[Federal Register: March 5, 2007 (Volume 72, Number 42)]
[Notices]
[Page 9787-9792]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05mr07-82]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-27745; 812-13344]
BLDRS Index Funds Trust, et al.; Notice of Application
February 28, 2007.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order under section 6(c) of the
Investment Company Act of 1940 (``Act'') for an exemption from sections
2(a)(32), 4(2), 22(d), 24(d) and 26(a)(2)(C) of the Act and rule 22c-1
under the Act; under sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and (a)(2) of the Act; and under
section 17(d) of the Act and rule 17d-1 under the Act to permit certain
joint transactions.
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SUMMARY OF APPLICATION: Applicants request an order that would permit:
(a) BLDRS Index Funds Trust (the ``Fund''), a unit investment trust
(``UIT'') with multiple series (each series, a ``Trust'') whose
portfolios will consist of the component stocks of various specified
indices (collectively, the ``Benchmark Indices,'' and each, a
``Benchmark Index''), to issue shares (``Trust Shares'') that are only
redeemable in large aggregations; (b) secondary market transactions in
Trust Shares to occur at negotiated prices; (c) dealers to sell Trust
Shares to purchasers in the secondary market unaccompanied by a
prospectus when prospectus delivery is not required by the Securities
Act of 1933 (``Securities Act''); (d) the Trusts, rather than the
Sponsor (as defined below), to bear certain expenses associated with
maintaining the Trusts; (e) certain ``affiliated persons'' of the
Trusts to deposit securities into, and receive securities from, the
Trusts in connection with the purchase and redemption of Trust Shares;
and (f) the Trusts to reimburse the Sponsor for payment of an annual
licensing fee to The Bank of New York (``BoNY'').
APPLICANTS: The Fund, PowerShares Capital Management LLC
(``PowerShares,'' together with its successor in interest \1\ and with
any person, directly or indirectly, controlling, controlled by, or
under common control with, PowerShares, ``Sponsor''), and ALPS
Distributors, Inc. (``Distributor'').
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\1\ ``Successors in interest'' means any entity or entities that
result from a reorganization into another jurisdiction or a change
in the type of business organization.
FILING DATES: The application was filed on November 20, 2006.
Applicants have
[[Page 9788]]
agreed to file an amendment during the notice period, the substance of
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which is reflected in this notice.
HEARING OR NOTIFICATION OF HEARING: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on March 20, 2007, and should be accompanied by proof of
service on applicants, in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Addresses: Secretary, U.S. Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-1090. Applicants:
H. Bruce Bond, PowerShares Capital Management LLC, 301 West Roosevelt
Road, Wheaton, IL 60187.
FOR FURTHER INFORMATION CONTACT: Jaea F. Hahn, Senior Counsel, at (202)
551-6870, or Janet M. Grossnickle, Branch Chief, at (202) 551-6821
(Division of Investment Management, Office of Investment Company
Regulation).
Applicants' Representations
1. Each Trust is a unit investment trust that is or will be
organized under the laws of the State of New York. The Sponsor is a
wholly owned subsidiary of AIM Management Group Inc.\2\ The Bank of New
York (``BoNY'') acts as trustee to each Trust (``Trustee'') pursuant to
a trust agreement entered into by and between BoNY and the Initial
Sponsor (each a ``Trust Agreement''). The Distributor is registered as
a broker-dealer under the Securities Exchange Act of 1934 (``Exchange
Act'') and serves, on an agency basis, as principal underwriter of the
Trusts.
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\2\ On October 18, 2006, PowerShares entered into a Transaction
Agreement (``Transaction Agreement'') with The Nasdaq Stock Market
(``Nasdaq''), the parent of Nasdaq Global Funds, Inc. (formerly
named Nasdaq AMEX Investment Product Services, Inc., and later
renamed Nasdaq Financial Products Services, Inc., the ``Initial
Sponsor'') pursuant to which the Initial Sponsor will transfer
sponsorship of the Trusts to PowerShares. In connection with the
Transaction Agreement, PowerShares is seeking exemptive relief
substantially identical to the relief granted to the Trust pursuant
to a Commission order (Investment Company Act Release No. 25797
(Nov. 8, 2002), as amended by Investment Company Act Release No.
26415 (Apr. 9, 2004)). The transfer of sponsorship of the Trust from
the Initial Sponsor to PowerShares is contingent upon receipt of the
exemptive relief requested in the application.
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2. Each Trust holds a portfolio of securities (``Portfolio
Securities'') consisting of substantially all of the securities in
substantially the same weighting as the component securities of the
Benchmark Index that it tracks (the ``Index Securities''). There are
currently four Trusts (``Current Trusts'').\3\ The Benchmark Indices
for the Current Trusts (the ``Initial Benchmark Indices'') are compiled
by BoNY (the ``BoNY Index Provider'').\4\ Pursuant to guidelines
adopted by BoNY for the Index Provider, the BoNY personnel involved in
compiling the Benchmark Indices cannot include any BoNY employees who
are members of the BoNY division that provides trustee services to the
Trusts, any broker-dealer affiliated with BoNY, BoNY's asset management
division, or BoNY's private banking group.
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\3\ The Current Trusts are the BLDRS Asia 50 ADR Index Fund,
BLDRS Developed Markets 100 ADR Index Fund, BLDRS Emerging Markets
50 ADR Index Fund and BLDRS Europe 100 ADR Index Fund. All Trusts
that currently intend to rely on the requested order have been named
as applicants. Any other existing Trust or any Trust organized in
the future that relies on the requested order will comply with the
terms and conditions of the application.
\4\ The Benchmark Indices are the (a) BoNY Asia 50 ADR Index,
(b) BoNY Developed Markets 100 ADR Index, (c) BoNY Emerging Markets
50 ADR Index and (d) BoNY Europe 100 ADR Index. The Initial
Benchmark Indices are sub-indices of the BoNY ADR Index, which is an
index of all U.S. exchange-listed Depositary Receipts (``DRs''),
subject to certain eligibility requirements. Applicants note that
BoNY is a prominent participant in the DR market, and receives
various fees and commissions in connection with its DR program
functions. BoNY has informed applicants that the index compilation
is bound by objective criteria, and that the identity of the
depositary bank for a DR is never a criterion in the selection of
Index Securities. As discussed in the application, BoNY represents
that its DR sales efforts are not coordinated with the compilation
of the Benchmark Indices.
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3. In the future, applicants may offer additional Trusts based on
other Benchmark Indices (``Future Trusts''). Any Future Trust will (a)
be organized under New York state law pursuant to a trust agreement
substantially identical to the Trust Agreements, (b) be sponsored by
the Sponsor, and (c) comply with the terms and conditions of the
requested order. No entity that creates, compiles, sponsors or
maintains a Benchmark Index will be an affiliated person, as defined in
section 2(a)(3) of the Act, or an affiliated person of an affiliated
person, of the Sponsor, Distributor or promoter of a Trust.
4. Trust Shares, units of beneficial interest in the Trusts, are
designed to provide investors with an instrument that closely tracks
the Benchmark Indices, trades like a share of common stock, and pays
periodic dividends proportionate to those paid by the Index Securities
to the extent they exceed the Trust's fees and expenses.\5\ The Trustee
makes adjustments to the Portfolio Securities to reflect changes made
by the BoNY Index Provider to the composition and weighting of the
Index Securities.\6\ All adjustments to the Portfolio Securities are
made by the Trustee as set forth in the Trust Agreements and are non-
discretionary. Applicants state that the Trustee, consistent with its
fiduciary duties, may utilize a broker-dealer that is an ``affiliated
person,'' as defined in section 2(a)(3) of the Act, of the Trustee
(each, an ``Affiliated Broker-Dealer'') in executing the transactions
that are necessitated by the required adjustment(s).\7\ Applicants
state that neither BoNY nor any Affiliated Broker-Dealer purchases or
sells DRs on a principal basis, or intends to sell DRs or any other
securities to any Trust on a principal basis. BoNY and its Affiliated
Broker-Dealers would engage in transactions with a Trust on an agency
basis only.
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\5\ The Trusts make quarterly distributions when dividends on
the Portfolio Securities and other income of the Trust, if any,
exceed fees and expenses accrued by the Trust during the previous
quarter. The Trustee may vary the frequency of dividend
distributions under certain circumstances.
\6\ The BoNY Index Provider determines, comprises and calculates
Benchmark Indices without regard to any Trust. BoNY has instituted
formal firewall procedures to ensure that no BoNY personnel involved
in providing trustee services to the Trusts have access to
information regarding changes to the Benchmark Indices prior to
their public announcement.
\7\ BoNY has adopted firewall procedures that prohibit
communications regarding changes or proposed changes to the
Benchmark Indices between any Affiliated Broker-Dealer and the BoNY
personnel involved in the compilation of the Benchmark Indices.
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5. Trust fees and expenses are first paid out of income received by
the Trust in the form of dividends and other distributions on Portfolio
Securities.\8\ Each Trust pays the Trustee a fee ranging from 0.06% to
0.10% of the net asset value (``NAV'') of the Trust on an annualized
basis, such percentage to vary based on the NAV of the Trust. The
Trustee in its discretion may waive all or any portion of such fee.
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\8\ Applicants expect that the income of the Trust may be
insufficient to pay the fees and expenses of the Trust. In such
circumstances, the Trustee will sell Portfolio Securities to
generate sufficient cash to pay the Trust fees and expenses in
excess of Trust income. The Trustee is ordinarily required to sell
Portfolio Securities whenever the Trustee determines that accrued
fees and expenses exceed dividends and other Trust accrued income on
a projected basis by more than 0.01% of the NAV of the Trust.
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6. Pursuant to a license agreement (``License Agreement''), the
BoNY Index
[[Page 9789]]
Provider has granted the Sponsor a license to use the Benchmark Indices
and certain trademarks of BoNY. The Sponsor will pay the BoNY Index
Provider an annual licensing fee for each Benchmark Index and will seek
reimbursement from each Trust for the fee charged in connection with
its Benchmark Index. The Sponsor will pay the Distributor a flat annual
fee for services provided to the Trusts. The Sponsor will not seek
reimbursement from any Trust for such payment without obtaining prior
exemptive relief from the Commission.
7. Trust Shares are issued in aggregations of 50,000 shares
(``Creation Units''). Orders to purchase Creation Units generally must
be delivered to the Distributor through a party that has executed a
participant agreement with the Distributor and Trustee, and is either
(a) a participant in the Continuous Net Settlement System of the
National Securities Clearing Corporation (``NSCC,'' and the NSCC
process of placing orders, the ``Trust Shares Clearing Process''), or
(b) a Depository Trust Company (``DTC'') participant, but such entity
or person is not required to be a Nasdaq member.
8. An investor wishing to purchase a Creation Unit from the Trust
will have to transfer to the Trustee a ``Portfolio Deposit,''
consisting of the following: (a) A portfolio of securities
substantially similar in composition and weighting to the Index
Securities (``Deposit Securities''); \9\ (b) a cash payment equal to
the dividends accrued on the Portfolio Securities since the last
dividend payment on the Portfolio Securities, net of expenses and
liabilities (``Income Net of Expense Amount''); and (c) a cash payment
or credit to equalize any differences between the market value of the
Deposit Securities and the NAV of the Trust on a per Creation Unit
basis (``Balancing Amount,'' and together with the Income Net of
Expense Amount, the ``Cash Component'').\10\ The Sponsor or its
designee makes available on each Business Day a list of the names and
the required number of shares of each of the Deposit Securities in the
current Portfolio Deposit, as well as the Income Net of Expense Amount,
effective through and including the previous Business Day, per
outstanding Trust Share.\11\ The Sponsor or its designee makes
available on the Exchange, every 15 seconds of each Business Day, the
sum of the Income Net of Expense Amount and the value of the Deposit
Securities, on a per Trust Share basis. An investor making a Portfolio
Deposit is charged a service fee (``Transaction Fee'') to be paid to
the Trustee to defray the Trustee's costs in processing transactions
for the Trust.\12\
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\9\ The Trusts will comply with the federal securities laws in
accepting Deposit Securities and satisfying redemptions with
Redemption Securities (as defined below), including that the Deposit
Securities and Redemption Securities are sold in transactions that
would be exempt from registration under the Securities Act of 1933.
The specified Deposit Securities and Redemption Securities generally
will correspond pro rata to the Portfolio Securities.
\10\ At the close of the market on each Business Day (as defined
below), the Trustee calculates the NAV of each Trust, divides that
amount by the total number of shares outstanding (yielding a ``Per
Trust Share NAV''), multiplies the Per Trust Share NAV by the number
of Trust Shares in a Creation Unit (e.g., 50,000), thereby
calculating the NAV per Creation Unit. The Trustee then calculates
the required number of shares of Index Securities and the Cash
Component that will comprise a Portfolio Deposit for the following
Business Day. A ``Business Day'' is any day that the Nasdaq or any
other Exchange that lists Trust Shares is open for business and any
day that the Trusts are open for business as required by section
22(e) of the Act.
\11\ The cash equivalent of an Index Security may be included in
the Cash Component of a Portfolio Deposit in lieu of the Index
Security if (a) the Trustee determines that an Index Security is
likely to be unavailable or available in insufficient quantity for
inclusion in a Portfolio Deposit, or (b) a particular investor is
restricted from investing or engaging in transactions in the Index
Security (for example, when the investor is a broker-dealer
restricted by regulation or internal policy from investing in
securities issued by a company on whose board of directors one of
its principals serves or when the investor is a broker-dealer and
the security is on its ``restricted list'').
\12\ The Transaction Fee will be $10 per each security ``name''
(i.e., each security identified by a separate CUSIP number) in the
Portfolio Deposit, rounded to the nearest $500 for BLDRS Asia 50 ADR
Index Fund and BLDRS Emerging Markets 50 ADR Index Fund and $1,000
for BLDRS Developed Markets 100 ADR Index Fund and BLDRS Europe 100
ADR Index Fund per Participating Party (as defined below) per day,
regardless of the number of Creation Units purchased by such
Participating Party on such day. ``Participating Party'' means an
NSCC participant who may place orders through the Trust Shares
Clearing Process. The Transaction Fee may be changed by the Trustee
with the Sponsor's consent, but will not exceed 0.20% of the value
of a Creation Unit. Investors who purchase Creation Units outside
the Trust Shares Clearing Process will pay the Transaction Fee plus
an amount not to exceed three times the Transaction Fee. The amount
of the Transaction Fee is disclosed in the prospectus for the Trust.
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9. Orders to purchase Creation Units are placed with the
Distributor, who is responsible for transmitting orders to the Trustee.
The Distributor issues confirmations of acceptance, issues delivery
instructions to the Trustee to implement the delivery of Creation
Units, and maintains records of the orders and the confirmations. The
Distributor also is responsible for delivering prospectuses to
purchasers of Creation Units and may provide certain other
administrative services.
10. Persons purchasing Creation Units from the Trust may hold the
Trust Shares or sell some, or all, of them in the secondary market.
Trust Shares of the Current Trusts are listed on Nasdaq and all Trust
Shares will be listed on a national securities exchange as defined in
section 2(a)(26) of the Act (``Exchange''). Trust Shares are traded in
the secondary market as individual units (i.e., in less than Creation
Units) in the same manner as other equity securities. Participating
Parties act as market makers (``Market Makers'') on Nasdaq and maintain
a market for Trust Shares.\13\ The price of each Trust Share that
trades on Nasdaq is based on the current bid-offer market. Transactions
involving Trust Shares on Nasdaq are subject to customary brokerage
commissions and charges. Applicants state that the price at which Trust
Shares trade is disciplined by arbitrage opportunities created by the
continuous ability to purchase or redeem Creation Units at their NAV,
which ensures that Trust Shares do not trade at a material premium or
discount in relation to their NAV.\14\
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\13\ No particular Market Maker is contractually obligated to
make a market in Trust Shares although Nasdaq's listing requirements
stipulate that at least two Market Makers must be registered in
Trust Shares to maintain a listing on Nasdaq. Applicants state that
no Market Maker will be an affiliated person, promoter, or principal
underwriter of the Trusts, or an affiliated person of such persons,
within the meaning of section 2(a)(3) of the Act, except pursuant to
section 2(a)(3)(A) or (C) of the Act due to ownership of Trust
Shares, as described below.
\14\ Applicants do not believe there are any special liquidity
issues as to constituents in the Benchmark Indices, in light of the
fact that constituent DRs are selected based on liquidity that is
high relative to DRs that would otherwise fit the relevant criteria.
The constituent DRs of the Benchmark Indices are traded and priced
on national securities exchanges, as are the constituent securities
of other indices on which exchange-traded funds investing in
domestic securities are based. Accordingly, applicants believe that
the pricing transparency for DRs should be equivalent to that of
other securities that are traded and priced on national securities
exchanges. Because there are no apparent differences in the pricing
transparency between DRs and such other equity securities,
applicants believe that there are no corresponding differences in,
and no deleterious effects on, the arbitrage efficiency of the
Trusts.
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11. Purchasers of Creation Units include institutional investors
and arbitrageurs, which include institutional investors. Market Makers
or specialists of an Exchange also may purchase Trust Shares in
connection with their market making activities. Secondary market
purchasers of Trust Shares include both institutional and retail
investors.\15\
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\15\ Trust Shares are registered in book-entry form only. DTC or
its nominee is the record owner of all outstanding Trust Shares.
Beneficial ownership of Trust Shares is shown on the records of DTC
or its participants.
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12. Applicants make available a standard Trust Shares product
description (``Product Description'') to members and member
organizations for
[[Page 9790]]
distribution to investors purchasing Trust Shares in accordance with
Exchange rules. Currently, the rules of the National Association of
Securities Dealers (``NASD'') require that NASD members distribute a
Product Description to all purchasers of Trust Shares. The Product
Description provides a plain English overview of a Trust, including the
material risks and potential rewards of owning Trust Shares, and
discloses the salient aspects of Trust Shares. The Product Description
advises investors that a prospectus for Trust Shares is available
without charge from the investor's broker or from the Distributor.
Applicants believe that the volume of purchase transactions in which an
investor will not receive a Product Description does not constitute a
significant portion of the market activity in Trust Shares.
13. Trust Shares are not individually redeemable, except upon
termination of the Trust. Trust Shares are redeemable in Creation Units
only. An investor redeeming a Creation Unit will receive a portfolio of
securities typically identical in composition and weighting to the
Deposit Securities as of the date the redemption request was made
(``Redemption Securities''). The redeeming investor may receive the
cash equivalent of an Index Security (a) when the Trustee determines
that an Index Security is likely to be unavailable or available in
insufficient quantity for delivery by the Trust, or (b) upon the
request of the redeeming investor (because, for example, the redeeming
investor is restricted by regulation or otherwise from holding an Index
Security). The redeeming investor also may receive, or may pay, cash in
an amount equal to the Cash Component in effect on the relevant
Business Day for Portfolio Deposits (``Cash Redemption Amount''). The
redeeming investor will pay a Transaction Fee, which will be calculated
in the same manner as a Transaction Fee payable in connection with the
purchase of a Creation Unit on the relevant Business Day.
14. Because each Trust ordinarily redeems in kind, rather than in
cash, the Trustee will not have to maintain cash reserves for
redemptions. This allows the assets of each Trust to be committed as
fully as possible to tracking the relevant Benchmark Index, and allows
each Trust to track the relevant Benchmark Index more closely than
other market basket products that must allocate a portion of their
assets to cash for redemptions.
Applicants' Legal Analysis
1. Applicants request an order under (a) section 6(c) of the Act
granting an exemption from sections 2(a)(32), 4(2), 22(d), 24(d) and
26(a)(2)(C) of the Act and rule 22c-1 under the Act; (b) sections 6(c)
and 17(b) of the Act granting an exemption from sections 17(a)(1) and
(2) of the Act; and (c) section 17(d) and rule 17d-1 under the Act to
permit certain joint transactions.
2. Section 6(c) of the Act provides that the Commission may exempt
any person, security, or transaction, or any class of persons,
securities, or transactions, if and to the extent that such exemption
is necessary or appropriate in the public interest and consistent with
the protection of investors and the purposes fairly intended by the
policy and provisions of the Act.
Sections 4(2) and 2(a)(32) of the Act
3. Section 4(2) of the Act defines a UIT as an investment company
that, among other things, issues only redeemable securities. 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 a
proportionate share of the issuer's current net assets, or the cash
equivalent. Because Trust Shares would not be individually redeemable,
applicants request an order that would permit the Trust to register as
a UIT and issue Trust Shares that are redeemable in Creation Units
only. Applicants state that investors may purchase and redeem Trust
Shares through the Trust in Creation Units. Applicants further state
that, because the market price of Creation Units is disciplined by
arbitrage opportunities, investors should be able to sell individual
Trust Shares in the secondary market at approximately NAV.
Section 22(d) of the Act and Rule 22c-1 Under the Act
4. Section 22(d) of the Act, among other things, prohibits a dealer
from selling a redeemable security that is being currently offered to
the public by or through an underwriter, except at the 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 next
computed after receipt of a tender of the security for redemption or of
an order to purchase or sell the security. Applicants state that
secondary market trading in Trust Shares takes place at negotiated
prices, not at a current offering price described in the prospectus and
not at a price based on NAV. Thus, purchases and sales of Trust Shares
in the secondary market do not comply with section 22(d) and rule 22c-
1, and applicants request an exemption from these provisions.
5. Applicants maintain that, while there is little legislative
history regarding section 22(d), its provisions and those of rule 22c-1
appear to have been designed to (a) prevent dilution caused by certain
riskless trading schemes by principal underwriters and contract
dealers, (b) prevent unjust discrimination or preferential treatment
among buyers, and (c) assure an orderly distribution of shares by
eliminating price competition from dealers offering shares at less than
the published sales price and repurchasing shares at more than the
published redemption price. Applicants believe that none of these
purposes is thwarted by permitting Trust Shares to trade in the
secondary market at negotiated prices. Applicants state that secondary
market trading in Trust Shares does not involve the Trust directly and
cannot, therefore, result in dilution of Trust assets. Applicants also
state that, to the extent different prices exist during a trading day,
or from day to day, for Trust Shares, such variances occur as a result
of third-party market forces, such as supply and demand, and not as a
result of unjust or discriminatory manipulation. Therefore, applicants
assert that secondary market transactions in Trust Shares do not create
discrimination or preferential treatment among buyers. Finally,
applicants contend that the proposed distribution system is orderly
because arbitrage activity ensures that the difference between the
market price of Trust Shares and their NAV remains narrow.
Section 24(d) of the Act
6. Section 24(d) of the Act provides, in pertinent part, that the
prospectus delivery exemption provided to dealer transactions by
section 4(3) of the Securities Act does not apply to any transaction in
a redeemable security issued by a UIT. Applicants request an exemption
from section 24(d) to permit dealers in Trust Shares to rely on the
prospectus delivery exemption provided by section 4(3) of the
Securities Act.\16\
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\16\ Applicants are not seeking relief from the prospectus
delivery requirement for non-secondary market transactions,
including purchases of Creation Units or those involving an issuer.
Applicants state that persons purchasing Creation Units will be
cautioned in the prospectus that some activities on their part may,
depending on the circumstances, result in their being deemed
statutory underwriters and subject them to the prospectus delivery
and liability provisions of the Securities Act. For example, a
broker-dealer firm and/or its client may be deemed a statutory
underwriter if it takes Creation Units after placing an order with
the Distributor, breaks them down into the constituent Trust Shares,
and sells Trust Shares directly to its customers, or if it chooses
to couple the purchase of a supply of new Trust Shares with an
active selling effort involving solicitation of secondary market
demand for Trust Shares. The prospectus states that whether a person
is an underwriter depends upon all the facts and circumstances
pertaining to that person's activities. The prospectus also states
that dealers who are not ``underwriters'' but are participating in a
distribution (as contrasted to ordinary secondary market trading
transactions), and thus dealing with Trust Shares that are part of
an ``unsold allotment'' within the meaning of section 4(3)(C) of the
Securities Act, would be unable to take advantage of the prospectus
delivery exemption provided by section 4(3) of the Securities Act.
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[[Page 9791]]
7. Applicants state that the secondary market for Trust Shares is
significantly different from the typical secondary market for UIT
securities, which is usually maintained by the sponsor of the UIT.
Trust Shares are listed on an Exchange and trade in the same manner as
listed securities issued by operating companies and closed-end
investment companies. Dealers selling shares of operating companies and
closed-end investment companies in the secondary market are generally
not required to deliver a prospectus to a purchaser.
8. Applicants contend that Trust Shares, as listed securities,
merit a reduction in the compliance costs and regulatory burdens
resulting from the imposition of prospectus delivery obligations in the
secondary market. Because Trust Shares are exchange-listed, prospective
investors have access to several types of market information about the
product. Applicants state that quotations, last sale price, and volume
information are continually available on a real-time basis through the
consolidated tape and are available throughout the day on brokers'
computer screens and other electronic services. The previous day's
price and volume information also is published in the financial section
of newspapers. The Sponsor publishes daily, on a per Trust Share basis,
the Income Net of Expense Amount. The Fund's Web site contains
quantitative information, updated on a daily basis, regarding the
previous Business Day's NAV and the reported closing price. The Web
site also includes for each Trust, a calculation of the premium or
discount of the closing price against NAV and data, in chart format,
displaying the frequency distribution of discounts and premiums of the
closing price against the NAV, within appropriate ranges, for each of
the four previous calendar quarters.
9. In addition, secondary market purchasers generally receive the
Product Description. Applicants state that, while the Product
Description is not intended as a substitute for a prospectus, it
contains pertinent information about Trust Shares. Applicants also note
that Trust Shares are understandable to retail investors as a product
that tracks the Benchmark Indices.
Section 26(a)(2)(C) of the Act
10. Section 26(a)(2)(C) of the Act requires, among other things,
that a UIT's trust indenture prohibit payments to the trust's depositor
(in the case of a Trust, the Sponsor), and any affiliated person of the
depositor, except payments for performing certain administrative
services. Applicants request an exemption from section 26(a)(2)(C) to
permit any Trust to reimburse the Sponsor for certain licensing,
registration, and marketing expenses.
11. Applicants state that, ordinarily, a sponsor of a UIT has an
opportunity to profit in connection with the creation of a trust in two
ways--through the difference between the acquisition cost of the
securities and their value on the date of deposit in the trust and, to
the extent a secondary market is maintained for units, through the
imposition of sales charges on resales of units. Expenses normally
incurred in the creation and maintenance of a trust can then be offset
against such profits. Applicants assert, however, that under the
proposed structure, the usual sources of income are not available
because the Sponsor does not impose a sales load or deposit Index
Securities into the Trust. Applicants contend that the motivation for
the limitations imposed in section 26(a)(2)(C) of the Act was the fear
that sponsors could take unfair advantage of a trust to profit, when
profits were already being generated through sales charges and market
gains (on the securities deposited by the sponsor). Applicants contend
that no such opportunity to profit exists for Sponsor.
12. Applicants state that permitting a Trust to reimburse the
Sponsor for certain of the Trust's expenses is no more disadvantageous
to the holders of Trust Shares than allowing the expenses to be imposed
indirectly as offsets to sales loads and other charges, as is done by
typical UITs. Applicants state that a Trust pays the Sponsor only its
actual out-of-pocket expenses. Finally, applicants state that the
payment is capped at 30 basis points of the Trust's NAV on an
annualized basis, with any expenses in excess of that amount to be
absorbed by the Sponsor.
Section 17(a) of the Act
13. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such person, from selling any security to or purchasing any security
from, the investment company. Section 2(a)(3) defines ``affiliated
person'' to include any person directly or indirectly owning,
controlling, or holding with power to vote, 5% or more of the
outstanding voting securities of the other person, and any person
controlling, controlled by or under common control with the other
person. Section 2(a)(9) provides that a control relationship will be
presumed where one person owns 25% or more of another person's voting
securities. Applicants state that, because the definition of
``affiliated person'' includes any person owning 5% or more, or more
than 25%, of an issuer's outstanding voting securities, every purchaser
of a Creation Unit will be an affiliated person of the Trust so long as
20 or fewer Creation Units are in existence. Applicants request an
exemption from section 17(a) under sections 6(c) and 17(b) to permit
persons that are affiliated persons solely by virtue of a 5% or more,
or more than 25%, ownership interest in a Trust (or affiliated persons
of such persons that are not otherwise affiliated with the Trusts) to
purchase and redeem Creation Units through in-kind transactions.
14. Section 17(b) authorizes the Commission to exempt a proposed
transaction from section 17(a) if the terms of the transaction,
including the consideration to be paid or received, are reasonable and
fair and do not involve overreaching, and the proposed transaction is
consistent with the policies of the registered investment company and
with the general purposes of the Act. Applicants assert that no useful
purpose would be served by prohibiting the affiliated persons described
above from making in-kind purchases and redemptions of Creation Units.
The composition of a Portfolio Deposit made by a purchaser, like the
Redemption Securities and Cash Redemption Amount given to a redeeming
investor, is the same regardless of the investor's identity, and is
valued under the same objective standards applied to valuing the
Portfolio Securities in connection with determining the Trust's NAV.
Therefore, applicants state that in-kind purchases and redemptions
afford no opportunity for the affiliated persons described above to
effect a transaction detrimental to other holders of Trust Shares.
Applicants also believe that in-kind
[[Page 9792]]
purchases and redemptions do not result in abusive self-dealing or
overreaching by affiliated persons of the Funds.
Section 17(d) of the Act and Rule 17d-1 Under the Act
15. Section 17(d) of the Act and rule 17d-1 under the Act prohibit
any affiliated person of, or principal underwriter for, a registered
investment company, or any affiliated person of the affiliated person
or the principal underwriter, acting as principal, from effecting any
transaction in connection with any joint enterprise or other
arrangement or profit-sharing plan in which the investment company
participates, unless an application regarding the joint transaction has
been filed with the Commission and granted by order. Under rule 17d-1,
in passing upon such applications, the Commission considers whether the
participation of the registered investment company in the joint
transaction is consistent with the provisions, policies and purposes of
the Act and the extent to which such participation is on a basis
different from or less advantageous than that of other participants.
16. Applicants request an order under rule 17d-1 that would permit
a Trust to reimburse the Sponsor for the payment to the BoNY Index
Provider of an annual license fee under the License Agreement.
Applicants believe that relief is necessary because the Sponsor may be
deemed an affiliated person of the Trust, as defined in section 2(a)(3)
of the Act, and the Trust's undertaking to reimburse the Sponsor might
be deemed a joint enterprise or other joint arrangement in which the
Trust is a participant, in contravention of section 17(d) and rule 17d-
1.
17. The License Agreement allows applicants to use the Benchmark
Indices as bases for Trust Shares and to use certain of BoNY's trade
name and trademark rights. Applicants believe that BoNY is a valuable
name that is well-known to investors and believe that investors wish to
invest in instruments that closely mirror the Benchmark Indices. In
view of this, applicants state that it is necessary to obtain from BoNY
the License Agreement so that appropriate reference to BoNY may be made
in materials describing Trust Shares and the Trust. Applicants assert
that the terms and provisions of the License Agreement are comparable
to the terms and provisions of other similar license agreements and
that the annual license fee is for fair value, is in an amount
comparable to that which would be charged by the BoNY Index Provider
for similar arrangements, and is in an amount comparable to that
charged by licensors in connection with the formation of other UITs
based on other indices. For these reasons, applicants state that the
proposed license fee arrangement satisfies the standards of section
17(d) and rule 17d-1.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. Each Trust's prospectus and Product Description will clearly
disclose that, for purposes of the Act, Trust Shares are issued by a
registered investment company, and the acquisition of Trust Shares by
investment companies is subject to the restrictions of Section 12(d)(1)
of the Act, except as permitted by an exemptive order that permits
registered investment companies to invest in Trust Shares beyond the
limits in Section 12(d)(1)(A), subject to certain terms and conditions,
including that the registered investment company enter into an
agreement with the Trust regarding the terms of the investment.
2. As long as a Trust operates in reliance on the requested order,
the Trust Shares will be listed on an Exchange.
3. The Web site for the Trusts, which will be publicly accessible
at no charge, will contain the following information, on a per Trust
Share basis, for each Trust: (a) The prior Business Day's NAV and the
reported closing price, and a calculation of the premium or discount of
such price against such NAV; and (b) data in chart format displaying
the frequency distribution of discounts and premiums of the daily
closing price against the NAV, within appropriate ranges, for each of
the four previous calendar quarters. In addition, the Product
Description for each Trust will state that the Web site for the Trusts
has information about the premiums and discounts at which the Trust
Shares have traded.
4. The prospectus and annual report for each Trust will also
include: (a) The information listed in condition 3(b) above, (i) in the
case of the prospectus, for the most recently completed year (and the
most recently completed quarter or quarters, as applicable), and (ii)
in the case of the annual report, for the immediately preceding five
years, as applicable; and (b) the following data, calculated on a per
Trust Share basis for one, five and ten year periods (or life of that
Trust), (i) the cumulative total return and the average annual total
return based on NAV and closing price, and (ii) the cumulative total
return of the relevant Benchmark Index.
5. Before a Trust may rely on the order, the Commission will have
approved pursuant to rule 19b-4 under the Exchange Act, an Exchange
rule requiring Exchange members and member organizations effecting
transactions in Trust Shares to deliver a Product Description to
purchasers of Trust Shares.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-3784 Filed 3-2-07; 8:45 am]
BILLING CODE 8010-01-P