HealthShares, Inc., et al.; Notice of Application, 67404-67408 [E6-19666]
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Federal Register / Vol. 71, No. 224 / Tuesday, November 21, 2006 / Notices
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which may include local labor market
patterns, commuting patterns, and the
practices of other employers. The Pay
Agent must give thorough consideration
to the views and recommendations of
the Federal Salary Council, a body
composed of experts in the fields of
labor relations and pay policy and
representatives of Federal employee
organizations. The President appoints
the members of the Federal Salary
Council, which submits annual
recommendations to the President’s Pay
Agent about the locality pay program.
Based on recommendations of the
Federal Salary Council, we use
Metropolitan Statistical Area (MSA) and
Combined Statistical Area (CSA)
definitions established by the Office of
Management and Budget as the basis for
locality pay area definitions. The
definitions of the terms CSA and MSA
in section 531.602 of title 5, Code of
Federal Regulations, and section
531.609(d) provide that locality pay area
definitions change automatically when
OMB adds locations to a CSA or MSA.
Under the regulations, the changes in
locality pay areas resulting from OMB
additions to a CSA or MSA go into effect
the first pay period beginning on or after
January 1, of the following year.
On April 25, 2006, and May 26, 2006,
OMB issued bulletins announcing
corrections to OMB Bulletin 06–01
updating MSAs and CSAs. The bulletins
add the Sherman-Denison, TX MSA to
the Dallas-Fort Worth, TX CSA, and the
Reading, PA MSA to the PhiladelphiaCamden-Vineland, PA-NJ-DE-MD CSA.
OMB also added the Providence-New
Bedford-Fall River, RI-MA MSA to the
Boston-Worcester-Manchester, MA–NH
CSA, and the Greeley, CO MSA to the
Denver-Aurora-Boulder, CO CSA. The
addition to the Dallas CSA will add
Grayson County, TX, to the Dallas
locality pay area and the addition to the
Philadelphia CSA will add Berks
County, PA to the Philadelphia locality
pay area. These changes will occur
automatically under existing
regulations. The other changes require
corresponding changes in the official
designation of the Boston and Denver
locality pay areas but do not change the
geographic scope of those pay areas
because the Providence area is already
included in the Boston locality pay area
and the Greeley area is already part of
the Denver locality pay area under the
Pay Agent’s rules for areas of
application.
Impact and Implementation
The changes in locality pay area
boundaries will move an estimated 61
GS employees from the Rest of U.S.
(RUS) locality pay area to the Dallas
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locality pay area and about 187 GS
employees from the RUS locality pay
area to the Philadelphia locality pay
area, at a total cost of about $600,000
per year. The changes become
applicable on the first day of the first
pay period beginning on or after January
1, 2007.
Office of Personnel Management.
Linda M. Springer,
Director.
[FR Doc. E6–19477 Filed 11–20–06; 8:45 am]
BILLING CODE 6325–39–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
27553; 812–13264]
HealthShares, Inc., et al.; Notice of
Application
November 16, 2006.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of an application for an
order under section 6(c) of the
Investment Company Act of 1940
(‘‘Act’’) for an exemption from sections
2(a)(32), 5(a)(1), 22(d), and 24(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.
AGENCY:
Summary of Application: Applicants
request an order granting relief to permit
(a) an open-end management investment
company, the series of which consist of
the component securities of certain
equity securities indexes, to issue shares
(‘‘Shares’’) that can be redeemed only in
large aggregations (‘‘Creation Units’’), (b)
secondary market transactions in Shares
to occur at negotiated prices on a
national securities exchange, as defined
in section 2(a)(26) of the Act
(‘‘Exchange’’), (c) dealers to sell 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’’), and (d) certain affiliated persons
of the series to deposit securities into,
and receive securities from, the series in
connection with the purchase and
redemption of Creation Units.
Applicants: HealthShares, Inc.
(‘‘Corporation’’), Ferghana-Wellspring
LLC (‘‘Index Creator’’), and X-Shares
Advisors, LLC (‘‘Advisor’’).
DATES: Filing Dates: The application was
filed on March 1, 2006, and amended on
August 23, 2006 and November 15,
2006.
Hearing or Notification of Hearing: An
order granting the application will be
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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 December 6, 2006, 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: Secretary, U.S. Securities
and Exchange Commission, 100 F
Street, NE., Washington, DC 20549–
1090; Applicants, 420 Lexington
Avenue, Suite 2550, New York, NY
10170.
FOR FURTHER INFORMATION CONTACT:
Shannon Conaty, Senior Counsel, at
(202) 551–6827, or Mary Kay Frech,
Branch Chief, at (202) 551–6821
(Division of Investment Management,
Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained for a fee at the Public
Reference Desk, U.S. Securities and
Exchange Commission, 100 F Street,
NE., Washington DC 20549–0102
(telephone (202) 551–5850).
Applicants’ Representations
1. The Corporation, a Maryland
corporation, is registered under the Act
as an open-end management investment
company. Applicants currently intend
to introduce 20 series (‘‘Initial Funds’’)
of the Corporation and may establish
additional series in the future (‘‘Future
Funds,’’ and together with the Initial
Funds, ‘‘Funds’’). The Advisor, a
wholly-owned subsidiary of the Index
Creator, is registered as an investment
adviser under the Investment Advisers
Act of 1940 (‘‘Advisers Act’’) and will
serve as the investment adviser to each
Fund.1 The Advisor expects to enter
into a sub-advisory agreement with BNY
Investment Advisors to serve as subadviser (‘‘Sub-Advisor’’) to the Funds.
The Sub-Advisor is not otherwise an
affiliated person of the Advisor or the
Index Creator and is registered as an
investment adviser under the Advisers
Act. ALPS Distributors, Inc., a broker1 Neither the Index Creator nor the Advisor nor
any affiliated person of the Index Creator or the
Advisor is or will be registered as a broker or dealer.
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dealer registered under the Securities
Exchange Act of 1934 (‘‘Exchange Act’’),
will serve as principal underwriter for
the Funds (the ‘‘Distributor’’).
2. Each Fund seeks to invest in a
portfolio of equity securities (‘‘Portfolio
Securities’’) that substantially replicate
a particular benchmark (each an
‘‘Index’’ or ‘‘Underlying Index’’ and
collectively, the ‘‘Indices’’ or
‘‘Underlying Indices’’). The Underlying
Indices are based on a proprietary,
rules-based methodology developed by
the Index Creator to define certain
segments of the healthcare, life sciences
and biotechnology sectors of both
domestic and international markets
(‘‘Methodology’’).2 The Methodology,
including the rules which govern the
inclusion and weighting of securities in
the Underlying Indices, will be publicly
available, including on either the
Advisor’s or the Funds’ website (‘‘Web
site’’), along with the identities and
weightings of the component securities
of each Index (‘‘Component Securities’’)
and the Portfolio Securities of each
Fund.3 While the Index Creator may
change the rules of the Methodology in
the future, the Index Creator presently
does not intend to do so. Any change to
the Methodology would not take effect
until the Index Creator had given the
public at least 60 days advance notice
of the change and had given reasonable
notice of the change to the Index
Administrator/Calculation Agent. The
‘‘Index Administrator/Calculation
Agent’’ is the entity that, pursuant to an
agreement with the Index Creator, is
solely responsible for all Index
calculation, maintenance, dissemination
and reconstitution activities.4 The
2 Each Underlying Index is developed using an
investment approach known as ‘‘Vertical
Investing,’’ which seeks to categorize companies
within a particular healthcare, life sciences or
biotechnology index by focusing on each company’s
business activities with regard to the diagnosis of
diseases, the development of drugs, treatments,
therapies and delivery systems, and the
development of enabling/research tools and
technologies for use in these sectors.
3 The Index Creator, as owner of the Indices and
all intellectual property related to them, intends to
license the Indices to the Advisor for use in
connection with the Funds. The license will
specifically state that the Advisor must provide the
use of the Indices to the Funds at no cost.
4 The Index Administrator/Calculation Agent will
determine the number, type and weight of securities
that comprise each Index and perform, or cause to
be performed, all other calculations that are
necessary to determine the proper constitution of
each Index. The Index Administrator/Calculation
Agent will not disclose any information about any
Index’s constitution to the Index Creator, the
Advisor, the Sub-Advisor or the Funds prior to the
publication of such information on the Website.
However, the Index Administrator/Calculation
Agent may disclose such information solely to
certain employees of the Index Creator and its
affiliates who will monitor the Methodology and
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Administrator/Calculation Agent is not,
and will not be, an affiliated person, or
an affiliated person of an affiliated
person, of the Funds, Advisor, SubAdvisor, Index Creator, any promoter of
the Funds, or the Distributor of the
Funds.5
3. Applicants state that the Index
Personnel will not have any
responsibility for the management of the
Funds. In addition, applicants have
adopted policies and procedures that,
among other things, are designed to
limit or prohibit communications
between the Index Personnel and other
employees of the Index Creator and the
Advisor or any Sub-Advisor
(‘‘Firewalls’’). Among other things, the
Firewalls prohibit the Index Personnel
from disseminating non-public
information about the Indices, including
potential changes to the Methodology,
to, among others, the employees of the
Advisor or any Sub-Advisor responsible
for managing the Funds (‘‘advisory
personnel’’). The Firewalls also prohibit
the Advisor’s and Sub-Advisor’s
advisory personnel from sharing any
non-public information about the
management of the Funds with the
personnel responsible for creating,
monitoring, calculating, maintaining or
disseminating the Indices (i.e., Index
Personnel and the Index Administrator/
Calculation Agent). Further, the Advisor
and the Sub-Advisor have adopted,
pursuant to rule 206(4)–7 under the
Advisers Act, written policies and
procedures designed to prevent
violations of the Advisers Act and the
rules under the Advisers Act. The
Advisor, the Sub-Advisor and the
Distributor each have adopted or will
adopt a Code of Ethics as required under
rule 17j–1 under the Act, which
contains provisions reasonably
necessary to prevent Access Persons (as
defined in rule 17j–1) from engaging in
any conduct prohibited in rule 17j–1. In
addition, the Advisor and the SubAdvisor have adopted or will adopt
policies and procedures to detect and
prevent insider trading as required
under section 204A of the Advisers Act,
which are reasonably designed, taking
into account the nature of their
business, to prevent the misuse in
violation of the Advisers Act, Exchange
Act, or rules and regulations under the
Advisers Act and Exchange Act, of
material non-public information.
the Indices (‘‘Index Personnel’’) and to the chief
compliance officer of the Funds, the Advisor and
the Sub-Advisor for purposes of monitoring
compliance with the code of ethics of these entities.
5 Standard & Poor’s (‘‘S&P’’) will serve as Index
Administrator/Calculation Agent for the Underlying
Indices.
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4. Any Future Fund will be advised
by the Advisor or an entity controlled
by or under common control with the
Advisor. Applicants will not offer a
Future Fund unless either they have
requested and received with respect to
such Future Fund exemptive relief from
the Commission or a no-action position
from the staff of the Commission, or the
Future Fund will be listed on an
Exchange without the need for a filing
under rule 19b–4 under the Exchange
Act. In addition, any Future Fund that
relies on any order granted pursuant to
this application will comply with the
terms and conditions of the application,
including the following: (a) The
Methodology will be publicly available,
including on the Website; (b) once the
rules of the Methodology are
established, applicants may change
them only after giving the public at least
60 days advance notice of any change;
(c) applicants have Firewalls; (d) the
Index Administrator/Calculation Agent
will not be an affiliated person, or an
affiliated person of an affiliated person,
of the Funds, Advisor, Sub-Advisor,
Index Creator, Distributor or promoter of
the Funds; and (e) the Indexes will be
reconstituted on a fixed periodic basis
no more frequently than quarterly.
5. The investment objective of each
Fund will be to provide investment
results that track the performance,
before fees and expenses, of a particular
Underlying Index. The intra-day value
of each Index will be disseminated
every 15 seconds throughout the trading
day over the Consolidated Tape on each
day that the Funds are open, which
includes any day that the Funds are
required by to be open under section
22(e) of the Act (‘‘Business Day’’). In
seeking to achieve its investment
objective, each Fund will utilize either
a replication or a representative
sampling strategy. A Fund using a
replication strategy generally will invest
in the Component Securities in its
Underlying Index in approximately the
same weightings as in the Underlying
Index. In certain circumstances, such as
when a Component Security is illiquid
or there are practical difficulties or
substantial costs involved in holding
every security in an Underlying Index,
a Fund may use a representative
sampling strategy pursuant to which it
will invest in some but not all of the
Component Securities.6 Applicants
6 Each Fund will invest at least 90% of its assets
in Component Securities. Each Fund may invest up
to 10% of its assets in securities that are not
Component Securities, but which the Advisor or
Sub-Advisor believes will help the Fund track its
Underlying Index, including futures, options and
swap contracts, cash and cash equivalents. Certain
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anticipate that a Fund that utilizes a
representative sampling strategy will
not track the performance of its
Underlying Index with the same degree
of accuracy as an investment vehicle
that invests in every Component
Security of the Underlying Index in the
same weighting as the Underlying
Index. Applicants expect that each Fund
will have a tracking error relative to the
performance of its Underlying Index of
less than 5%.
6. Shares of the Funds will be sold at
a price of between $40 and $250 per
Share in Creation Units of 50,000
Shares. All orders to purchase Creation
Units must be placed with the
Distributor by or through an
‘‘Authorized Participant,’’ an entity that
has entered into an agreement with the
Distributor and that is either (a) A
participant in the continuous net
settlement system of the National
Securities Clearing Corporation, a
clearing agency registered with the
Commission or (b) a participant in the
Depository Trust Company (‘‘DTC,’’ and
such participant, ‘‘DTC Participant’’).
Creation Units generally will be issued
in exchange for an in-kind deposit of
securities and cash, though a Fund may
sell Creation Units on a cash-only basis
in limited circumstances. An investor
wishing to purchase a Creation Unit
from a Fund will have to transfer to the
Fund a ‘‘Creation Deposit’’ consisting of:
(a) A portfolio of securities that has been
selected by the Advisor or Sub-Advisor
to correspond generally to the
performance of the relevant Index
(‘‘Deposit Securities’’); and (b) a cash
payment to equalize any differences
between the market value of the Deposit
Securities per Creation Unit and the net
asset value (‘‘NAV’’) per Creation Unit
(‘‘Cash Requirement’’).7 An investor
purchasing a Creation Unit from a Fund
Funds may invest in American Depositary Receipts
or Global Depositary Receipts (collectively,
‘‘Depositary Receipts’’) based on securities of
foreign companies in the Underlying Index. A Fund
would treat Depositary Receipts that represent
Component Securities of its Underlying Index as
Component Securities for purposes of any
requirements related to the percentage of
Component Securities held by a Fund.
7 On each Business Day, prior to the opening of
trading on the Exchange, the Advisor or SubAdvisor will make available the list of the names
and the required number of shares of each Deposit
Security required for the Creation Deposit for the
Fund. That Creation Deposit will apply to all
purchases of Creation Units until a new Creation
Deposit for the Fund is announced. Each Fund
reserves the right to permit or require the
substitution of an amount of cash in lieu of
depositing some or all of the Deposit Securities. The
Exchange will disseminate every 15 seconds
throughout the trading day over the Consolidated
Tape an amount representing, on a per Share basis,
the sum of the current value of the Deposit
Securities and the estimated Cash Requirement.
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will be charged a fee (‘‘Transaction
Fee’’) to prevent the dilution of the
interests of the remaining shareholders
resulting from the Fund incurring costs
in connection with the purchase of the
Creation Units.8 Each Fund will
disclose the maximum Transaction Fee
in its prospectus (‘‘Prospectus’’) and the
method of calculating the Transaction
Fee in its statement of additional
information (‘‘SAI’’). No sales charges
for purchases of Creation Units of any
Fund are contemplated. The
Corporation is authorized to implement
a plan under rule 12b–1 under the Act
for each of the Funds, which will be
disclosed in the Fund’s Prospectus, if
implemented.
7. Orders to purchase Creation Units
of a Fund will be placed with the
Distributor who will be responsible for
transmitting orders to the Funds. The
Distributor will maintain a record of
Creation Unit purchases. The
Distributor will be responsible for
issuing confirmations of acceptance and
furnishing Prospectuses to purchasers of
Creation Units.
8. Persons purchasing Creation Units
from a Fund may hold the Shares or sell
some or all of them in the secondary
market. Shares of the Funds will be
listed on an Exchange and traded in the
secondary market in the same manner as
other equity securities. It is expected
that one or more members of the
Exchange will act as a specialist
(‘‘Specialist’’), and maintain a market on
the Exchange for the Shares. The price
of Shares traded on an Exchange will be
based on a current bid/offer market.
Purchases and sales of Shares in the
secondary market will be subject to
customary brokerage commissions and
charges.
9. Applicants expect that purchasers
of Creation Units will include
institutional investors and arbitrageurs.
The Specialist, in providing for a fair
and orderly secondary market for
Shares, also may purchase Creation
Units for use in its market-making
activities. Applicants expect that
secondary market purchasers of Shares
will include both institutional and retail
investors.9 Applicants expect that the
price at which the Shares trade will be
disciplined by arbitrage opportunities
created by the ability to continually
8 When a Fund permits a purchaser to substitute
cash for Deposit Securities, the purchaser may be
assessed a higher Transaction Fee to offset the
brokerage and other transaction costs incurred by
the Fund to purchase the requisite Deposit
Securities.
9 Shares will be registered in book-entry form
only. DTC or its nominee will be the registered
owner of all outstanding Shares. DTC or DTC
Participants will maintain records reflecting the
beneficial owners of Shares.
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purchase or redeem Creation Units at
their NAV, which should ensure that
the Shares will not trade at a material
discount or premium in relation to their
NAV.
10. Shares will not be individually
redeemable. Shares will only be
redeemable in Creation Units from a
Fund. To redeem, an investor will have
to accumulate enough Shares to
constitute a Creation Unit. Redemption
orders must be placed by or through an
Authorized Participant. An investor
redeeming a Creation Unit generally
will receive (a) A portfolio of securities
designated to be delivered for Creation
Unit redemptions on the date that the
request for redemption is submitted
(‘‘Redemption Securities’’), and (b) a
‘‘Cash Redemption Payment,’’
consisting of an amount calculated in
the same manner as the Cash
Requirement. An investor may receive
the cash equivalent of a Redemption
Security in certain circumstances, such
as if the investor is constrained from
effecting transactions in the security by
regulation or policy. A redeeming
investor will pay a Transaction Fee,
which is calculated in the same manner
as a Transaction Fee payable in
connection with purchases of Creation
Units.
11. Applicants state that neither the
Corporation nor any Fund will be
marketed or otherwise held out as a
traditional open-end investment
company or mutual fund. Rather,
applicants state that each Fund will be
marketed as an ‘‘exchange-traded fund,’’
‘‘investment company,’’ ‘‘fund,’’ or
‘‘trust.’’ All marketing materials that
refer to redeemability or describe the
method of obtaining, buying or selling
Shares will prominently disclose that
Shares are not individually redeemable
and that Shares may be acquired or
redeemed from the Fund in Creation
Units only. The same type of disclosure
will be provided in the Prospectus, SAI,
shareholder reports and investor
educational materials issued or
circulated in connection with Shares.
The Funds will provide copies of their
annual and semi-annual shareholder
reports to DTC Participants for
distribution to beneficial owners of
Shares.
Applicants’ Legal Analysis
1. Applicants request an order under
section 6(c) of the Act granting an
exemption from sections 2(a)(32),
5(a)(1), 22(d), and 24(d) of the Act and
rule 22c–1 Under the Act, and under
sections 6(c) and 17(b) of the Act
granting an exemption from sections
17(a)(1) and 17(a)(2) of the Act.
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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, from any provision of the
Act, 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. Section 17(b)
of the Act authorizes the Commission to
exempt a proposed transaction from
section 17(a) if evidence establishes that
the terms of the transaction, including
the consideration to be paid or received,
are reasonable and fair and do not
involve overreaching on the part of any
person concerned, and the proposed
transaction is consistent with the
policies of the registered investment
company and the general provisions of
the Act.
sroberts on PROD1PC70 with NOTICES
Sections 5(a)(1) and 2(a)(32) of the Act
3. 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 Shares
will not be individually redeemable,
applicants request an order that would
permit the Corporation to register as an
open-end management investment
company and issue Shares that are
redeemable in Creation Units only.
Applicants state that investors may
purchase Shares in Creation Units and
redeem Creation Units from each Fund.
Applicants further state that because the
market price of Shares will be
disciplined by arbitrage opportunities,
investors should be able to sell Shares
in the secondary market at prices that
do not vary substantially from their
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, which is
currently being offered to the public by
or through a principal underwriter,
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.
Applicants state that secondary market
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trading in Shares will take 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
Shares in the secondary market will not
comply with section 22(d) of the Act
and rule 22c–1 under the Act.
Applicants request an exemption under
section 6(c) from these provisions.
5. Applicants assert that the concerns
sought to be addressed by section 22(d)
of the Act and rule 22c–1 under the Act
with respect to pricing are equally
satisfied by the proposed method of
pricing Shares. Applicants maintain that
the provisions of section 22(d), as well
as 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) ensure an orderly
distribution of investment company
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.
6. Applicants believe that none of
these purposes will be thwarted by
permitting Shares to trade in the
secondary market at negotiated prices.
Applicants state that (a) Secondary
market trading in Shares does not
involve the Funds as parties and cannot
result in dilution of an investment in
Shares, and (b) to the extent different
prices exist during a given trading day,
or from day to day, such variances occur
as a result of third-party market forces,
such as supply and demand. Therefore,
applicants assert that secondary market
transactions in Shares will not lead to
discrimination or preferential treatment
among purchasers. Finally, applicants
contend that the proposed distribution
system will be orderly because arbitrage
activity will ensure that the difference
between the market price of Shares and
their NAV remains narrow.
Section 24(d) of the Act
7. Section 24(d) of the Act provides,
in relevant 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 an open-end investment
company. Applicants request an
exemption from section 24(d) to permit
dealers selling Shares to rely on the
prospectus delivery exemption provided
by section 4(3) of the Securities Act.10
10 Applicants state that they do not seek relief
from the prospectus delivery requirement for non-
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67407
8. Applicants state that Shares will be
listed on an Exchange and will be
traded in a manner similar to other
equity securities, including the shares of
closed-end investment companies.
Applicants note that dealers selling
shares of closed-end investment
companies in the secondary market
generally are not required to deliver a
prospectus to the purchaser. Applicants
contend that Shares, as a listed security,
merit a reduction in the compliance
costs and regulatory burdens resulting
from the imposition of prospectus
delivery obligations in the secondary
market. Because Shares will be
exchange-listed, prospective investors
will have access to several types of
market information about Shares.
Applicants state that information
regarding market price and volume will
be continually available on a real-time
basis throughout the day on computer
screens of brokers and other electronic
services. The previous day’s closing
price and volume information for Shares
also will be published daily in the
financial section of newspapers. In
addition, the Web site will include, for
each Fund, the prior Business Day’s
NAV, the mid-point of the bid-ask
spread for a Share at the time of
calculation of the NAV (‘‘Bid/Ask
Price’’), and a calculation of the
premium or discount of the closing
price against such Bid/Ask Price, as
well as data in chart format displaying
the frequency distribution of discounts
and premiums of the Bid/Ask Price
against the NAV, within appropriate
ranges, for each of the four previous
calendar quarters.
9. Investors also will receive a short
product description (‘‘Product
Description’’), describing a Fund and its
secondary market transactions, such as purchases of
Shares from the Funds or an underwriter.
Applicants state that the Prospectus will caution
persons purchasing Creation Units that some
activities on their part, depending on the
circumstances, may 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 Shares and sells them directly
to its customers, or if it chooses to couple the
creation of new Shares with an active selling effort
involving solicitation of secondary market demand
for Shares. The Prospectus will state that whether
a person is an underwriter depends upon all the
facts and circumstances pertaining to that person’s
activities. The Prospectus also will state that dealers
who are not ‘‘underwriters’’ but are participating in
a distribution (as contrasted to ordinary secondary
market trading transactions), and thus dealing with
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.
E:\FR\FM\21NON1.SGM
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67408
Federal Register / Vol. 71, No. 224 / Tuesday, November 21, 2006 / Notices
sroberts on PROD1PC70 with NOTICES
Shares. Applicants state that, while not
intended as a substitute for a
Prospectus, the Product Description will
contain information about Shares that is
tailored to meet the needs of investors
purchasing Shares in the secondary
market. The Product Description will
prominently disclose that the Indexes
are created and sponsored by an
affiliated person of the Advisor.
Sections 17(a)(1) and (2) of the Act
10. Section 17(a) of the Act generally
prohibits an affiliated person of a
registered investment company, or an
affiliated person of such a person, from
selling any security to or purchasing any
security from the company. Section
2(a)(3) of the Act 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
directly or indirectly controlling,
controlled by or under common control
with the other person. Section 2(a)(9) of
the Act provides that a control
relationship will be presumed where
one person owns more than 25% of
another person’s voting securities.
11. Applicants request an exemption
from section 17(a) to the extent
necessary to permit (a) persons who are
affiliated persons of a Fund solely by
virtue of holding with the power to vote
5% or more, or more than 25%, of the
Shares of a Fund (‘‘First-Tier Affiliates’’)
and (b) affiliated persons of First-Tier
Affiliates who are not otherwise
affiliated with the Fund, and persons
who are affiliated persons of a Fund
solely by virtue of holding with the
power to vote 5% or more, or more than
25%, of the outstanding voting
securities of other registered investment
companies (or series thereof) advised by
the Advisor (‘‘Second-Tier Affiliates’’)
to purchase and redeem Creation Units
through in-kind purchases and sales of
securities. Applicants contend that no
useful purpose would be served by
prohibiting the First- and Second-Tier
Affiliates from purchasing or redeeming
Creation Units through in-kind
transactions. The deposit procedure for
in-kind purchases and the redemption
procedure for in-kind redemptions will
be the same for all purchases and
redemptions. Deposit Securities and
Redemption Securities will be valued in
the same manner as the Portfolio
Securities. Therefore, applicants state,
the in-kind purchases and redemptions
for which relief is requested will afford
no opportunity for the affiliated persons
of a Fund, or the affiliated persons of
such affiliated persons, described above,
to effect a transaction detrimental to
VerDate Aug<31>2005
14:17 Nov 20, 2006
Jkt 211001
other holders of Shares. Applicants also
believe that these in-kind purchases and
redemptions will not result in selfdealing or overreaching of the Fund.
Applicants’ Conditions
Applicants agree that any order
granting the requested order will be
subject to the following conditions:
1. Applicants will not register a
Future Fund by means of filing a posteffective amendment to the
Corporation’s registration statement or
by any other means, unless either (a)
Applicants have requested and received
with respect to such Future Fund, either
exemptive relief from the Commission
or a no-action letter from the Division of
Investment Management of the
Commission, or (b) the Future Fund will
be listed on an Exchange without the
need for a filing pursuant to rule 19b4 under the Exchange Act.
2. Each Fund’s Prospectus and
Product Description will clearly
disclose that, for purposes of the Act,
Shares are issued by the Funds and that
the acquisition of 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 a Fund beyond
the limits of section 12(d)(1), subject to
certain terms and conditions, including
that the registered investment company
enter into an agreement with the Fund
regarding the terms of the investment.
3. As long as the Corporation operates
in reliance on the requested order, the
Shares will be listed on an Exchange.
4. Neither the Corporation nor any
Fund will be advertised or marketed as
an open-end investment company or a
mutual fund. Each Fund’s Prospectus
will prominently disclose that Shares
are not individually redeemable shares
and will disclose that the owners of
Shares may acquire those Shares from a
Fund and tender those Shares for
redemption to a Fund in Creation Units
only. Any advertising material that
describes the purchase or sale of
Creation Units or refers to redeemability
will prominently disclose that Shares
are not individually redeemable and
that owners of Shares may acquire those
Shares from a Fund and tender those
Shares for redemption to a Fund in
Creation Units only.
5. The Web site maintained for the
Corporation, which is and will be
publicly accessible at no charge, will
contain the following information, on a
per Share basis, for each Fund: (a) The
prior Business Day’s NAV and the Bid/
Ask Price and a calculation of the
premium or discount of the Bid/Ask
Price at the time of calculation of the
PO 00000
Frm 00083
Fmt 4703
Sfmt 4703
NAV against such NAV; and (b) data in
chart format displaying the frequency
distribution of discounts and premiums
of the daily Bid/Ask Price against the
NAV, within appropriate ranges, for
each of the four previous calendar
quarters. In addition, the Product
Description for each Fund will state that
the website for the Fund has
information about the premiums and
discounts at which the Shares have
traded.
6. The Prospectus and annual report
for each Fund will also include: (a) The
information listed in condition 5(b), (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 Share basis for one,
five and ten year periods (or life of the
Fund), (i) the cumulative total return
and the average annual total return
based on NAV and Bid/Ask Price, and
(ii) the cumulative total return of the
relevant Underlying Index.
7. Before a Fund 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 Shares to deliver a
Product Description to purchasers of
Shares.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Nancy M. Morris,
Secretary.
[FR Doc. E6–19666 Filed 11–20–06; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54747; File No. SR–BSE–
2006–51]
Self-Regulatory Organizations; Boston
Stock Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of
Proposed Rule Change and
Amendment No. 1 Thereto Relating to
Exchange Fees and Charges
November 14, 2006.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
31, 2006, the Boston Stock Exchange,
Inc. (‘‘BSE’’ or ‘‘Exchange’’) filed with
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
E:\FR\FM\21NON1.SGM
21NON1
]]>Agencies
[Federal Register Volume 71, Number 224 (Tuesday, November 21, 2006)]
[Notices]
[Pages 67404-67408]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-19666]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 27553; 812-13264]
HealthShares, Inc., et al.; Notice of Application
November 16, 2006.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (``Act'') for an exemption from sections
2(a)(32), 5(a)(1), 22(d), and 24(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.
-----------------------------------------------------------------------
Summary of Application: Applicants request an order granting relief
to permit (a) an open-end management investment company, the series of
which consist of the component securities of certain equity securities
indexes, to issue shares (``Shares'') that can be redeemed only in
large aggregations (``Creation Units''), (b) secondary market
transactions in Shares to occur at negotiated prices on a national
securities exchange, as defined in section 2(a)(26) of the Act
(``Exchange''), (c) dealers to sell 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''), and
(d) certain affiliated persons of the series to deposit securities
into, and receive securities from, the series in connection with the
purchase and redemption of Creation Units.
Applicants: HealthShares, Inc. (``Corporation''), Ferghana-
Wellspring LLC (``Index Creator''), and X-Shares Advisors, LLC
(``Advisor'').
DATES: Filing Dates: The application was filed on March 1, 2006, and
amended on August 23, 2006 and November 15, 2006.
Hearing or Notification of Hearing: An order granting the
application 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 December 6, 2006, 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: Secretary, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-1090; Applicants, 420 Lexington
Avenue, Suite 2550, New York, NY 10170.
FOR FURTHER INFORMATION CONTACT: Shannon Conaty, Senior Counsel, at
(202) 551-6827, or Mary Kay Frech, Branch Chief, at (202) 551-6821
(Division of Investment Management, Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
Public Reference Desk, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington DC 20549-0102 (telephone (202) 551-5850).
Applicants' Representations
1. The Corporation, a Maryland corporation, is registered under the
Act as an open-end management investment company. Applicants currently
intend to introduce 20 series (``Initial Funds'') of the Corporation
and may establish additional series in the future (``Future Funds,''
and together with the Initial Funds, ``Funds''). The Advisor, a wholly-
owned subsidiary of the Index Creator, is registered as an investment
adviser under the Investment Advisers Act of 1940 (``Advisers Act'')
and will serve as the investment adviser to each Fund.\1\ The Advisor
expects to enter into a sub-advisory agreement with BNY Investment
Advisors to serve as sub-adviser (``Sub-Advisor'') to the Funds. The
Sub-Advisor is not otherwise an affiliated person of the Advisor or the
Index Creator and is registered as an investment adviser under the
Advisers Act. ALPS Distributors, Inc., a broker-
[[Page 67405]]
dealer registered under the Securities Exchange Act of 1934 (``Exchange
Act''), will serve as principal underwriter for the Funds (the
``Distributor'').
---------------------------------------------------------------------------
\1\ Neither the Index Creator nor the Advisor nor any affiliated
person of the Index Creator or the Advisor is or will be registered
as a broker or dealer.
---------------------------------------------------------------------------
2. Each Fund seeks to invest in a portfolio of equity securities
(``Portfolio Securities'') that substantially replicate a particular
benchmark (each an ``Index'' or ``Underlying Index'' and collectively,
the ``Indices'' or ``Underlying Indices''). The Underlying Indices are
based on a proprietary, rules-based methodology developed by the Index
Creator to define certain segments of the healthcare, life sciences and
biotechnology sectors of both domestic and international markets
(``Methodology'').\2\ The Methodology, including the rules which govern
the inclusion and weighting of securities in the Underlying Indices,
will be publicly available, including on either the Advisor's or the
Funds' website (``Web site''), along with the identities and weightings
of the component securities of each Index (``Component Securities'')
and the Portfolio Securities of each Fund.\3\ While the Index Creator
may change the rules of the Methodology in the future, the Index
Creator presently does not intend to do so. Any change to the
Methodology would not take effect until the Index Creator had given the
public at least 60 days advance notice of the change and had given
reasonable notice of the change to the Index Administrator/Calculation
Agent. The ``Index Administrator/Calculation Agent'' is the entity
that, pursuant to an agreement with the Index Creator, is solely
responsible for all Index calculation, maintenance, dissemination and
reconstitution activities.\4\ The Administrator/Calculation Agent is
not, and will not be, an affiliated person, or an affiliated person of
an affiliated person, of the Funds, Advisor, Sub-Advisor, Index
Creator, any promoter of the Funds, or the Distributor of the Funds.\5\
---------------------------------------------------------------------------
\2\ Each Underlying Index is developed using an investment
approach known as ``Vertical Investing,'' which seeks to categorize
companies within a particular healthcare, life sciences or
biotechnology index by focusing on each company's business
activities with regard to the diagnosis of diseases, the development
of drugs, treatments, therapies and delivery systems, and the
development of enabling/research tools and technologies for use in
these sectors.
\3\ The Index Creator, as owner of the Indices and all
intellectual property related to them, intends to license the
Indices to the Advisor for use in connection with the Funds. The
license will specifically state that the Advisor must provide the
use of the Indices to the Funds at no cost.
\4\ The Index Administrator/Calculation Agent will determine the
number, type and weight of securities that comprise each Index and
perform, or cause to be performed, all other calculations that are
necessary to determine the proper constitution of each Index. The
Index Administrator/Calculation Agent will not disclose any
information about any Index's constitution to the Index Creator, the
Advisor, the Sub-Advisor or the Funds prior to the publication of
such information on the Website. However, the Index Administrator/
Calculation Agent may disclose such information solely to certain
employees of the Index Creator and its affiliates who will monitor
the Methodology and the Indices (``Index Personnel'') and to the
chief compliance officer of the Funds, the Advisor and the Sub-
Advisor for purposes of monitoring compliance with the code of
ethics of these entities.
\5\ Standard & Poor's (``S&P'') will serve as Index
Administrator/Calculation Agent for the Underlying Indices.
---------------------------------------------------------------------------
3. Applicants state that the Index Personnel will not have any
responsibility for the management of the Funds. In addition, applicants
have adopted policies and procedures that, among other things, are
designed to limit or prohibit communications between the Index
Personnel and other employees of the Index Creator and the Advisor or
any Sub-Advisor (``Firewalls''). Among other things, the Firewalls
prohibit the Index Personnel from disseminating non-public information
about the Indices, including potential changes to the Methodology, to,
among others, the employees of the Advisor or any Sub-Advisor
responsible for managing the Funds (``advisory personnel''). The
Firewalls also prohibit the Advisor's and Sub-Advisor's advisory
personnel from sharing any non-public information about the management
of the Funds with the personnel responsible for creating, monitoring,
calculating, maintaining or disseminating the Indices (i.e., Index
Personnel and the Index Administrator/Calculation Agent). Further, the
Advisor and the Sub-Advisor have adopted, pursuant to rule 206(4)-7
under the Advisers Act, written policies and procedures designed to
prevent violations of the Advisers Act and the rules under the Advisers
Act. The Advisor, the Sub-Advisor and the Distributor each have adopted
or will adopt a Code of Ethics as required under rule 17j-1 under the
Act, which contains provisions reasonably necessary to prevent Access
Persons (as defined in rule 17j-1) from engaging in any conduct
prohibited in rule 17j-1. In addition, the Advisor and the Sub-Advisor
have adopted or will adopt policies and procedures to detect and
prevent insider trading as required under section 204A of the Advisers
Act, which are reasonably designed, taking into account the nature of
their business, to prevent the misuse in violation of the Advisers Act,
Exchange Act, or rules and regulations under the Advisers Act and
Exchange Act, of material non-public information.
4. Any Future Fund will be advised by the Advisor or an entity
controlled by or under common control with the Advisor. Applicants will
not offer a Future Fund unless either they have requested and received
with respect to such Future Fund exemptive relief from the Commission
or a no-action position from the staff of the Commission, or the Future
Fund will be listed on an Exchange without the need for a filing under
rule 19b-4 under the Exchange Act. In addition, any Future Fund that
relies on any order granted pursuant to this application will comply
with the terms and conditions of the application, including the
following: (a) The Methodology will be publicly available, including on
the Website; (b) once the rules of the Methodology are established,
applicants may change them only after giving the public at least 60
days advance notice of any change; (c) applicants have Firewalls; (d)
the Index Administrator/Calculation Agent will not be an affiliated
person, or an affiliated person of an affiliated person, of the Funds,
Advisor, Sub-Advisor, Index Creator, Distributor or promoter of the
Funds; and (e) the Indexes will be reconstituted on a fixed periodic
basis no more frequently than quarterly.
5. The investment objective of each Fund will be to provide
investment results that track the performance, before fees and
expenses, of a particular Underlying Index. The intra-day value of each
Index will be disseminated every 15 seconds throughout the trading day
over the Consolidated Tape on each day that the Funds are open, which
includes any day that the Funds are required by to be open under
section 22(e) of the Act (``Business Day''). In seeking to achieve its
investment objective, each Fund will utilize either a replication or a
representative sampling strategy. A Fund using a replication strategy
generally will invest in the Component Securities in its Underlying
Index in approximately the same weightings as in the Underlying Index.
In certain circumstances, such as when a Component Security is illiquid
or there are practical difficulties or substantial costs involved in
holding every security in an Underlying Index, a Fund may use a
representative sampling strategy pursuant to which it will invest in
some but not all of the Component Securities.\6\ Applicants
[[Page 67406]]
anticipate that a Fund that utilizes a representative sampling strategy
will not track the performance of its Underlying Index with the same
degree of accuracy as an investment vehicle that invests in every
Component Security of the Underlying Index in the same weighting as the
Underlying Index. Applicants expect that each Fund will have a tracking
error relative to the performance of its Underlying Index of less than
5%.
---------------------------------------------------------------------------
\6\ Each Fund will invest at least 90% of its assets in
Component Securities. Each Fund may invest up to 10% of its assets
in securities that are not Component Securities, but which the
Advisor or Sub-Advisor believes will help the Fund track its
Underlying Index, including futures, options and swap contracts,
cash and cash equivalents. Certain Funds may invest in American
Depositary Receipts or Global Depositary Receipts (collectively,
``Depositary Receipts'') based on securities of foreign companies in
the Underlying Index. A Fund would treat Depositary Receipts that
represent Component Securities of its Underlying Index as Component
Securities for purposes of any requirements related to the
percentage of Component Securities held by a Fund.
---------------------------------------------------------------------------
6. Shares of the Funds will be sold at a price of between $40 and
$250 per Share in Creation Units of 50,000 Shares. All orders to
purchase Creation Units must be placed with the Distributor by or
through an ``Authorized Participant,'' an entity that has entered into
an agreement with the Distributor and that is either (a) A participant
in the continuous net settlement system of the National Securities
Clearing Corporation, a clearing agency registered with the Commission
or (b) a participant in the Depository Trust Company (``DTC,'' and such
participant, ``DTC Participant''). Creation Units generally will be
issued in exchange for an in-kind deposit of securities and cash,
though a Fund may sell Creation Units on a cash-only basis in limited
circumstances. An investor wishing to purchase a Creation Unit from a
Fund will have to transfer to the Fund a ``Creation Deposit''
consisting of: (a) A portfolio of securities that has been selected by
the Advisor or Sub-Advisor to correspond generally to the performance
of the relevant Index (``Deposit Securities''); and (b) a cash payment
to equalize any differences between the market value of the Deposit
Securities per Creation Unit and the net asset value (``NAV'') per
Creation Unit (``Cash Requirement'').\7\ An investor purchasing a
Creation Unit from a Fund will be charged a fee (``Transaction Fee'')
to prevent the dilution of the interests of the remaining shareholders
resulting from the Fund incurring costs in connection with the purchase
of the Creation Units.\8\ Each Fund will disclose the maximum
Transaction Fee in its prospectus (``Prospectus'') and the method of
calculating the Transaction Fee in its statement of additional
information (``SAI''). No sales charges for purchases of Creation Units
of any Fund are contemplated. The Corporation is authorized to
implement a plan under rule 12b-1 under the Act for each of the Funds,
which will be disclosed in the Fund's Prospectus, if implemented.
---------------------------------------------------------------------------
\7\ On each Business Day, prior to the opening of trading on the
Exchange, the Advisor or Sub-Advisor will make available the list of
the names and the required number of shares of each Deposit Security
required for the Creation Deposit for the Fund. That Creation
Deposit will apply to all purchases of Creation Units until a new
Creation Deposit for the Fund is announced. Each Fund reserves the
right to permit or require the substitution of an amount of cash in
lieu of depositing some or all of the Deposit Securities. The
Exchange will disseminate every 15 seconds throughout the trading
day over the Consolidated Tape an amount representing, on a per
Share basis, the sum of the current value of the Deposit Securities
and the estimated Cash Requirement.
\8\ When a Fund permits a purchaser to substitute cash for
Deposit Securities, the purchaser may be assessed a higher
Transaction Fee to offset the brokerage and other transaction costs
incurred by the Fund to purchase the requisite Deposit Securities.
---------------------------------------------------------------------------
7. Orders to purchase Creation Units of a Fund will be placed with
the Distributor who will be responsible for transmitting orders to the
Funds. The Distributor will maintain a record of Creation Unit
purchases. The Distributor will be responsible for issuing
confirmations of acceptance and furnishing Prospectuses to purchasers
of Creation Units.
8. Persons purchasing Creation Units from a Fund may hold the
Shares or sell some or all of them in the secondary market. Shares of
the Funds will be listed on an Exchange and traded in the secondary
market in the same manner as other equity securities. It is expected
that one or more members of the Exchange will act as a specialist
(``Specialist''), and maintain a market on the Exchange for the Shares.
The price of Shares traded on an Exchange will be based on a current
bid/offer market. Purchases and sales of Shares in the secondary market
will be subject to customary brokerage commissions and charges.
9. Applicants expect that purchasers of Creation Units will include
institutional investors and arbitrageurs. The Specialist, in providing
for a fair and orderly secondary market for Shares, also may purchase
Creation Units for use in its market-making activities. Applicants
expect that secondary market purchasers of Shares will include both
institutional and retail investors.\9\ Applicants expect that the price
at which the Shares trade will be disciplined by arbitrage
opportunities created by the ability to continually purchase or redeem
Creation Units at their NAV, which should ensure that the Shares will
not trade at a material discount or premium in relation to their NAV.
---------------------------------------------------------------------------
\9\ Shares will be registered in book-entry form only. DTC or
its nominee will be the registered owner of all outstanding Shares.
DTC or DTC Participants will maintain records reflecting the
beneficial owners of Shares.
---------------------------------------------------------------------------
10. Shares will not be individually redeemable. Shares will only be
redeemable in Creation Units from a Fund. To redeem, an investor will
have to accumulate enough Shares to constitute a Creation Unit.
Redemption orders must be placed by or through an Authorized
Participant. An investor redeeming a Creation Unit generally will
receive (a) A portfolio of securities designated to be delivered for
Creation Unit redemptions on the date that the request for redemption
is submitted (``Redemption Securities''), and (b) a ``Cash Redemption
Payment,'' consisting of an amount calculated in the same manner as the
Cash Requirement. An investor may receive the cash equivalent of a
Redemption Security in certain circumstances, such as if the investor
is constrained from effecting transactions in the security by
regulation or policy. A redeeming investor will pay a Transaction Fee,
which is calculated in the same manner as a Transaction Fee payable in
connection with purchases of Creation Units.
11. Applicants state that neither the Corporation nor any Fund will
be marketed or otherwise held out as a traditional open-end investment
company or mutual fund. Rather, applicants state that each Fund will be
marketed as an ``exchange-traded fund,'' ``investment company,''
``fund,'' or ``trust.'' All marketing materials that refer to
redeemability or describe the method of obtaining, buying or selling
Shares will prominently disclose that Shares are not individually
redeemable and that Shares may be acquired or redeemed from the Fund in
Creation Units only. The same type of disclosure will be provided in
the Prospectus, SAI, shareholder reports and investor educational
materials issued or circulated in connection with Shares. The Funds
will provide copies of their annual and semi-annual shareholder reports
to DTC Participants for distribution to beneficial owners of Shares.
Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the Act
granting an exemption from sections 2(a)(32), 5(a)(1), 22(d), and 24(d)
of the Act and rule 22c-1 Under the Act, and under sections 6(c) and
17(b) of the Act granting an exemption from sections 17(a)(1) and
17(a)(2) of the Act.
[[Page 67407]]
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, from any provision of the Act, 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.
Section 17(b) of the Act authorizes the Commission to exempt a proposed
transaction from section 17(a) if evidence establishes that the terms
of the transaction, including the consideration to be paid or received,
are reasonable and fair and do not involve overreaching on the part of
any person concerned, and the proposed transaction is consistent with
the policies of the registered investment company and the general
provisions of the Act.
Sections 5(a)(1) and 2(a)(32) of the Act
3. 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 Shares will not be individually redeemable,
applicants request an order that would permit the Corporation to
register as an open-end management investment company and issue Shares
that are redeemable in Creation Units only. Applicants state that
investors may purchase Shares in Creation Units and redeem Creation
Units from each Fund. Applicants further state that because the market
price of Shares will be disciplined by arbitrage opportunities,
investors should be able to sell Shares in the secondary market at
prices that do not vary substantially from their 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, which is currently being offered to
the public by or through a principal underwriter, 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.
Applicants state that secondary market trading in Shares will take
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 Shares in the secondary market will not comply with section
22(d) of the Act and rule 22c-1 under the Act. Applicants request an
exemption under section 6(c) from these provisions.
5. Applicants assert that the concerns sought to be addressed by
section 22(d) of the Act and rule 22c-1 under the Act with respect to
pricing are equally satisfied by the proposed method of pricing Shares.
Applicants maintain that the provisions of section 22(d), as well as
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) ensure an orderly
distribution of investment company 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.
6. Applicants believe that none of these purposes will be thwarted
by permitting Shares to trade in the secondary market at negotiated
prices. Applicants state that (a) Secondary market trading in Shares
does not involve the Funds as parties and cannot result in dilution of
an investment in Shares, and (b) to the extent different prices exist
during a given trading day, or from day to day, such variances occur as
a result of third-party market forces, such as supply and demand.
Therefore, applicants assert that secondary market transactions in
Shares will not lead to discrimination or preferential treatment among
purchasers. Finally, applicants contend that the proposed distribution
system will be orderly because arbitrage activity will ensure that the
difference between the market price of Shares and their NAV remains
narrow.
Section 24(d) of the Act
7. Section 24(d) of the Act provides, in relevant 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 an open-end investment company.
Applicants request an exemption from section 24(d) to permit dealers
selling Shares to rely on the prospectus delivery exemption provided by
section 4(3) of the Securities Act.\10\
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\10\ Applicants state that they do not seek relief from the
prospectus delivery requirement for non-secondary market
transactions, such as purchases of Shares from the Funds or an
underwriter. Applicants state that the Prospectus will caution
persons purchasing Creation Units that some activities on their
part, depending on the circumstances, may 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
Shares and sells them directly to its customers, or if it chooses to
couple the creation of new Shares with an active selling effort
involving solicitation of secondary market demand for Shares. The
Prospectus will state that whether a person is an underwriter
depends upon all the facts and circumstances pertaining to that
person's activities. The Prospectus also will state that dealers who
are not ``underwriters'' but are participating in a distribution (as
contrasted to ordinary secondary market trading transactions), and
thus dealing with 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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8. Applicants state that Shares will be listed on an Exchange and
will be traded in a manner similar to other equity securities,
including the shares of closed-end investment companies. Applicants
note that dealers selling shares of closed-end investment companies in
the secondary market generally are not required to deliver a prospectus
to the purchaser. Applicants contend that Shares, as a listed security,
merit a reduction in the compliance costs and regulatory burdens
resulting from the imposition of prospectus delivery obligations in the
secondary market. Because Shares will be exchange-listed, prospective
investors will have access to several types of market information about
Shares. Applicants state that information regarding market price and
volume will be continually available on a real-time basis throughout
the day on computer screens of brokers and other electronic services.
The previous day's closing price and volume information for Shares also
will be published daily in the financial section of newspapers. In
addition, the Web site will include, for each Fund, the prior Business
Day's NAV, the mid-point of the bid-ask spread for a Share at the time
of calculation of the NAV (``Bid/Ask Price''), and a calculation of the
premium or discount of the closing price against such Bid/Ask Price, as
well as data in chart format displaying the frequency distribution of
discounts and premiums of the Bid/Ask Price against the NAV, within
appropriate ranges, for each of the four previous calendar quarters.
9. Investors also will receive a short product description
(``Product Description''), describing a Fund and its
[[Page 67408]]
Shares. Applicants state that, while not intended as a substitute for a
Prospectus, the Product Description will contain information about
Shares that is tailored to meet the needs of investors purchasing
Shares in the secondary market. The Product Description will
prominently disclose that the Indexes are created and sponsored by an
affiliated person of the Advisor.
Sections 17(a)(1) and (2) of the Act
10. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such a person, from selling any security to or purchasing any security
from the company. Section 2(a)(3) of the Act 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 directly or
indirectly controlling, controlled by or under common control with the
other person. Section 2(a)(9) of the Act provides that a control
relationship will be presumed where one person owns more than 25% of
another person's voting securities.
11. Applicants request an exemption from section 17(a) to the
extent necessary to permit (a) persons who are affiliated persons of a
Fund solely by virtue of holding with the power to vote 5% or more, or
more than 25%, of the Shares of a Fund (``First-Tier Affiliates'') and
(b) affiliated persons of First-Tier Affiliates who are not otherwise
affiliated with the Fund, and persons who are affiliated persons of a
Fund solely by virtue of holding with the power to vote 5% or more, or
more than 25%, of the outstanding voting securities of other registered
investment companies (or series thereof) advised by the Advisor
(``Second-Tier Affiliates'') to purchase and redeem Creation Units
through in-kind purchases and sales of securities. Applicants contend
that no useful purpose would be served by prohibiting the First- and
Second-Tier Affiliates from purchasing or redeeming Creation Units
through in-kind transactions. The deposit procedure for in-kind
purchases and the redemption procedure for in-kind redemptions will be
the same for all purchases and redemptions. Deposit Securities and
Redemption Securities will be valued in the same manner as the
Portfolio Securities. Therefore, applicants state, the in-kind
purchases and redemptions for which relief is requested will afford no
opportunity for the affiliated persons of a Fund, or the affiliated
persons of such affiliated persons, described above, to effect a
transaction detrimental to other holders of Shares. Applicants also
believe that these in-kind purchases and redemptions will not result in
self-dealing or overreaching of the Fund.
Applicants' Conditions
Applicants agree that any order granting the requested order will
be subject to the following conditions:
1. Applicants will not register a Future Fund by means of filing a
post-effective amendment to the Corporation's registration statement or
by any other means, unless either (a) Applicants have requested and
received with respect to such Future Fund, either exemptive relief from
the Commission or a no-action letter from the Division of Investment
Management of the Commission, or (b) the Future Fund will be listed on
an Exchange without the need for a filing pursuant to rule 19b-4 under
the Exchange Act.
2. Each Fund's Prospectus and Product Description will clearly
disclose that, for purposes of the Act, Shares are issued by the Funds
and that the acquisition of 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 a Fund beyond the limits of section 12(d)(1), subject to
certain terms and conditions, including that the registered investment
company enter into an agreement with the Fund regarding the terms of
the investment.
3. As long as the Corporation operates in reliance on the requested
order, the Shares will be listed on an Exchange.
4. Neither the Corporation nor any Fund will be advertised or
marketed as an open-end investment company or a mutual fund. Each
Fund's Prospectus will prominently disclose that Shares are not
individually redeemable shares and will disclose that the owners of
Shares may acquire those Shares from a Fund and tender those Shares for
redemption to a Fund in Creation Units only. Any advertising material
that describes the purchase or sale of Creation Units or refers to
redeemability will prominently disclose that Shares are not
individually redeemable and that owners of Shares may acquire those
Shares from a Fund and tender those Shares for redemption to a Fund in
Creation Units only.
5. The Web site maintained for the Corporation, which is and will
be publicly accessible at no charge, will contain the following
information, on a per Share basis, for each Fund: (a) The prior
Business Day's NAV and the Bid/Ask Price and a calculation of the
premium or discount of the Bid/Ask Price at the time of calculation of
the NAV against such NAV; and (b) data in chart format displaying the
frequency distribution of discounts and premiums of the daily Bid/Ask
Price against the NAV, within appropriate ranges, for each of the four
previous calendar quarters. In addition, the Product Description for
each Fund will state that the website for the Fund has information
about the premiums and discounts at which the Shares have traded.
6. The Prospectus and annual report for each Fund will also
include: (a) The information listed in condition 5(b), (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 Share basis
for one, five and ten year periods (or life of the Fund), (i) the
cumulative total return and the average annual total return based on
NAV and Bid/Ask Price, and (ii) the cumulative total return of the
relevant Underlying Index.
7. Before a Fund 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 Shares to deliver a Product Description to purchasers
of Shares.
For the Commission, by the Division of Investment Management,
under delegated authority.
Nancy M. Morris,
Secretary.
[FR Doc. E6-19666 Filed 11-20-06; 8:45 am]
BILLING CODE 8011-01-P
