November 21, 2005

Securities Industry Association
Derivative Products Committee
120 Broadway, 35 Fl.
New York, NY 10271-0080

Dear Ms. Bullitt, Mr. Vitha, and Ms. Medero:

In your letter, dated August 26, 2005, the Derivative Products Committee of the Securities Industry Association, with the support of Barclays Global Investors, N.A., requests an exemption from Section 11(d)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) in connection with certain extensions of credit on the shares of exchange-traded funds (“ETFs”).¹ Specifically, you request that the Commission extend the relief from Section 11(d)(1) currently available for broker-dealers that trade the shares of a particular ETF solely in the secondary market to include broker-dealers involved in the issuance and redemption of shares of such ETF as Authorized Participants (as described in your letter) of such ETF (“Broker-Dealer APs”).

Response

On the basis of your representations and the facts presented, we find that it is appropriate in the public interest and consistent with the protection of investors to grant, and hereby grant, an exemption from Section 11(d)(1) of the Exchange Act to permit broker-dealers to extend or maintain or arrange for the extension or maintenance of credit to or for customers on the shares of Qualifying ETFs (as defined below) for which such broker-dealers are Broker-Dealer APs, subject to the following conditions:

1. Neither the Broker-Dealer AP, nor any natural person associated with such Broker-Dealer AP, directly or indirectly (including through any affiliate of such Broker-Dealer AP), receives from the fund complex² any payment, compensation or other economic incentive to promote or sell the shares of the ETF to persons outside the fund complex,³ other than non-cash compensation permitted under NASD Rule 2830(l)(5)(A), (B), or (C);⁴ and
    
2. The Broker-Dealer AP does not extend, maintain or arrange for the extension or maintenance of credit to or for a customer on shares of the ETF before thirty days have passed from the date that the ETF’s shares initially commence trading (except to the extent that such extension, maintenance or arranging of credit is otherwise permitted pursuant to Rule 11d1-1).

For purposes of our response, Qualifying ETFs are ETFs that satisfy all three of the following conditions:

1. The ETF shares are issued by an open-end investment company or unit investment trust registered with the Commission under the Investment Company Act;
    
2. The ETF shares are listed and trade on a market that has obtained approval from the Commission pursuant to Section 19(b) of the Exchange Act of a rule change regarding the listing and trading of the ETF shares on the market (or that is relying on Rule 19b-4(e) to list and trade the ETF shares); and
    
3. The ETF (a) consists of a basket of twenty or more Component Securities,⁵ with no one Component Security constituting more than 25% of the total value of the ETF, and is managed to track a particular index all of the components of which are publicly available;⁶ or (b) solely for purposes of the exemptive relief for Broker-Dealer APs from Section 11(d)(1) of the Exchange Act, is an ETF with respect to which the staff of the Division of Market Regulation (“Staff”) has granted Non-AP Broker-Dealers (as defined below) relief from the requirements of Section 11(d)(1) in a letter dated prior to the date of this letter, provided that the ETF has not changed in such a way as to materially affect any of the facts or representations in such prior letter.

Prior No-Action Positions under Section 11(d)(1)

As noted in your letter, the Staff has confirmed on numerous occasions prior to the date of this response that it would not recommend enforcement action under Section 11(d)(1) to the Commission against broker-dealers that are not Broker-Dealer APs in a particular ETF, but that effect transactions in shares of such ETF exclusively in the secondary market (“Non-AP Broker-Dealers”), and extend or maintain or arrange for the extension or maintenance of credit to or for customers on such ETF shares in connection with such secondary market transactions. Such relief is limited to Non-AP Broker-Dealers that do not (and whose associated persons who are natural persons do not), directly or indirectly (including through any affiliate of such Non-AP Broker-Dealer), receive from the fund complex any payment, compensation or other economic incentive to promote or sell the shares of the ETF to persons outside the fund complex, other than non-cash compensation permitted under NASD Rule 2830(l)(5)(A), (B), or (C).⁷

Extension of Class Relief

We have provided exemptive, no-action and interpretive relief to ETFs, and to broker-dealers effecting transactions in ETF shares, with respect to various provisions of the securities laws. In particular, we provided, among other things, exemptive relief from Rule 10b-10 and no-action relief from Section 11(d)(1) and Rules 11d1-2, 15c1-5 and 15c1-6 in two class letters in 2001 and 2002.⁸ Since the issuance of the Class Letters, we have continued to provide relief to ETFs that failed to meet one or more of the conditions specified in the Class Letters. With the additional experience we have gained in this area, and in light of the relief granted to Broker-Dealer APs above, we believe that it is appropriate to expand the scope of the relief in the Class Letters with respect to Section 11(d)(1) and Rules 10b-10, 11d1-2, 15c1-5 and 15c1-6 to include Qualifying ETFs, as detailed below.⁹

Section 11(d)(1) and Rule 11d1-2

The Staff will not recommend enforcement action to the Commission against Non-AP Broker-Dealers that extend or maintain or arrange for the extension or maintenance of credit to or for customers on shares of Qualifying ETFs in connection with secondary market transactions in such ETF shares, provided that the Non-AP Broker-Dealer does not (and its associated persons who are natural persons do not), directly or indirectly (including through any affiliate of such Non-AP Broker-Dealer), receive from the fund complex any payment, compensation or other economic incentive to promote or sell the shares of the ETF to persons outside the fund complex, other than non-cash compensation permitted under NASD Rule 2830(l)(5)(A), (B), or (C).¹⁰

The Staff also will not recommend enforcement action to the Commission under Section 11(d)(1) if broker-dealers treat shares of Qualifying ETFs, for the purposes of Rule 11d1-2 under the Exchange Act, as “securities issued by a registered open-end investment company or unit investment trust as defined in the Investment Company Act of 1940.”

Rule 10b-10

Because of the institutional nature of the market for ETF shares in Creation Unit (as defined in your letter) size aggregations and the public availability of information regarding the identity of the securities to be tendered or received by customers for purposes of ETF share issuance and redemption transactions, we find that it is appropriate in the public interest and consistent with the protection of investors to grant, and hereby grant, an exemption from Rule 10b-10 under the Exchange Act to permit broker-dealers that issue or redeem shares of Qualifying ETFs on behalf of their customers to confirm such issuance or redemption transactions without providing a statement of the identity, price or number of shares of each individual Component Security tendered to or delivered by the ETF pursuant to the issuance or redemption transaction. This exemption does not apply to purchases or sales of ETF shares in the secondary market and is subject to the following conditions:

1. Confirmation statements of issuance and redemption transactions in ETF shares will contain all of the information specified in paragraph (a) of Rule 10b-10 other than identity, price, and number of shares of each Component Security tendered or received by the customer in the transaction.
    
2. Any confirmation statement of an issuance or redemption transaction in ETF shares that omits the identity, price, or number of shares of Component Securities will contain a statement that such omitted information will be provided to the customer upon request; and
    
3. All such requests will be fulfilled in a timely manner in accordance with paragraph (c) of Rule 10b-10.

Rules 15c1-5 and 15c1-6

Primarily because of the composite nature of ETF shares and the relatively small proportionate share of any Component Security in an ETF share, the Staff will not recommend enforcement action to the Commission under Rule 15c1-5 if a broker-dealer executes transactions in shares of Qualifying ETFs without disclosing any control relationship with an issuer of a Component Security. Moreover, the Staff will not recommend that the Commission take enforcement action under Rule 15c1-6 if a broker-dealer executes transactions in shares of Qualifying ETFs without disclosing its participation or interest in a primary or secondary distribution of a Component Security.

* * * * *

The foregoing exemption from Exchange Act Section 11(d)(1) for Broker-Dealer APs is based solely on your representations and the facts presented.¹¹ That exemption and the exemption from Rule 10b-10, and the no-action positions under Section 11(d)(1) and Rules 11d1-2, 15c1-5 and 15c1-6 are strictly limited to the application of the section and the rules to transactions involving shares of Qualifying ETFs under the circumstances described above and in your letter. In the event that any material change occurs with respect to any of those facts, representations, or circumstances, such transactions should be discontinued, pending presentation of the facts for our consideration. Requests for relief regarding transactions in shares of ETFs that do not satisfy the above criteria (or for products that are not within the scope of this relief¹²) will continue to be considered on a case-by-case basis.¹³

The foregoing exemptions are subject to modification or revocation if at any time the Commission determines that such action is necessary or appropriate in furtherance of the purposes of the Exchange Act. Moreover, the foregoing no-action positions are subject to modification or revocation as necessary or appropriate. The Staff expresses no view with respect

to any other questions the proposed transactions may raise, including, but not limited to, the adequacy of disclosure concerning, and the applicability of other federal and state laws or rules of any self-regulatory organization to, the proposed transactions.

cc: Georgia Bullitt, Esq.
Executive Director
Morgan Stanley & Co. Incorporated
2000 Westchester Avenue
Purchase, NY 10577

John R. Vitha, Esq.
Vice President and Associate General Counsel
Goldman, Sachs & Co.
One New York Plaza
38^th Floor
New York, NY 10004

Joanne T. Medero, Esq.
Managing Director and
General Counsel
Barclays Global Investors, N.A.
45 Fremont Street
San Francisco, CA 94105

¹ As described more fully in your letter, ETFs are investment companies registered under the Investment Company Act of 1940 (the “Investment Company Act”) either as unit investment trusts or as open-end investment companies. Shares of ETFs are traded by both institutional and retail investors on securities exchanges and in the over-the-counter markets at negotiated prices. ETFs are designed to replicate the holdings or correspond to the performance and yield of a reference securities index or a highly correlated subset of the securities underlying the index.

² For purposes of our response, the term “fund complex” means the issuer of the ETF shares, any other issuer of ETF shares that holds itself out to investors as a related company for purposes of investment or investor services, any investment adviser, Distributor (as defined in your letter), sponsor, depositor, or trustee (in the case of a unit investment trust) of any such issuer or any “affiliated person” (as defined in the Investment Company Act) of any such issuer or any such investment adviser, Distributor, sponsor, depositor or trustee.

³ We would consider an indirect payment to include a sales load, as that term is defined in Section 2(a)(35) of the Investment Company Act, on ETF shares. As noted in your letter, this condition would prohibit a broker-dealer relying on this relief from receiving 12b-1 fees.

⁴ ETFs may be formed as different series of shares issued by a single trust or company that is registered under the Investment Company Act. For purposes of our response, each such separate series would be viewed as a separate ETF. All classes of securities that are part of the same series would be deemed the same “ETF shares” for purposes of determining whether a Broker-Dealer AP or any associated person receives from the fund complex any payment, compensation or other economic incentive to promote or sell the ETF shares, even if the other classes of securities are not exchange-traded. Consequently, a broker-dealer’s receipt of compensation from the fund complex to promote one class of shares would disqualify the broker-dealer from extending credit in reliance on this letter on any ETF shares that are part of the same series, but would not affect the ability of the broker-dealer to extend credit in reliance on this letter on other ETF shares that are part of a different series issued by the same entity.

⁵ For purposes of our response, “Component Securities” are individual securities that comprise the ETF basket, e.g., securities that are assembled to replicate the particular index that the ETF tracks.

⁶ For purposes of our response, whether any one Component Security constitutes more than 25% of the total value of the ETF shall be determined as of the most recent rebalancing of the ETF’s reference securities index.

⁷ See, e.g., Letter re: SPDRs (Jan. 27, 1993) (“The only compensation a broker-dealer will receive for representing a customer in purchasing SPDRs is the commission charged to that customer -- most likely the same compensation the broker-dealer would receive in connection with any stock purchase by a customer. There is no special financial incentive to a broker-dealer, other than the broker-dealer's regular commission, to engage in secondary market transactions in SPDRs, whether as principal or agent.”); Letter re: iShares MSCI EAFE Growth Index Fund and iShares MSCI EAFE Value Index Fund (Aug. 4, 2005) (“The only compensation a broker-dealer will receive for representing a customer in purchasing iShares is the commission or asset-based brokerage account fee charged to that customer, which in all likelihood is the same compensation the broker-dealer would receive in connection with any stock purchase by a customer. There is no special financial incentive to a broker-dealer, other than the broker-dealer's regular commission, to engage in secondary market transactions in iShares, either as principal or agent.”). See notes 2-4, above, for additional information on this limitation.

⁸ See Letter re: American Stock Exchange LLC (August 17, 2001); Letter re: NASDAQ Stock Market, Inc. (Nov. 13, 2002) (together, “Class Letters”).

⁹ We are not expanding the scope of the Class Letters with respect to Exchange Act Rules 10a-1,
10b-17, or 14e-5, or Rules 101 or 102 of Regulation M at this time, but are currently considering whether such an expansion may be appropriate.

¹⁰ See notes 2-4, above, for additional information on this limitation.

¹¹ For example, the 11(d)(1) relief granted in this letter would not be available to a broker-dealer for transactions in shares of an ETF on which a sales load is, or was during the initial distribution period, charged. The Staff would consider a request for 11(d)(1) relief regarding such an ETF on a case-by-case basis.

¹² For example, the relief does not apply to transactions in securities issued by closed-end investment companies or trust-issued receipts issued by entities not registered as investment companies under the Investment Company Act. See, e.g., Letter re: streetTRACKS Gold Trust (Nov. 17, 2004).

¹³ In addition, as noted above, we are not expanding the scope of the Class Letters with respect to Exchange Act Rules 10a-1, 10b-17, or 14e-5, or Rules 101 or 102 of Regulation M. Requests for relief under those rules also will continue to be considered on a case-by-case basis.

¹⁴ 17 C.F.R. 200.30-3(32); 17 C.F.R. 200.30-3(63).

Incoming Letter:

The Incoming Letter is in Acrobat format.

http://www.sec.gov/divisions/marketreg/mr-noaction/sia112105.htm