect to the amount of the dividend.  This difference will affect the relative performance of the classes because, during the period when the dividend is out of the market, ETF Class shareholders will not receive income or experience appreciation or depreciation on the amount of the dividend. Applicants do not believe that this economic difference will be significant.

 

Applicants do not believe that this difference between Mutual Fund Class and the ETF Class resulting from the different dividend payment schedules is inconsistent with the purposes underlying Section 18 of the Act for the following reasons:

 

•

As noted above, Applicants do not believe the potential performance difference between the Mutual Fund Class and ETF Class will be significant.

•

Applicants do not believe that the potential performance difference will consistently favor one class over the other. Because share prices may move up or down, the payment delay experienced by ETF Class shareholders may help or hurt investment performance depending upon market conditions.

•

Section 18 does not guarantee equality of performance among different classes of the same Fund. Indeed, different classes may have different performance as a result of the different expense ratios that might apply to each class. Typically, those performance differences are far greater than the performance differences that are likely to result from different classes having different dividend payment dates.

•

The use of different dividend payment dates is a necessary consequence of the fact that ETF Shares are exchange-traded while Mutual Fund Shares are not. The delay between the ex-dividend date and the payment date is an inherent feature of any ETF that investors must accept in order to obtain the other inherent features of the instrument, such as intra-day trading.

•

The delay between the ex-dividend date and the payment date cannot be avoided; it would exist whether an ETF was structured as a separate share class of a multi-class fund or as a stand-alone fund.

(iii)

Potential inequitable voting power.

As noted, Section 18(i) provides that “every share of stock . . . issued by a registered management investment company . . . shall be a voting stock and have equal voting rights with every other outstanding voting stock.” Because shareholders of each Fund have voting rights based on the number of shares owned, and because the shareholders in the Mutual Fund Class may be able to reinvest dividends sooner than shareholders in the ETF Class, each Mutual Fund Class shareholder could obtain more voting power than an ETF Class Shareholder in the days immediately following an ex-dividend date.

 

Applicants believe that their proposed treatment of voting rights meets the standards of Section 18(i) because every share issued by the Funds will have equal voting rights in that each share will be entitled to one vote per share and a fractional vote per fractional share.  While the voting power of a Mutual Fund Class shareholder arguably could be different due to the ability to reinvest dividends more quickly, voting power and voting rights are not necessarily the same thing. Even if one takes the position that the classes have different voting rights as a result of their different dividend policies, Applicants’ proposal merits an exemption from Section 18(i) because, given the expected immaterial difference in voting power between the classes, it is extremely unlikely that the outcome of a proxy vote would ever be affected.

 

 

As discussed above in Section III of the Application, the Commission expressed concern in the context of the Adopting Release that the cash outflows and related cash drag associated with a Mutual Fund Class could impact a Fund’s portfolio, generating costs that shareholders of both classes would share. The potential for “cross-subsidization” between the classes may be viewed as a potential conflict between the classes. Applicants note as an initial matter that each Fund in the US Benchmark Series has an underlying portfolio comprised of highly-liquid U.S. Treasuries, cash and cash equivalents. Each Fund’s respective investment objective and principal investment strategies are limited to providing exposure to on-the-run U.S. Treasury securities of a single duration. Accordingly, each Fund inherently holds the requisite highly-liquid U.S. Treasury securities, cash and cash equivalents to meet cash outflows due to Mutual Fund Class redemptions. The potential cash drag associated with holding the cash equivalents necessary to satisfy Mutual Fund Class redemptions would therefore not be applicable given that the U.S. Treasury market is widely regarded as the deepest and most liquid securities market in the world.¹⁵

Additionally, in the Adopting Release, the Commission noted concerns regarding distributable capital gains associated with portfolio transactions.  Applicants expect that each Fund would be managed in a tax efficient manner such that the Adviser would utilize (1) the ability of the ETF Class to mitigate tax liability through in-kind redemptions, and, (2) where beneficial, the use of equalization accounting.  The Adviser’s implementation of these tax management strategies will benefit all shareholders.

 

Rule 18f-3 requires that the Board of Directors of the Company (“Board”), including a majority of the Directors who are not “interested persons” of the Company as defined in the 1940 Act (“Independent Directors”), determine that the multiple-class plan for the Fund is in the best interests of each class individually and of the Fund as a whole. In light of the Commission’s concerns, Applicants propose several conditions to the requested relief that will help to ensure that the Board, including the Independent Directors, are provided with the requisite information by the Adviser and other Fund service providers to make this determination.  As noted above, based on the unique characteristics of the Funds attributable to their investments in U.S. Treasury securities, Applicants believe that shareholders of both the ETF Class and Mutual Fund Class of each Fund would benefit from the multi-class structure. As addressed in the next section, Applicants also will take steps to inform and educate investors regarding the characteristics of the multi-class structure, including the potential that transactions through one class could generate portfolio transaction costs and tax consequences for shareholders in the other class.

c. Investor Confusion.  With respect to the issue of investor confusion, Applicants intend to take numerous steps that Applicants believe will minimize or eliminate any potential for investor confusion. At the outset, Applicants believe the potential for investor confusion is very limited. Applicants note that ETFs have been in existence for more than twenty-five years, and some ETFs are so popular that they consistently are among the highest volume securities on the Exchange on which they trade. As a general matter, it appears that investors are familiar with the concept of ETF shares and understand the fundamental differences between ETF shares and conventional mutual fund shares, regardless of whether the ETF shares are issued by ETFs or through ETF classes. As the Commission noted in the Adopting Release, “ETF investors have grown familiar with ETFs and the fundamental distinctions between ETFs and mutual funds,” and the Commission therefore determined that Rule 6c-11 did not need to include special disclosure requirements to highlight the ways in which mutual funds and ETFs differ.¹⁶ Further, even though Rule 6c-11 does not include exemptive relief to permit ETF Classes, the Commission did consider the disclosure requirements that apply to ETF Classes at the time of the rulemaking, and its amendments to Form N-1A regarding ETF trading costs apply equally to ETFs and ETF Classes.¹⁷ Applicants also believe that it is extremely unlikely that any investor acquiring Mutual Fund Shares or ETF Shares through the Exchange Privilege, if available, will do so without understanding the differences between the classes, since an investor would make an exchange only if the investor wanted to own shares with different characteristics. As noted above, many investors in the Funds are also clients of Financial Intermediaries that could help explain differences between the classes.

¹⁶ Adopting Release at 116.

•

Different products, different names.  All references to the ETF Shares will use the Fund name, which includes the term “ETF”.

•

Separate prospectuses.  There will be separate prospectuses for a Fund’s ETF Shares and Mutual Fund Shares.

•

Prominent disclosure in the ETF Shares Prospectus.  The cover and summary section of each Fund’s ETF Shares prospectus will include disclosure that the ETF Shares are listed on an Exchange and are not individually redeemable.

•

Disclosure about the Exchange Privilege.  To the extent Mutual Fund Shares may be converted into ETF Shares as part of an Exchange Privilege, a Fund’s Mutual Fund Shares prospectus will contain appropriate disclosure about the ETF Shares and the Exchange Privilege. To the extent ETF Shares may be converted into Mutual Fund Shares as part of an Exchange Privilege, a Fund’s ETF Shares prospectus will contain appropriate disclosure about the Mutual Fund Shares and the Exchange Privilege.

•

No reference to ETF Shares as a mutual fund investment. The ETF Shares will not be marketed as a mutual fund investment. Marketing materials may refer to ETF Shares as an interest in an investment company or Fund but will not refer to a “mutual fund” except to compare or contrast the ETF Shares with Mutual Fund Shares.  Where appropriate, there may be express disclosure that ETF Shares are not a mutual fund product.

•

Disclosure regarding dividends. The prospectus for each Fund’s ETF Shares will disclose, to the extent applicable, that reinvestment of dividends (if elected and permissible by the Financial Intermediary) may not occur until several days after the ex-dividend date.

•

Educational material. The Adviser will provide plain English disclosure on its website about ETF Shares and how they differ from Mutual Fund Shares.

C.

Precedent

V.

CONDITIONS

1.

A Fund will operate an ETF Class as an “exchange-traded fund” in compliance with the requirements of Rule 6c-11 under the Act, except that a Fund will list only one class of its shares on an Exchange and also may offer an Exchange Privilege.

2.

A Fund will comply with Rule 18f-3 under the Act, except to the extent that the ETF Class and Mutual Fund Class have different rights and obligations as described in this Application. As required by Rule 18f-3, before the first issuance of Mutual Fund Shares, and before any material amendment of a written plan under Rule 18f-3 to include a Mutual Fund Class, a majority of the Board Members, and a majority of the Independent Directors, shall find that the plan is in the best interests of each ETF Class and Mutual Fund Class individually and of the Fund as a whole.  As required by Rule 18f-3, before any vote on a plan including a Mutual Fund Class, the Board shall request and evaluate, and any agreement relating to the class arrangement shall require the Adviser to furnish, such information as may be reasonably necessary to evaluate the plan.

3.

To assist in the initial Board consideration of the addition of a Mutual Fund Class to a Fund, the Adviser shall prepare a written report for the Board evaluating the appropriateness of the Mutual Fund Class in light of the specific circumstances of the Fund and the investment strategy of the Fund.  The Adviser shall provide information that the Board deems relevant to the Board’s consideration of the Mutual Fund Class, which may include, among other information, creation and redemption activity reports for the ETF Class, portfolio turnover, brokerage and other costs associated with buying and selling portfolio securities, any impact on portfolio performance resulting from cash balances maintained to satisfy cash redemptions, and any distributable capital gains. The report will assist the Fund Board in evaluating the potential for any conflicts between the ETF Class and the Mutual Fund Class based on current and historical information as well as the reasonably anticipated transaction activity for the respective classes.

4.

The Board periodically will evaluate the class structure of each Fund. To inform this evaluation, the Board will receive a report from the Adviser that provides information that the Board deems necessary to assist its evaluation, which may include, among other information, data regarding brokerage and other costs associated with portfolio transactions, cash levels, or tax consequences for the applicable Fund. The Board will consider whether the report suggests any issues, including conflicts between the classes, that require additional Board action.

5.

Each Fund that issues a Mutual Fund Class will include appropriate disclosure in its registration statement regarding the key characteristics of, and any risks associated with, the multi-class structure, including the potential that transactions through one class could generate portfolio transaction costs and tax consequences for shareholders in other classes.

VI.

PROCEDURAL MATTERS

VII.

CONCLUSION

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