PowerShares Exchange-Traded Fund Trust, et al.; Notice of Application, 25802-25808 [E7-8599]
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25802
Federal Register / Vol. 72, No. 87 / Monday, May 7, 2007 / Notices
57(o) of the Act, of HTGC’s directors on
the basis that such issuance is in the
best interests of HTGC and its
stockholders.
3. The amount of voting securities
that would result from the exercise of all
of HTGC’s outstanding warrants,
options, and rights, together with any
Restricted Stock issued pursuant to the
Amended and Restated Plans, at the
time of issuance shall not exceed 25%
of the outstanding voting securities of
HTGC, except that if the amount of
voting securities that would result from
the exercise of all of HTGC’s
outstanding warrants, options, and
rights issued to HTGC’s directors,
officers, and employees, together with
any Restricted Stock issued pursuant to
the Amended and Restated Plans, would
exceed 15% of the outstanding voting
securities of HTGC, then the total
amount of voting securities that would
result from the exercise of all
outstanding warrants, options, and
rights, together with any Restricted
Stock issued pursuant to the Amended
and Restated Plans, at the time of
issuance shall not exceed 20% of the
outstanding voting securities of HTGC.
4. The maximum amount of shares of
Restricted Stock that may be issued
under the Amended and Restated Plans
will be 10% of the outstanding shares of
common stock of HTGC on the effective
date of the Amended and Restated Plans
plus 10% of the number of shares of
HTGC’s common stock issued or
delivered by HTGC (other than pursuant
to compensation plans) during the term
of the Amended and Restated Plans.
5. The Board will review the
Amended and Restated Plans at least
annually. In addition, the Board will
review periodically the potential impact
that the issuance of Restricted Stock
under the Amended and Restated Plans
could have on HTGC’s earnings and
NAV per share, such review to take
place prior to any decisions to grant
Restricted Stock under the Amended
and Restated Plans, but in no event less
frequently than annually. Adequate
procedures and records will be
maintained to permit such review. The
Board will be authorized to take
appropriate steps to ensure that the
grant of Restricted Stock under the
Amended and Restated Plans would not
have an effect contrary to the interests
of HTGC’s stockholders. This authority
will include the authority to prevent or
limit the granting of additional
Restricted Stock under the Amended
and Restated Plans. All records
maintained pursuant to this condition
will be subject to examination by the
Commission and its staff.
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For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–8683 Filed 5–4–07; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
27811; 812–13335]
PowerShares Exchange-Traded Fund
Trust, et al.; Notice of Application
April 30, 2007.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of an application for an
order under section 6(c) of the
Investment Company Act of 1940 (the
‘‘Act’’) for an exemption from sections
2(a)(32), 5(a)(1), 22(d), 22(e) 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 (a)(2) of the Act.
AGENCY:
Applicants
request an order that would permit (a)
series of open-end management
investment companies, whose portfolios
will consist of the component securities
of certain foreign equity securities
indexes or fixed income securities
indexes, to issue shares (‘‘Fund Shares’’)
that can be purchased from the
investment companies and redeemed
only in large aggregations (‘‘Creation
Units’’); (b) secondary market
transactions in Fund Shares to occur at
negotiated prices on a national
securities exchange; (c) dealers to sell
Fund Shares to purchasers in the
secondary market unaccompanied by a
prospectus, when prospectus delivery is
not required by the Securities Act of
1933 (the ‘‘Securities Act’’); (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; and (e) the series to pay
redemption proceeds, under certain
circumstances, more than seven days
after the tender of a Creation Unit for
redemption. In addition, the order
would delete a condition related to
future relief and expand the scope of
future relief in a prior order.1
APPLICANTS: PowerShares ExchangeTraded Fund Trust (the ‘‘Initial Trust’’),
SUMMARY OF APPLICATION:
1 See PowerShares Exchange-Traded Fund Trust,
Investment Company Act Release Nos. 25961
(March 4, 2003) (notice) and 25985 (March 28,
2003) (order) (the ‘‘Prior Order’’).
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PowerShares Global Exchange-Traded
Fund Trust (the ‘‘New Trust,’’ and
together with the Initial Trust, the
‘‘Trusts’’), PowerShares Capital
Management LLC (the ‘‘Adviser’’), and
AIM Distributors, Inc. (the
‘‘Distributor’’).
FILING DATES: The application was filed
on October 19, 2006 and amended on
March 29, 2007 and April 26, 2007.
Applicants have agreed to file an
amendment during the notice period,
the substance of which is contained in
this notice.
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 May 24, 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: Secretary, Securities and
Exchange Commission, 100 F Street, NE,
Washington, DC 20549–1090. The
Trusts and the Adviser: 301 West
Roosevelt Road, Wheaton, IL 60187; the
Distributor: 11 Greenway Plaza, Suite
100, Houston, TX 77046–1173.
FOR FURTHER INFORMATION CONTACT:
Marilyn Mann, Senior Counsel, at (202)
551–6813, 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
Commission’s Public Reference Branch,
100 F Street, NE., Washington, DC
20549–0102 (telephone (202) 551–5850).
Applicants’ Representations
1. The Trusts are open-end
management investment companies
registered under the Act and organized
as Massachusetts business trusts. The
Trusts are organized as series funds
(each such series, an ‘‘Index Fund’’).
The Initial Trust currently offers and
sells certain Index Funds. The Initial
Trust intends to offer nine new Index
Funds and the New Trust intends to
offer 37 new Index Funds (each, a ‘‘New
Fund’’). The Adviser is registered as an
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investment adviser under the
Investment Advisers Act of 1940 (the
‘‘Advisers Act’’) and will serve as the
investment adviser to each New Fund.
The Distributor, a broker-dealer
registered under the Securities
Exchange Act of 1934 (the ‘‘Exchange
Act’’), will serve as the principal
underwriter for each New Fund. The
Adviser may in the future retain one or
more sub-advisers (‘‘Sub-Advisers’’) to
manage one or more of the New Funds
for which it will act as the investment
adviser. The Sub-Advisers will be
registered under the Advisers Act or
will be exempt from such registration.
2. Each New Fund will invest in a
portfolio of securities (‘‘Portfolio
Securities’’) generally consisting of the
component securities (‘‘Component
Securities’’) of a specified securities
index (the ‘‘Underlying Indexes’’). In the
case of the New Funds offered by Initial
Trust, the Underlying Indexes will be
composed of fixed-income securities
(each, a ‘‘Fixed Income Index’’) and in
the case of the New Funds offered by
the New Trust, the Underlying Indexes
will be composed of foreign securities
(each, a ‘‘Foreign Index’’). Each New
Fund based on a Fixed Income Index is
referred to as a ‘‘Fixed Income Fund.’’ 2
Each New Fund based on a Foreign
Index is a ‘‘Foreign Fund.’’ 3 The board
of trustees of each Trust or of additional
open-end management investment
companies created by the Adviser
(‘‘Board’’) may establish additional
Index Funds in the future (the ‘‘Future
2 The Fixed Income Indexes for the Fixed Income
Funds are: DB Emerging Markets USD Liquid Bond
Index, Merrill Lynch U.S. Domestic Index, Merrill
Lynch Global Inflation-Linked Government Index,
Merrill Lynch 1–10 Years U.S. Inflation-Linked
Treasury Index, Ryan/Mergent 1–30 Year Laddered
Treasury Index, DB U.S. Agency Mortgage TBA
Index, Wachovia Global ex-U.S. Bond Index,
Wachovia Yield Focused Investment Grade Bond
Index, and Wachovia High Yield Bond Index.
3 The Foreign Indexes for the Foreign Funds are:
the FTSE RAFI Developed Markets ex-U.S. 1000
Index, FTSE RAFI Developed Markets ex-U.S. Small
Index, FTSE RAFI Emerging Markets Index, FTSE
RAFI Europe Index, FTSE RAFI Europe Small
Index, FTSE RAFI Latin America Index, FTSE RAFI
Asia Pacific ex-Japan Index, FTSE RAFI Asia Pacific
ex-Japan Small Index, FTSE RAFI BRIC Index,
FTSE RAFI Japan Index, FTSE RAFI Canada Index,
FTSE RAFI Germany Index, FTSE RAFI Hong Kong
Index, FTSE RAFI Mexico Index, FTSE RAFI South
Korea Index, FTSE RAFI Taiwan Index, FTSE RAFI
United Kingdom Index, FTSE RAFI China Index,
FTSE RAFI Australia Index, FTSE RAFI Brazil
Index, FTSE RAFI France Index, FTSE RAFI South
Africa Index, Indus India Index, WilderHill New
Energy Global Innovation Index, International
Listed Private Equity Index, Palisades Global Water
Index, QSG Developed International Opportunities
Index, QSG Developed International Value Index,
QSG Developed International Growth Index, QSG
Active Japan Index, QSG Asia-Pacific Opportunities
Index, QSG Active Europe Index, QSG Active
Australia Index, QSG Active Canada Index, QSG
Active France Index, QSG Active Germany Index,
and QSG Active UK Index.
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Funds’’) that will be based on other
Foreign Indexes or Fixed Income
Indexes. Applicants request that the
relief requested in the application apply
to any such Future Funds. Any Future
Fund will (a) be advised by the Adviser
or an entity controlling, controlled by or
under common control with the Adviser
and (b) comply with the terms and
conditions of the order.4 No entity that
creates, compiles, sponsors or maintains
an Underlying Index is or 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 Trusts, the
Adviser, the Sub-Adviser, the
Distributor, or a promoter of a New
Fund.
3. The investment objective of each
New Fund will be to provide investment
results that generally correspond, before
fees and expenses, to the total return of
the relevant Underlying Index. A
Foreign Fund will invest at least 90% of
its assets in the Component Securities of
its Foreign Index and in Depositary
Receipts (as defined below) representing
such Component Securities. A Foreign
Fund may invest up to 10% of its assets
in certain stock index futures, stock
options, options on stock index futures,
and swap contracts, in each case related
to its respective Foreign Index and its
Component Securities, as well as cash
and cash equivalents. Each Fixed
Income Fund generally will invest at
least 90% of its assets in Component
Securities of its respective Fixed Income
Index (except with respect to the
PowerShares Domestic Aggregate Bond
Portfolio and the PowerShares
Mortgage-Backed Securities Portfolio, as
set forth below). However, each Fixed
Income Fund may at times invest up to
20% of its assets in certain futures,
options and swap contracts, cash and
cash equivalents, as well as in bonds not
included in its Fixed Income Index, but
which the Adviser or Sub-Adviser
believes will help the Fixed Income
Fund track its Fixed Income Index.
4. The PowerShares Domestic
Aggregate Bond Portfolio will seek to
track that portion of the Merrill Lynch
U.S. Domestic Index devoted to
government mortgage-backed securities
(‘‘MBS’’) by investing a corresponding
percentage of its assets either in MBS
included in the index or in to-beannounced (‘‘TBA’’) transactions on
MBS. The PowerShares MortgageBacked Securities Portfolio will invest
at least 90% of its assets in MBS
included in the DB U.S. Agency
4 All existing entities that currently intend to rely
on the requested order have been named as
applicants. Any other existing or future entity that
subsequently relies on the order will comply with
the terms and conditions of the application.
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25803
Mortgage TBA Index or in TBA
transactions on MBS. A ‘‘TBA
transaction’’ essentially is a purchase or
sale of a pass-through security for future
settlement at an agreed-upon date.
Applicants state that most mortgage
pass-through securities trades are
executed as TBA transactions.
Applicants state that TBA transactions
increase the liquidity and pricing
efficiency of transactions in MBS
because they permit similar MBS to be
traded interchangeably pursuant to
commonly observed settlement and
delivery requirements.
5. Each Foreign Fund will utilize as
an investment approach either a
replication strategy or a representative
sampling strategy, and each Fixed
Income Fund will use a representative
sampling strategy. A Foreign Fund using
a replication strategy generally will hold
most of the Component Securities of the
Foreign Index in the same approximate
proportions as the Foreign Index, but
may not hold all of the securities that
comprise the Foreign Index in certain
instances. A New Fund using a
representative sampling strategy will
seek to hold a representative sample of
the Component Securities of the
Underlying Index and will invest in
some but not all of the Component
Securities of its Underlying Index.
Applicants anticipate that a New Fund
that utilizes a representative sampling
strategy will not track its Underlying
Index with the same degree of accuracy
as an investment vehicle that invested
in every Component Security of the
Underlying Index with the same
weighting as the Underlying Index.
Applicants expect that each New Fund
will have a tracking error relative to the
performance of its respective
Underlying Index of less than 5 percent.
6. Any Depositary Receipts held by a
Foreign Fund will be negotiable
securities that represent ownership of a
non-U.S. company’s publicly traded
stock. Depositary Receipts will typically
be American Depositary Receipts
(‘‘ADRs’’), but may include Global
Depositary Receipts (‘‘GDRs’’) and Euro
Depositary Receipts (‘‘EDRs’’). ADRs,
GDRs and EDRs are collectively referred
to herein as ‘‘Depositary Receipts.’’
Applicants believe that, in certain cases,
holding one or more Depositary
Receipts rather than Component
Securities of the relevant Foreign Index,
will improve the liquidity, tradability
and settlement of a Foreign Fund’s then
current Fund Deposit (as defined below)
(thereby improving the efficiency of the
creation and redemption process and
facilitating efficient arbitrage activity),
while at the same time permitting a
Foreign Fund to maintain direct
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exposure to Component Securities of its
Foreign Index. Applicants intend that
any Foreign Fund would be able to treat
Depositary Receipts that represent
Component Securities of its Foreign
Index as Component Securities for
purposes of any requirements that a
percentage of a Foreign Fund’s portfolio
be invested in Component Securities of
its Foreign Index.
7. Creation Units will consist of either
50,000 or 100,000 Shares, as specified in
the relevant prospectus (‘‘Prospectus’’).
The price of a Creation Unit will range
from $1,000,000 to $5,000,000. Creation
Units may be purchased only by or
through a party that has entered into an
agreement with the Distributor
regarding creations and redemptions of
Creation Units (an ‘‘Authorized
Participant’’). An Authorized
Participant must be either (a) a brokerdealer or other participant in the
continuous net settlement system of the
National Securities Clearing
Corporation, a clearing agency that is
registered with the Commission, or (b)
a participant in the Depository Trust
Company (‘‘DTC’’) system. Creation
Units generally will be issued in
exchange for an in-kind deposit of
securities and cash. A New Fund also
may sell Creation Units on a cash-only
basis in limited circumstances.5 An
investor wishing to purchase a Creation
Unit from a New Fund will have to
transfer to the New Fund a ‘‘Fund
Deposit’’ consisting of: (a) a portfolio of
securities that has been selected by the
Adviser to correspond to the returns on
the relevant Underlying Index (‘‘Deposit
5 Over time, the Adviser or Sub-Adviser may
conclude that operating on an exclusively in-kind
basis for a New Fund may present operational
problems for such New Fund. Therefore, each Trust
may permit, in its discretion, with respect to a New
Fund under certain circumstances, an in-kind
purchaser to substitute cash in lieu of depositing
some or all of the requisite Deposit Securities. For
example, each of the PowerShares Domestic
Aggregate Bond Portfolio and the PowerShares
Mortgage-Backed Securities Portfolio will require
purchasing investors to substitute cash in lieu of
any Deposit Security that is a mortgage TBA
transaction. This cash in lieu of mortgage TBAs will
likely result in cash-only creations with respect to
the PowerShares Mortgage-Backed Securities
Portfolio. More generally, substitution might be
permitted or required because one or more Deposit
Securities may be unavailable, may not be available
in the quantity needed to make a Portfolio Deposit,
or may not be eligible for trading by an Authorized
Participant (or the investor on whose behalf the
Authorized Participant is acting). Applicants
currently expect that PowerShares FTSE RAFI
Taiwan Portfolio, PowerShares FTSE RAFI South
Korea Portfolio, PowerShares FTSE RAFI Brazil
Portfolio, PowerShares FTSE RAFI BRIC Portfolio
and PowerShares Indus India Portfolio will utilize
‘‘cash-only’’ purchases and redemptions of Creation
Units due to local exchange restrictions on short
sales and/or free delivery of stocks, as well as
difficulty associated with borrowing stocks in the
applicable markets.
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Securities’’), and (b) a cash payment to
equalize any differences between the
market value per Creation Unit of the
Deposit Securities and the net asset
value (‘‘NAV’’) per Creation Unit (‘‘Cash
Component’’).6 An investor purchasing
a Creation Unit from a New Fund will
be charged a fee (‘‘Transaction Fee’’) to
prevent the dilution of the interests of
the remaining shareholders resulting
from the New Fund incurring costs in
connection with the purchase of the
Creation Units.7 Each New Fund will
disclose the Transaction Fees charged
by the New Fund in its Prospectus and
the method of calculating the
Transaction Fees in its Prospectus or
statement of additional information
(‘‘SAI’’).
8. Orders to purchase Creation Units
of a New Fund will be placed with the
Distributor who will be responsible for
transmitting each order to each New
Fund. The Distributor will issue, and
maintain records of, confirmations of
acceptance to purchasers of Creation
Units and delivery instructions to the
Trusts (to implement the delivery of
Creation Units). The Distributor will
also be responsible for delivering
Prospectuses to purchasers of Creation
Units.
9. Persons purchasing Creation Units
from a New Fund may hold the Fund
Shares or sell some or all of them in the
secondary market. Shares of the New
Funds will be listed on a national
securities exchange, as defined in
section 2(a)(26) of the Act (an
6 On each business day, prior to the opening of
trading on the Exchange (as defined below), the
Adviser or Sub-Adviser will make available a list
of the names and the required number of shares of
each Deposit Security required for the Fund Deposit
for each New Fund. That Fund Deposit will apply
to all purchases of Creation Units until a new Fund
Deposit for a New Fund is announced. Each New
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 in
certain circumstances. With respect to the Foreign
Funds, the Exchange or other market information
provider will disseminate every 15 seconds
throughout the trading day via the facilities of the
Consolidated Tape Association an amount
representing on a per share basis the sum of the
current value of the Deposit Securities and the
estimated Cash Component. As the respective
international local markets close, the market value
of the Deposit Securities will continue to be
updated for foreign exchange rates for the
remainder of the U.S. trading day at the prescribed
15 second interval. With respect to the Fixed
Income Funds, the Exchange or other market
information provider will disseminate a calculation
of the approximate NAV of a Fund Share (the
‘‘Intra-day Indicative Value’’ or ‘‘IIV’’) every 15
seconds throughout the trading day, separately from
the consolidated tape.
7 When a New Fund permits a purchaser to
substitute cash for Deposit Securities, the purchaser
may be assessed an additional fee to offset the
brokerage and other transaction costs associated
with using cash to purchase the requisite Deposit
Securities.
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‘‘Exchange’’), and traded in the
secondary market in the same manner as
other equity securities. An Exchange
specialist (‘‘Specialist’’) will be assigned
to make a market in Shares. If The
NASDAQ Stock Market, Inc.
(‘‘NASDAQ’’) is the listing Exchange,
one or more member firms of NASDAQ
will act as a market maker (‘‘Market
Maker’’) and maintain a market on
NASDAQ for Fund Shares trading on
NASDAQ. The price of Fund Shares
traded on an Exchange will be based on
a current bid/offer market. Each Fund
Share is currently expected to have a
market value of between $20 and $50.
Transactions involving the sale of Fund
Shares in the secondary market will be
subject to customary brokerage
commissions and charges.
10. Applicants expect that purchasers
of Creation Units will include
institutional investors and arbitrageurs
(which could include institutional
investors). The Specialist or Market
Maker, in providing for a fair and
orderly secondary market for Fund
Shares, also may purchase Creation
Units for use in its market-making
activities. Applicants expect that
secondary market purchasers of Fund
Shares will include both institutional
and retail investors.8 Applicants expect
that the price at which the Fund 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 Fund Shares will
not trade at a material discount or
premium in relation to their NAV.
11. Fund Shares will not be
individually redeemable. Fund Shares
will only be redeemable in Creation
Units through a New Fund. To redeem,
an investor will have to accumulate
enough Fund Shares to constitute a
Creation Unit. An investor redeeming a
Creation Unit generally will receive (a)
the Portfolio Securities designated to be
delivered for Creation Unit redemptions
on the date the request for redemption
is made (‘‘Fund Securities’’),9 which
8 Fund Shares will be registered in book-entry
form only. DTC or its nominee will be the registered
owner of all outstanding Fund Shares. DTC or its
participants will maintain records reflecting the
beneficial owners of Fund Shares.
9 The New Funds will comply with the federal
securities laws in accepting Deposit Securities and
satisfying redemptions with Fund Securities,
including that the Deposit Securities and Fund
Securities are sold in transactions that would be
exempt from registration under the Securities Act.
As a general matter, the Deposit Securities and
Fund Securities will correspond pro rata to the
securities held by the New Funds. In accepting
Deposit Securities and satisfying redemptions with
Fund Securities that are restricted securities eligible
for resale pursuant to rule 144A under the
Securities Act, each New Fund will comply with
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may not be identical to the Deposit
Securities applicable to the purchase of
Creation Units, and (b) a ‘‘Cash
Redemption Payment,’’ consisting of an
amount calculated in the same manner
as the Cash Component, although the
actual amount of the Cash Redemption
Payment may differ from the Cash
Component if the Fund Securities are
not identical to the Deposit Securities
on a given day. An investor may receive
the cash equivalent of a Fund Security
upon its request if, for example, the
investor were constrained from effecting
transactions in the Fund Security by
regulation or policy.
12. A redeeming investor will pay a
Transaction Fee to offset transaction
costs, whether the redemption proceeds
are in kind or cash. When an investor
redeems for cash rather than in kind, the
investor may pay a higher Transaction
Fee. Such Transaction Fee will be
calculated in the same manner as a
Transaction Fee payable in connection
with the purchase of a Creation Unit.
13. Applicants state that neither the
Trusts nor any New Fund will be
marketed or otherwise held out as a
‘‘mutual fund.’’ Rather, applicants state
that each New Fund will be marketed as
an ‘‘exchange-traded fund.’’ No New
Fund marketing materials (other than as
required in the Prospectus) will refer to
a New Fund as an ‘‘open-end’’ or
‘‘mutual fund,’’ except to contrast a New
Fund with a conventional open-end
management investment company. In all
marketing materials where the method
of obtaining, buying, or selling Fund
Shares is described, applicants will
include a statement to the effect that
Fund Shares are not redeemable through
a New Fund except in Creation Units.
The same type of disclosure will be
provided in each New Fund’s
Prospectus, SAI, advertising materials,
and all reports to shareholders. The
New Funds will provide copies of their
annual and semi-annual shareholder
reports to DTC participants for
distribution to beneficial holders of
Fund Shares.
14. Applicants also seek to amend the
Prior Order to modify the terms under
which the Initial Trust may offer
additional series in the future. The Prior
Order is currently subject to a condition
that does not permit applicants to
register any series by means of filing a
post-effective amendment to the Initial
Trust’s registration statement or by any
other means, unless (a) applicants have
requested and received with respect to
such series, either exemptive relief from
the Commission or a no-action letter
from the Division of Investment
Management of the Commission, or (b)
the series will be listed on a national
securities exchange without the need for
filing pursuant to rule 19b–4 under the
Exchange Act. The order would amend
the Prior Order to delete this condition.
In addition, the order would expand the
relief under the Prior Order to include
registered investment companies other
than the Initial Trust. As amended, the
Prior Order would permit the
introduction of series of the Initial Trust
and series of other open-end
management investment companies
(collectively, ‘‘Future Index Funds’’)
that (a) are advised by the Adviser or an
entity controlling, controlled by or
under common control with the
Adviser; (b) track Underlying Indices
comprised of equity securities issued by
domestic issuers that are created,
compiled, sponsored or maintained by
an entity that is not an affiliated person,
as defined in section 2(a)(3) of the Act,
or an affiliated person of an affiliated
person, of the Adviser, the Distributor,
the Initial Trust, the New Trust or any
sub-advisor or promoter of an Index
Fund, and (c) comply with the
respective terms and conditions of the
Prior Order, as amended by the order.
15. Applicants believe that the
modification of the future relief
available under the Prior Order would
be consistent with section 6(c) and 17(b)
of the Act and that granting the
requested relief will facilitate the timely
creation of Future Index Funds and the
commencement of secondary market
trading of such Future Index Funds by
removing the need to seek additional
exemptive relief. Applicants submit that
the terms and conditions of the Prior
Order have been appropriate for the
exchange-traded funds advised by the
Adviser and would remain appropriate
for Future Index Funds. Applicants also
submit that tying exemptive relief under
the Act to the ability of a Future Index
Fund to be listed on an Exchange
without the need for a rule 19b–4 filing
under the Exchange Act is not necessary
to meet the standards under section 6(c)
and 17(b) of the Act.
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Applicants’ Legal Analysis
the conditions of rule 144A, including in satisfying
redemptions with such rule 144A eligible restricted
Fund Securities. The Prospectus for each New Fund
will also state that an Authorized Participant that
is not a Qualified Institutional Buyer (‘‘QIB’’) will
not be able to receive Fund Securities that are
restricted securities eligible for resale under rule
144A.
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18:36 May 04, 2007
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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), 22(e) and 24(d) of the Act
and rule 22c–1 under the Act; and
under sections 6(c) and 17(b) of the Act
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25805
granting an exemption from sections
17(a)(1) and (a)(2) of the Act.
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.
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 Fund
Shares will not be individually
redeemable, applicants request an order
that would permit each New Fund, as a
series of an open-end management
investment company, to issue Fund
Shares that are redeemable in Creation
Units only. Applicants state that
investors may purchase Fund Shares in
Creation Units from each New Fund and
redeem Creation Units. Applicants
further state that because the market
price of Fund Shares will be disciplined
by arbitrage opportunities, investors
should be able to sell Fund 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 Fund 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
Fund 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.
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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 Fund Shares. Applicants
maintain that while there is little
legislative history regarding section
22(d), its provisions, 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 resulting from sales at
different prices, and (c) assure 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 Fund Shares to trade in the
secondary market at negotiated prices.
Applicants state that (a) secondary
market trading in Fund Shares does not
involve the New Funds as parties and
cannot result in dilution of an
investment in Fund 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 thirdparty market forces, such as supply and
demand. Therefore, applicants assert
that secondary market transactions in
Fund 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 Fund
Shares and their NAV remains narrow.
Section 22(e) of the Act
7. Section 22(e) generally prohibits a
registered investment company from
suspending the right of redemption or
postponing the date of payment of
redemption proceeds for more than
seven days after the tender of a security
for redemption. The principal reason for
the requested exemption is that
settlement of redemptions for the
Foreign Funds is contingent not only on
the settlement cycle of the United States
market, but also on currently practicable
delivery cycles in local markets for
underlying foreign securities held by the
Foreign Funds. Applicants state that
local market delivery cycles for
transferring certain foreign securities to
investors redeeming Creation Units,
together with local market holiday
schedules, will under certain
circumstances require a delivery process
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18:36 May 04, 2007
Jkt 211001
in excess of seven calendar days for the
Foreign Funds. Applicants request relief
under section 6(c) of the Act from
section 22(e) to allow the Foreign Funds
to pay redemption proceeds more than
seven days after the tender of Fund
Shares for redemption. Applicants
anticipate that the delivery of
redemption proceeds would be made at
the latest within 14 calendar days after
the redemption request except to the
extent that a redemption delivery is
delayed due to the proclamation of new
or special holidays, the treatment by
market participants of certain days as
‘‘informal holidays,’’ the elimination of
existing holidays or changes in local
securities delivery practices. At all other
times and except as disclosed in the
relevant Prospectus, product description
(‘‘Product Description’’) and/or SAI,
applicants expect that each Foreign
Fund will be able to deliver redemption
proceeds within seven days.10 With
respect to Future Funds that are Foreign
Funds, applicants seek the same relief
from section 22(e) only to the extent that
circumstances similar to those described
in the application exist. Applicants state
that section 22(e) was designed to
prevent unreasonable, undisclosed and
unforeseen delays in the payment of
redemption proceeds. Applicants assert
that their requested relief will not lead
to the problems that section 22(e) was
designed to prevent. Applicants state
that the Prospectus, the Product
Description and/or the SAI for each
Foreign Fund will disclose those local
holidays (over the period of at least one
year following the date of the
Prospectus, Product Description or SAI),
if any, that are expected to prevent the
delivery of redemption proceeds in
seven calendar days, and the maximum
number of days needed to deliver the
proceeds for the New Fund. Applicants
are not requesting relief from section
22(e) with respect to Foreign Funds that
do not effect creations and redemptions
of Creation Units in-kind.
Section 24(d) of the Act
8. 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
10 Rule 15c6–1 under the Exchange Act requires
that most securities transactions be settled within
three business days of the trade. Applicants
acknowledge that no relief obtained from the
requirements of section 22(e) will affect any
obligations applicants may have under rule 15c6–
1.
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dealers selling Fund Shares to rely on
the prospectus delivery exemption
provided by section 4(3) of the
Securities Act.11
9. Applicants state that Fund 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 Fund 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 Fund Shares
will be exchange-listed, prospective
investors will have access to several
types of market information about Fund
Shares. Applicants state that
information regarding market price and
volume will be continually available on
a real-time basis throughout the day on
brokers’ computer screens and other
electronic services. The previous day’s
closing price and volume information
for Fund Shares also will be published
daily in the financial section of
newspapers. The website maintained for
the Trusts will include, for each New
Fund, the prior business day’s NAV, the
mid-point of the bid-ask spread at the
time of calculation of NAV (‘‘Bid/Ask
Price’’) and calculation of the premium
or discount of the Bid/Ask Price at the
time of calculation of the NAV against
such NAV, and data in chart format
displaying the frequency distribution of
11 Applicants do not seek relief from the
prospectus delivery requirement for non-secondary
market transactions, including purchases of
Creation Units or those involving an underwriter.
Applicants state that persons purchasing Creation
Units will be cautioned in a New Fund’s 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 Adviser, breaks them down into
the constituent Fund Shares, and sells Fund Shares
directly to its customers, or if it chooses to couple
the purchase of a supply of new Fund Shares with
an active selling effort involving solicitation of
secondary market demand for Fund Shares. A New
Fund’s Prospectus will state that whether a person
is an underwriter depends upon all the facts and
circumstances pertaining to that person’s activities.
A New Fund’s 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 Fund 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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discounts and premiums of the Bid/Ask
Price against the NAV, within
appropriate ranges, for each of the four
previous calendar quarters.12
10. Investors also will receive a
Product Description describing a New
Fund and its Fund Shares. Applicants
state that, while not intended as a
substitute for a Prospectus, the Product
Description will contain information
about Fund Shares that is tailored to
meet the needs of investors purchasing
Fund Shares in the secondary market.
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Sections 17(a)(1) and (2) of the Act
11. Section 17(a)(1) and (2) of the Act
generally prohibit an affiliated person of
a registered investment company, or an
affiliated person of such a person
(‘‘second tier affiliate’’), 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. The New Funds may
be deemed to be controlled by the
Adviser or an entity controlling,
controlled by or under common control
with the Adviser and hence affiliated
persons of each other. In addition, the
New Funds may be deemed to be under
common control with any other
registered investment company (or
series thereof) advised by the Adviser or
an entity controlling, controlled by or
under common control with the Adviser
(an ‘‘Affiliated Fund’’). Applicants state
that because the definition of ‘‘affiliated
person’’ includes any person owning
5% or more of an issuer’s outstanding
voting securities, every purchaser of a
Creation Unit will be affiliated with the
New Fund so long as fewer than twenty
Creation Units are in existence, and any
purchaser that owns more than 25% of
a New Fund’s outstanding Fund Shares
will be affiliated with a New Fund.
Applicants request an exemption from
section 17(a) under sections 6(c) and
17(b), to permit in-kind purchases and
redemptions by persons that are
affiliated persons or second tier
affiliates of the New Funds solely by
virtue of one or more of the following:
12 The Bid/Ask Price per Fund Share of a New
Fund is determined using the highest bid and the
lowest offer on the Exchange at the time of
calculation of such New Fund’s NAV.
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18:36 May 04, 2007
Jkt 211001
(1) Holding 5% or more, or more than
25%, of the outstanding Fund Shares of
either Trust or one or more New Funds;
(2) an affiliation with a person with an
ownership interest described in (1); or
(3) holding 5% or more, or more than
25%, of the shares of one or more
Affiliated Funds.
12. Section 17(b) of the Act authorizes
the Commission to exempt a proposed
transaction from section 17(a) of the Act
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. Applicants contend that no
useful purpose would be served by
prohibiting affiliated persons or second
tier affiliates of a New Fund from
purchasing or redeeming Creation Units
through ‘‘in-kind’’ transactions. The
deposit procedure for in-kind purchases
and the redemption procedure for inkind redemptions will be the same for
all purchases and redemptions. Deposit
Securities and Fund Securities will be
valued under the same objective
standards applied to valuing Portfolio
Securities. Therefore, applicants state
that in-kind purchases and redemptions
will afford no opportunity for the
affiliated persons and second tier
affiliates described above to effect a
transaction detrimental to the other
holders of Fund Shares. Applicants also
believe that in-kind purchases and
redemptions will not result in abusive
self-dealing or overreaching by these
persons of the New Fund.
Applicants’ Conditions
Applicants agree that the Prior Order
will continue to be subject to the same
conditions, except that condition 1 will
be deleted. With respect to the New
Funds, applicants agree that any order
granting the requested relief will be
subject to the following conditions:
1. Each New Fund’s Prospectus and
Product Description will clearly
disclose that, for purposes of the Act,
the Fund Shares are issued by a
registered investment company, and the
acquisition of Fund 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
New Fund beyond the limits in section
12(d)(1), subject to certain terms and
conditions, including that the registered
investment company enter into an
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25807
agreement with the New Fund regarding
the terms of the investment.
2. As long as a Trust operates in
reliance on the requested order, its Fund
Shares will be listed on an Exchange.
3. Neither the Trusts nor any of the
New Funds will be advertised or
marketed as an open-end fund or a
mutual fund. Each New Fund’s
Prospectus will prominently disclose
that Fund Shares are not individually
redeemable shares and will disclose that
the owners of Fund Shares may acquire
those Fund Shares from the New Fund
and tender those Fund Shares for
redemption to such New 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 Fund Shares are not individually
redeemable and that owners of Fund
Shares may acquire those Fund Shares
from the New Fund and tender those
Fund Shares for redemption to the New
Fund in Creation Units only.
4. The Web site maintained for the
Trusts, which is and will be publicly
accessible at no charge, will contain the
following information, on a per Fund
Share basis, for each New 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 New Fund will
state that the website for the New Fund
has information about the premiums
and discounts at which the Fund Shares
have traded.
5. Each New Fund’s Prospectus and
annual report will also include: (a) the
information listed in condition 4(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 Fund Share basis for
one, five and ten year periods (or life of
the New 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 applicable Underlying Index.
6. Before a New 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
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member organizations effecting
transactions in Fund Shares to deliver a
Product Description to purchasers of
Fund Shares.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–8599 Filed 5–4–07; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. IC–27809; 812–13356]
SSgA Funds Management, Inc., et al.;
Notice of Application
April 30, 2007.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of application to amend
a prior 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), 22(e) 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 (a)(2) of the Act.
AGENCY:
Applicants
request an order to amend a prior order
that permits: (a) Open-end management
investment companies, whose series are
based on certain equity securities
indices, to issue shares of limited
redeemability; (b) secondary market
transactions in the shares of the series
to occur at negotiated prices; (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’’); (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
aggregations of the series’ shares; and (e)
under certain circumstances, the series
that track certain foreign equity
securities indices to pay redemption
proceeds more than seven days after the
tender of shares (the ‘‘Prior Order’’).1
Applicants seek to amend the Prior
Order in order to offer additional series
based on certain fixed income securities
indices (the ‘‘New Funds’’). In addition,
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SUMMARY OF APPLICATION:
1 State Street Bank and Trust Company, et al.,
Investment Company Act Release No. 24666 (Sept.
24, 2000), superseding The Select Sector SPDR
Trust, Investment Company Act Release No. 23534
(Nov. 13, 1998), as amended by SSgA Funds
Management, Inc., et al., Investment Company Act
Release No. 27543 (Nov. 1, 2006).
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18:36 May 04, 2007
Jkt 211001
the order would delete a condition
related to future relief in the Prior
Order.
APPLICANTS: SSgA Funds Management,
Inc. (‘‘Adviser’’), State Street Global
Markets LLC (‘‘Distributor’’),
streetTRACKS Series Trust, and
streetTRACKS Index Shares Funds
(each, a ‘‘Trust’’ and together, the
‘‘Trusts’’).
FILING DATES: The application was filed
on January 5, 2007 and amended on
April 23, 2007.
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 May 24, 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: Secretary, U.S. Securities
and Exchange Commission, 100 F
Street, NE, Washington, DC 20549–
1090. Applicants: Scott M. Zoltowski,
Esq., State Street Global Advisors, One
Lincoln Street, Boston Massachusetts
02111; Vincent Manzi, State Street
Global Markets LLC, One Lincoln Street,
Boston, Massachusetts 02111; and W.
John McGuire, Esq., Morgan, Lewis &
Bockius LLP, 1111 Pennsylvania
Avenue, NW, Washington, DC 20004.
FOR FURTHER INFORMATION CONTACT:
Emerson S. Davis, Sr., Senior Counsel,
at (202) 551–6868, or Mary Kay Frech,
Branch Chief, at (202) 551–6821
(Division of Investment Management,
Office of Investment Company
Regulation).
The
following is a summary of the
application. The complete application
may be obtained for a fee at the
Commission’s Public Reference Branch,
100 F Street, NE, Washington, DC
20549–0102 (tel. 202–551–5850).
SUPPLEMENTARY INFORMATION:
Applicants’ Representations
1. Each Trust is an open-end
management investment company
registered under the Act and organized
as a Massachusetts business trust. The
Trusts are organized as series funds
with multiple series. The Adviser, an
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investment adviser registered under the
Investment Advisers Act of 1940, will
serve as investment adviser to the New
Funds. The Adviser may retain subadvisers (‘‘Sub-Advisers’’) to manage the
assets of a New Fund. Any Sub-Adviser
will be registered under the Advisers
Act. The Distributor, a broker-dealer
registered under the Securities
Exchange Act of 1934 (‘‘Exchange Act’’),
will serve as the principal underwriter
of the New Funds’’ shares.
2. Each Trust is currently permitted to
offer series based on equity securities
indices in reliance on the Prior Order.
Applicants seek to amend the Prior
Order to permit the Trusts to offer the
New Funds that, except as described in
the application, would operate in a
manner identical to the existing series of
the Trusts that are subject to the Prior
Order.
3. The New Funds will invest in
portfolios of securities generally
consisting of the component securities
of the Lehman Brothers 1–3 Year U.S.
Treasury Index, Lehman Brothers
Intermediate U.S. Treasury Index,
Lehman Brothers Long U.S. Treasury
Index, Lehman Brothers U.S. Aggregate
Index, Lehman Brothers 1–3 Year U.S.
Corporate Investment Grade Index,
Lehman Brothers U.S. Intermediate
Corporate Grade Index, and Lehman
Brothers U.S. Long Corporate
Investment Grade Index (the
‘‘Underlying Indexes’’). No entity that
creates, compiles, sponsors, or
maintains an Underlying Index is or
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 Trusts, the Adviser, any SubAdviser, the Distributor, or a promoter
of a New Fund.
4. The investment objective of each
New Fund will be to provide investment
results that correspond generally to the
price and yield performance of the
relevant Underlying Index. The Adviser
may fully replicate a New Fund’s
relevant Underlying Index or use a
representative sampling strategy where
the New Fund will seek to hold a
representative sample of the component
securities of the Underlying Index. Each
New Fund generally will invest at least
80% or 90% of its total assets, as
disclosed in the relevant prospectus, in
the securities that comprise the relevant
Underlying Index, but at times may
invest up to 20% of its total assets in
certain futures, options, and swap
contracts, cash and cash equivalents, as
well as securities not included in its
Underlying Index which the Adviser
believes will help the New Fund track
the Underlying Index. At all times, a
New Fund will hold, in the aggregate, at
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]]>Agencies
[Federal Register Volume 72, Number 87 (Monday, May 7, 2007)]
[Notices]
[Pages 25802-25808]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-8599]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 27811; 812-13335]
PowerShares Exchange-Traded Fund Trust, et al.; Notice of
Application
April 30, 2007.
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 (the ``Act'') for an exemption from
sections 2(a)(32), 5(a)(1), 22(d), 22(e) 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 (a)(2) of the Act.
-----------------------------------------------------------------------
Summary of Application: Applicants request an order that would permit
(a) series of open-end management investment companies, whose
portfolios will consist of the component securities of certain foreign
equity securities indexes or fixed income securities indexes, to issue
shares (``Fund Shares'') that can be purchased from the investment
companies and redeemed only in large aggregations (``Creation Units'');
(b) secondary market transactions in Fund Shares to occur at negotiated
prices on a national securities exchange; (c) dealers to sell Fund
Shares to purchasers in the secondary market unaccompanied by a
prospectus, when prospectus delivery is not required by the Securities
Act of 1933 (the ``Securities Act''); (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; and (e) the series to pay redemption proceeds, under certain
circumstances, more than seven days after the tender of a Creation Unit
for redemption. In addition, the order would delete a condition related
to future relief and expand the scope of future relief in a prior
order.\1\
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\1\ See PowerShares Exchange-Traded Fund Trust, Investment
Company Act Release Nos. 25961 (March 4, 2003) (notice) and 25985
(March 28, 2003) (order) (the ``Prior Order'').
Applicants: PowerShares Exchange-Traded Fund Trust (the ``Initial
Trust''), PowerShares Global Exchange-Traded Fund Trust (the ``New
Trust,'' and together with the Initial Trust, the ``Trusts''),
PowerShares Capital Management LLC (the ``Adviser''), and AIM
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Distributors, Inc. (the ``Distributor'').
Filing Dates: The application was filed on October 19, 2006 and amended
on March 29, 2007 and April 26, 2007. Applicants have agreed to file an
amendment during the notice period, the substance of which is contained
in this notice.
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 May 24, 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: Secretary, Securities and Exchange Commission, 100 F Street,
NE, Washington, DC 20549-1090. The Trusts and the Adviser: 301 West
Roosevelt Road, Wheaton, IL 60187; the Distributor: 11 Greenway Plaza,
Suite 100, Houston, TX 77046-1173.
FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Senior Counsel, at (202)
551-6813, 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
Commission's Public Reference Branch, 100 F Street, NE., Washington, DC
20549-0102 (telephone (202) 551-5850).
Applicants' Representations
1. The Trusts are open-end management investment companies
registered under the Act and organized as Massachusetts business
trusts. The Trusts are organized as series funds (each such series, an
``Index Fund''). The Initial Trust currently offers and sells certain
Index Funds. The Initial Trust intends to offer nine new Index Funds
and the New Trust intends to offer 37 new Index Funds (each, a ``New
Fund''). The Adviser is registered as an
[[Page 25803]]
investment adviser under the Investment Advisers Act of 1940 (the
``Advisers Act'') and will serve as the investment adviser to each New
Fund. The Distributor, a broker-dealer registered under the Securities
Exchange Act of 1934 (the ``Exchange Act''), will serve as the
principal underwriter for each New Fund. The Adviser may in the future
retain one or more sub-advisers (``Sub-Advisers'') to manage one or
more of the New Funds for which it will act as the investment adviser.
The Sub-Advisers will be registered under the Advisers Act or will be
exempt from such registration.
2. Each New Fund will invest in a portfolio of securities
(``Portfolio Securities'') generally consisting of the component
securities (``Component Securities'') of a specified securities index
(the ``Underlying Indexes''). In the case of the New Funds offered by
Initial Trust, the Underlying Indexes will be composed of fixed-income
securities (each, a ``Fixed Income Index'') and in the case of the New
Funds offered by the New Trust, the Underlying Indexes will be composed
of foreign securities (each, a ``Foreign Index''). Each New Fund based
on a Fixed Income Index is referred to as a ``Fixed Income Fund.'' \2\
Each New Fund based on a Foreign Index is a ``Foreign Fund.'' \3\ The
board of trustees of each Trust or of additional open-end management
investment companies created by the Adviser (``Board'') may establish
additional Index Funds in the future (the ``Future Funds'') that will
be based on other Foreign Indexes or Fixed Income Indexes. Applicants
request that the relief requested in the application apply to any such
Future Funds. Any Future Fund will (a) be advised by the Adviser or an
entity controlling, controlled by or under common control with the
Adviser and (b) comply with the terms and conditions of the order.\4\
No entity that creates, compiles, sponsors or maintains an Underlying
Index is or 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
Trusts, the Adviser, the Sub-Adviser, the Distributor, or a promoter of
a New Fund.
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\2\ The Fixed Income Indexes for the Fixed Income Funds are: DB
Emerging Markets USD Liquid Bond Index, Merrill Lynch U.S. Domestic
Index, Merrill Lynch Global Inflation-Linked Government Index,
Merrill Lynch 1-10 Years U.S. Inflation-Linked Treasury Index, Ryan/
Mergent 1-30 Year Laddered Treasury Index, DB U.S. Agency Mortgage
TBA Index, Wachovia Global ex-U.S. Bond Index, Wachovia Yield
Focused Investment Grade Bond Index, and Wachovia High Yield Bond
Index.
\3\ The Foreign Indexes for the Foreign Funds are: the FTSE RAFI
Developed Markets ex-U.S. 1000 Index, FTSE RAFI Developed Markets
ex-U.S. Small Index, FTSE RAFI Emerging Markets Index, FTSE RAFI
Europe Index, FTSE RAFI Europe Small Index, FTSE RAFI Latin America
Index, FTSE RAFI Asia Pacific ex-Japan Index, FTSE RAFI Asia Pacific
ex-Japan Small Index, FTSE RAFI BRIC Index, FTSE RAFI Japan Index,
FTSE RAFI Canada Index, FTSE RAFI Germany Index, FTSE RAFI Hong Kong
Index, FTSE RAFI Mexico Index, FTSE RAFI South Korea Index, FTSE
RAFI Taiwan Index, FTSE RAFI United Kingdom Index, FTSE RAFI China
Index, FTSE RAFI Australia Index, FTSE RAFI Brazil Index, FTSE RAFI
France Index, FTSE RAFI South Africa Index, Indus India Index,
WilderHill New Energy Global Innovation Index, International Listed
Private Equity Index, Palisades Global Water Index, QSG Developed
International Opportunities Index, QSG Developed International Value
Index, QSG Developed International Growth Index, QSG Active Japan
Index, QSG Asia-Pacific Opportunities Index, QSG Active Europe
Index, QSG Active Australia Index, QSG Active Canada Index, QSG
Active France Index, QSG Active Germany Index, and QSG Active UK
Index.
\4\ All existing entities that currently intend to rely on the
requested order have been named as applicants. Any other existing or
future entity that subsequently relies on the order will comply with
the terms and conditions of the application.
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3. The investment objective of each New Fund will be to provide
investment results that generally correspond, before fees and expenses,
to the total return of the relevant Underlying Index. A Foreign Fund
will invest at least 90% of its assets in the Component Securities of
its Foreign Index and in Depositary Receipts (as defined below)
representing such Component Securities. A Foreign Fund may invest up to
10% of its assets in certain stock index futures, stock options,
options on stock index futures, and swap contracts, in each case
related to its respective Foreign Index and its Component Securities,
as well as cash and cash equivalents. Each Fixed Income Fund generally
will invest at least 90% of its assets in Component Securities of its
respective Fixed Income Index (except with respect to the PowerShares
Domestic Aggregate Bond Portfolio and the PowerShares Mortgage-Backed
Securities Portfolio, as set forth below). However, each Fixed Income
Fund may at times invest up to 20% of its assets in certain futures,
options and swap contracts, cash and cash equivalents, as well as in
bonds not included in its Fixed Income Index, but which the Adviser or
Sub-Adviser believes will help the Fixed Income Fund track its Fixed
Income Index.
4. The PowerShares Domestic Aggregate Bond Portfolio will seek to
track that portion of the Merrill Lynch U.S. Domestic Index devoted to
government mortgage-backed securities (``MBS'') by investing a
corresponding percentage of its assets either in MBS included in the
index or in to-be-announced (``TBA'') transactions on MBS. The
PowerShares Mortgage-Backed Securities Portfolio will invest at least
90% of its assets in MBS included in the DB U.S. Agency Mortgage TBA
Index or in TBA transactions on MBS. A ``TBA transaction'' essentially
is a purchase or sale of a pass-through security for future settlement
at an agreed-upon date. Applicants state that most mortgage pass-
through securities trades are executed as TBA transactions. Applicants
state that TBA transactions increase the liquidity and pricing
efficiency of transactions in MBS because they permit similar MBS to be
traded interchangeably pursuant to commonly observed settlement and
delivery requirements.
5. Each Foreign Fund will utilize as an investment approach either
a replication strategy or a representative sampling strategy, and each
Fixed Income Fund will use a representative sampling strategy. A
Foreign Fund using a replication strategy generally will hold most of
the Component Securities of the Foreign Index in the same approximate
proportions as the Foreign Index, but may not hold all of the
securities that comprise the Foreign Index in certain instances. A New
Fund using a representative sampling strategy will seek to hold a
representative sample of the Component Securities of the Underlying
Index and will invest in some but not all of the Component Securities
of its Underlying Index. Applicants anticipate that a New Fund that
utilizes a representative sampling strategy will not track its
Underlying Index with the same degree of accuracy as an investment
vehicle that invested in every Component Security of the Underlying
Index with the same weighting as the Underlying Index. Applicants
expect that each New Fund will have a tracking error relative to the
performance of its respective Underlying Index of less than 5 percent.
6. Any Depositary Receipts held by a Foreign Fund will be
negotiable securities that represent ownership of a non-U.S. company's
publicly traded stock. Depositary Receipts will typically be American
Depositary Receipts (``ADRs''), but may include Global Depositary
Receipts (``GDRs'') and Euro Depositary Receipts (``EDRs''). ADRs, GDRs
and EDRs are collectively referred to herein as ``Depositary
Receipts.'' Applicants believe that, in certain cases, holding one or
more Depositary Receipts rather than Component Securities of the
relevant Foreign Index, will improve the liquidity, tradability and
settlement of a Foreign Fund's then current Fund Deposit (as defined
below) (thereby improving the efficiency of the creation and redemption
process and facilitating efficient arbitrage activity), while at the
same time permitting a Foreign Fund to maintain direct
[[Page 25804]]
exposure to Component Securities of its Foreign Index. Applicants
intend that any Foreign Fund would be able to treat Depositary Receipts
that represent Component Securities of its Foreign Index as Component
Securities for purposes of any requirements that a percentage of a
Foreign Fund's portfolio be invested in Component Securities of its
Foreign Index.
7. Creation Units will consist of either 50,000 or 100,000 Shares,
as specified in the relevant prospectus (``Prospectus''). The price of
a Creation Unit will range from $1,000,000 to $5,000,000. Creation
Units may be purchased only by or through a party that has entered into
an agreement with the Distributor regarding creations and redemptions
of Creation Units (an ``Authorized Participant''). An Authorized
Participant must be either (a) a broker-dealer or other participant in
the continuous net settlement system of the National Securities
Clearing Corporation, a clearing agency that is registered with the
Commission, or (b) a participant in the Depository Trust Company
(``DTC'') system. Creation Units generally will be issued in exchange
for an in-kind deposit of securities and cash. A New Fund also may sell
Creation Units on a cash-only basis in limited circumstances.\5\ An
investor wishing to purchase a Creation Unit from a New Fund will have
to transfer to the New Fund a ``Fund Deposit'' consisting of: (a) a
portfolio of securities that has been selected by the Adviser to
correspond to the returns on the relevant Underlying Index (``Deposit
Securities''), and (b) a cash payment to equalize any differences
between the market value per Creation Unit of the Deposit Securities
and the net asset value (``NAV'') per Creation Unit (``Cash
Component'').\6\ An investor purchasing a Creation Unit from a New Fund
will be charged a fee (``Transaction Fee'') to prevent the dilution of
the interests of the remaining shareholders resulting from the New Fund
incurring costs in connection with the purchase of the Creation
Units.\7\ Each New Fund will disclose the Transaction Fees charged by
the New Fund in its Prospectus and the method of calculating the
Transaction Fees in its Prospectus or statement of additional
information (``SAI'').
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\5\ Over time, the Adviser or Sub-Adviser may conclude that
operating on an exclusively in-kind basis for a New Fund may present
operational problems for such New Fund. Therefore, each Trust may
permit, in its discretion, with respect to a New Fund under certain
circumstances, an in-kind purchaser to substitute cash in lieu of
depositing some or all of the requisite Deposit Securities. For
example, each of the PowerShares Domestic Aggregate Bond Portfolio
and the PowerShares Mortgage-Backed Securities Portfolio will
require purchasing investors to substitute cash in lieu of any
Deposit Security that is a mortgage TBA transaction. This cash in
lieu of mortgage TBAs will likely result in cash-only creations with
respect to the PowerShares Mortgage-Backed Securities Portfolio.
More generally, substitution might be permitted or required because
one or more Deposit Securities may be unavailable, may not be
available in the quantity needed to make a Portfolio Deposit, or may
not be eligible for trading by an Authorized Participant (or the
investor on whose behalf the Authorized Participant is acting).
Applicants currently expect that PowerShares FTSE RAFI Taiwan
Portfolio, PowerShares FTSE RAFI South Korea Portfolio, PowerShares
FTSE RAFI Brazil Portfolio, PowerShares FTSE RAFI BRIC Portfolio and
PowerShares Indus India Portfolio will utilize ``cash-only''
purchases and redemptions of Creation Units due to local exchange
restrictions on short sales and/or free delivery of stocks, as well
as difficulty associated with borrowing stocks in the applicable
markets.
\6\ On each business day, prior to the opening of trading on the
Exchange (as defined below), the Adviser or Sub-Adviser will make
available a list of the names and the required number of shares of
each Deposit Security required for the Fund Deposit for each New
Fund. That Fund Deposit will apply to all purchases of Creation
Units until a new Fund Deposit for a New Fund is announced. Each New
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 in certain circumstances. With respect to the Foreign
Funds, the Exchange or other market information provider will
disseminate every 15 seconds throughout the trading day via the
facilities of the Consolidated Tape Association an amount
representing on a per share basis the sum of the current value of
the Deposit Securities and the estimated Cash Component. As the
respective international local markets close, the market value of
the Deposit Securities will continue to be updated for foreign
exchange rates for the remainder of the U.S. trading day at the
prescribed 15 second interval. With respect to the Fixed Income
Funds, the Exchange or other market information provider will
disseminate a calculation of the approximate NAV of a Fund Share
(the ``Intra-day Indicative Value'' or ``IIV'') every 15 seconds
throughout the trading day, separately from the consolidated tape.
\7\ When a New Fund permits a purchaser to substitute cash for
Deposit Securities, the purchaser may be assessed an additional fee
to offset the brokerage and other transaction costs associated with
using cash to purchase the requisite Deposit Securities.
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8. Orders to purchase Creation Units of a New Fund will be placed
with the Distributor who will be responsible for transmitting each
order to each New Fund. The Distributor will issue, and maintain
records of, confirmations of acceptance to purchasers of Creation Units
and delivery instructions to the Trusts (to implement the delivery of
Creation Units). The Distributor will also be responsible for
delivering Prospectuses to purchasers of Creation Units.
9. Persons purchasing Creation Units from a New Fund may hold the
Fund Shares or sell some or all of them in the secondary market. Shares
of the New Funds will be listed on a national securities exchange, as
defined in section 2(a)(26) of the Act (an ``Exchange''), and traded in
the secondary market in the same manner as other equity securities. An
Exchange specialist (``Specialist'') will be assigned to make a market
in Shares. If The NASDAQ Stock Market, Inc. (``NASDAQ'') is the listing
Exchange, one or more member firms of NASDAQ will act as a market maker
(``Market Maker'') and maintain a market on NASDAQ for Fund Shares
trading on NASDAQ. The price of Fund Shares traded on an Exchange will
be based on a current bid/offer market. Each Fund Share is currently
expected to have a market value of between $20 and $50. Transactions
involving the sale of Fund Shares in the secondary market will be
subject to customary brokerage commissions and charges.
10. Applicants expect that purchasers of Creation Units will
include institutional investors and arbitrageurs (which could include
institutional investors). The Specialist or Market Maker, in providing
for a fair and orderly secondary market for Fund Shares, also may
purchase Creation Units for use in its market-making activities.
Applicants expect that secondary market purchasers of Fund Shares will
include both institutional and retail investors.\8\ Applicants expect
that the price at which the Fund 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
Fund Shares will not trade at a material discount or premium in
relation to their NAV.
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\8\ Fund Shares will be registered in book-entry form only. DTC
or its nominee will be the registered owner of all outstanding Fund
Shares. DTC or its participants will maintain records reflecting the
beneficial owners of Fund Shares.
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11. Fund Shares will not be individually redeemable. Fund Shares
will only be redeemable in Creation Units through a New Fund. To
redeem, an investor will have to accumulate enough Fund Shares to
constitute a Creation Unit. An investor redeeming a Creation Unit
generally will receive (a) the Portfolio Securities designated to be
delivered for Creation Unit redemptions on the date the request for
redemption is made (``Fund Securities''),\9\ which
[[Page 25805]]
may not be identical to the Deposit Securities applicable to the
purchase of Creation Units, and (b) a ``Cash Redemption Payment,''
consisting of an amount calculated in the same manner as the Cash
Component, although the actual amount of the Cash Redemption Payment
may differ from the Cash Component if the Fund Securities are not
identical to the Deposit Securities on a given day. An investor may
receive the cash equivalent of a Fund Security upon its request if, for
example, the investor were constrained from effecting transactions in
the Fund Security by regulation or policy.
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\9\ The New Funds will comply with the federal securities laws
in accepting Deposit Securities and satisfying redemptions with Fund
Securities, including that the Deposit Securities and Fund
Securities are sold in transactions that would be exempt from
registration under the Securities Act. As a general matter, the
Deposit Securities and Fund Securities will correspond pro rata to
the securities held by the New Funds. In accepting Deposit
Securities and satisfying redemptions with Fund Securities that are
restricted securities eligible for resale pursuant to rule 144A
under the Securities Act, each New Fund will comply with the
conditions of rule 144A, including in satisfying redemptions with
such rule 144A eligible restricted Fund Securities. The Prospectus
for each New Fund will also state that an Authorized Participant
that is not a Qualified Institutional Buyer (``QIB'') will not be
able to receive Fund Securities that are restricted securities
eligible for resale under rule 144A.
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12. A redeeming investor will pay a Transaction Fee to offset
transaction costs, whether the redemption proceeds are in kind or cash.
When an investor redeems for cash rather than in kind, the investor may
pay a higher Transaction Fee. Such Transaction Fee will be calculated
in the same manner as a Transaction Fee payable in connection with the
purchase of a Creation Unit.
13. Applicants state that neither the Trusts nor any New Fund will
be marketed or otherwise held out as a ``mutual fund.'' Rather,
applicants state that each New Fund will be marketed as an ``exchange-
traded fund.'' No New Fund marketing materials (other than as required
in the Prospectus) will refer to a New Fund as an ``open-end'' or
``mutual fund,'' except to contrast a New Fund with a conventional
open-end management investment company. In all marketing materials
where the method of obtaining, buying, or selling Fund Shares is
described, applicants will include a statement to the effect that Fund
Shares are not redeemable through a New Fund except in Creation Units.
The same type of disclosure will be provided in each New Fund's
Prospectus, SAI, advertising materials, and all reports to
shareholders. The New Funds will provide copies of their annual and
semi-annual shareholder reports to DTC participants for distribution to
beneficial holders of Fund Shares.
14. Applicants also seek to amend the Prior Order to modify the
terms under which the Initial Trust may offer additional series in the
future. The Prior Order is currently subject to a condition that does
not permit applicants to register any series by means of filing a post-
effective amendment to the Initial Trust's registration statement or by
any other means, unless (a) applicants have requested and received with
respect to such series, either exemptive relief from the Commission or
a no-action letter from the Division of Investment Management of the
Commission, or (b) the series will be listed on a national securities
exchange without the need for filing pursuant to rule 19b-4 under the
Exchange Act. The order would amend the Prior Order to delete this
condition. In addition, the order would expand the relief under the
Prior Order to include registered investment companies other than the
Initial Trust. As amended, the Prior Order would permit the
introduction of series of the Initial Trust and series of other open-
end management investment companies (collectively, ``Future Index
Funds'') that (a) are advised by the Adviser or an entity controlling,
controlled by or under common control with the Adviser; (b) track
Underlying Indices comprised of equity securities issued by domestic
issuers that are created, compiled, sponsored or maintained by an
entity that is not an affiliated person, as defined in section 2(a)(3)
of the Act, or an affiliated person of an affiliated person, of the
Adviser, the Distributor, the Initial Trust, the New Trust or any sub-
advisor or promoter of an Index Fund, and (c) comply with the
respective terms and conditions of the Prior Order, as amended by the
order.
15. Applicants believe that the modification of the future relief
available under the Prior Order would be consistent with section 6(c)
and 17(b) of the Act and that granting the requested relief will
facilitate the timely creation of Future Index Funds and the
commencement of secondary market trading of such Future Index Funds by
removing the need to seek additional exemptive relief. Applicants
submit that the terms and conditions of the Prior Order have been
appropriate for the exchange-traded funds advised by the Adviser and
would remain appropriate for Future Index Funds. Applicants also submit
that tying exemptive relief under the Act to the ability of a Future
Index Fund to be listed on an Exchange without the need for a rule 19b-
4 filing under the Exchange Act is not necessary to meet the standards
under section 6(c) and 17(b) of the Act.
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), 22(e) 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
(a)(2) of the Act.
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.
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 Fund Shares will not be individually redeemable,
applicants request an order that would permit each New Fund, as a
series of an open-end management investment company, to issue Fund
Shares that are redeemable in Creation Units only. Applicants state
that investors may purchase Fund Shares in Creation Units from each New
Fund and redeem Creation Units. Applicants further state that because
the market price of Fund Shares will be disciplined by arbitrage
opportunities, investors should be able to sell Fund 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 Fund 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 Fund 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.
[[Page 25806]]
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 Fund
Shares. Applicants maintain that while there is little legislative
history regarding section 22(d), its provisions, 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 resulting from sales at different prices, and
(c) assure 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 Fund Shares to trade in the secondary market at
negotiated prices. Applicants state that (a) secondary market trading
in Fund Shares does not involve the New Funds as parties and cannot
result in dilution of an investment in Fund 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 Fund 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
Fund Shares and their NAV remains narrow.
Section 22(e) of the Act
7. Section 22(e) generally prohibits a registered investment
company from suspending the right of redemption or postponing the date
of payment of redemption proceeds for more than seven days after the
tender of a security for redemption. The principal reason for the
requested exemption is that settlement of redemptions for the Foreign
Funds is contingent not only on the settlement cycle of the United
States market, but also on currently practicable delivery cycles in
local markets for underlying foreign securities held by the Foreign
Funds. Applicants state that local market delivery cycles for
transferring certain foreign securities to investors redeeming Creation
Units, together with local market holiday schedules, will under certain
circumstances require a delivery process in excess of seven calendar
days for the Foreign Funds. Applicants request relief under section
6(c) of the Act from section 22(e) to allow the Foreign Funds to pay
redemption proceeds more than seven days after the tender of Fund
Shares for redemption. Applicants anticipate that the delivery of
redemption proceeds would be made at the latest within 14 calendar days
after the redemption request except to the extent that a redemption
delivery is delayed due to the proclamation of new or special holidays,
the treatment by market participants of certain days as ``informal
holidays,'' the elimination of existing holidays or changes in local
securities delivery practices. At all other times and except as
disclosed in the relevant Prospectus, product description (``Product
Description'') and/or SAI, applicants expect that each Foreign Fund
will be able to deliver redemption proceeds within seven days.\10\ With
respect to Future Funds that are Foreign Funds, applicants seek the
same relief from section 22(e) only to the extent that circumstances
similar to those described in the application exist. Applicants state
that section 22(e) was designed to prevent unreasonable, undisclosed
and unforeseen delays in the payment of redemption proceeds. Applicants
assert that their requested relief will not lead to the problems that
section 22(e) was designed to prevent. Applicants state that the
Prospectus, the Product Description and/or the SAI for each Foreign
Fund will disclose those local holidays (over the period of at least
one year following the date of the Prospectus, Product Description or
SAI), if any, that are expected to prevent the delivery of redemption
proceeds in seven calendar days, and the maximum number of days needed
to deliver the proceeds for the New Fund. Applicants are not requesting
relief from section 22(e) with respect to Foreign Funds that do not
effect creations and redemptions of Creation Units in-kind.
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\10\ Rule 15c6-1 under the Exchange Act requires that most
securities transactions be settled within three business days of the
trade. Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations applicants
may have under rule 15c6-1.
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Section 24(d) of the Act
8. 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 Fund Shares to rely on the prospectus delivery exemption
provided by section 4(3) of the Securities Act.\11\
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\11\ Applicants do not seek relief from the prospectus delivery
requirement for non-secondary market transactions, including
purchases of Creation Units or those involving an underwriter.
Applicants state that persons purchasing Creation Units will be
cautioned in a New Fund's 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 Adviser, breaks them down into the constituent Fund
Shares, and sells Fund Shares directly to its customers, or if it
chooses to couple the purchase of a supply of new Fund Shares with
an active selling effort involving solicitation of secondary market
demand for Fund Shares. A New Fund's Prospectus will state that
whether a person is an underwriter depends upon all the facts and
circumstances pertaining to that person's activities. A New Fund's
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 Fund
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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9. Applicants state that Fund 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 Fund 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 Fund Shares will be
exchange-listed, prospective investors will have access to several
types of market information about Fund Shares. Applicants state that
information regarding market price and volume will be continually
available on a real-time basis throughout the day on brokers' computer
screens and other electronic services. The previous day's closing price
and volume information for Fund Shares also will be published daily in
the financial section of newspapers. The website maintained for the
Trusts will include, for each New Fund, the prior business day's NAV,
the mid-point of the bid-ask spread at the time of calculation of NAV
(``Bid/Ask Price'') and calculation of the premium or discount of the
Bid/Ask Price at the time of calculation of the NAV against such NAV,
and data in chart format displaying the frequency distribution of
[[Page 25807]]
discounts and premiums of the Bid/Ask Price against the NAV, within
appropriate ranges, for each of the four previous calendar
quarters.\12\
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\12\ The Bid/Ask Price per Fund Share of a New Fund is
determined using the highest bid and the lowest offer on the
Exchange at the time of calculation of such New Fund's NAV.
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10. Investors also will receive a Product Description describing a
New Fund and its Fund Shares. Applicants state that, while not intended
as a substitute for a Prospectus, the Product Description will contain
information about Fund Shares that is tailored to meet the needs of
investors purchasing Fund Shares in the secondary market.
Sections 17(a)(1) and (2) of the Act
11. Section 17(a)(1) and (2) of the Act generally prohibit an
affiliated person of a registered investment company, or an affiliated
person of such a person (``second tier affiliate''), 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. The
New Funds may be deemed to be controlled by the Adviser or an entity
controlling, controlled by or under common control with the Adviser and
hence affiliated persons of each other. In addition, the New Funds may
be deemed to be under common control with any other registered
investment company (or series thereof) advised by the Adviser or an
entity controlling, controlled by or under common control with the
Adviser (an ``Affiliated Fund''). Applicants state that because the
definition of ``affiliated person'' includes any person owning 5% or
more of an issuer's outstanding voting securities, every purchaser of a
Creation Unit will be affiliated with the New Fund so long as fewer
than twenty Creation Units are in existence, and any purchaser that
owns more than 25% of a New Fund's outstanding Fund Shares will be
affiliated with a New Fund. Applicants request an exemption from
section 17(a) under sections 6(c) and 17(b), to permit in-kind
purchases and redemptions by persons that are affiliated persons or
second tier affiliates of the New Funds solely by virtue of one or more
of the following: (1) Holding 5% or more, or more than 25%, of the
outstanding Fund Shares of either Trust or one or more New Funds; (2)
an affiliation with a person with an ownership interest described in
(1); or (3) holding 5% or more, or more than 25%, of the shares of one
or more Affiliated Funds.
12. Section 17(b) of the Act authorizes the Commission to exempt a
proposed transaction from section 17(a) of the Act 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. Applicants
contend that no useful purpose would be served by prohibiting
affiliated persons or second tier affiliates of a New Fund 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 Fund Securities will
be valued under the same objective standards applied to valuing
Portfolio Securities. Therefore, applicants state that in-kind
purchases and redemptions will afford no opportunity for the affiliated
persons and second tier affiliates described above to effect a
transaction detrimental to the other holders of Fund Shares. Applicants
also believe that in-kind purchases and redemptions will not result in
abusive self-dealing or overreaching by these persons of the New Fund.
Applicants' Conditions
Applicants agree that the Prior Order will continue to be subject
to the same conditions, except that condition 1 will be deleted. With
respect to the New Funds, applicants agree that any order granting the
requested relief will be subject to the following conditions:
1. Each New Fund's Prospectus and Product Description will clearly
disclose that, for purposes of the Act, the Fund Shares are issued by a
registered investment company, and the acquisition of Fund 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 New Fund beyond the
limits in section 12(d)(1), subject to certain terms and conditions,
including that the registered investment company enter into an
agreement with the New Fund regarding the terms of the investment.
2. As long as a Trust operates in reliance on the requested order,
its Fund Shares will be listed on an Exchange.
3. Neither the Trusts nor any of the New Funds will be advertised
or marketed as an open-end fund or a mutual fund. Each New Fund's
Prospectus will prominently disclose that Fund Shares are not
individually redeemable shares and will disclose that the owners of
Fund Shares may acquire those Fund Shares from the New Fund and tender
those Fund Shares for redemption to such New 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 Fund Shares are not individually redeemable and that owners of
Fund Shares may acquire those Fund Shares from the New Fund and tender
those Fund Shares for redemption to the New Fund in Creation Units
only.
4. The Web site maintained for the Trusts, which is and will be
publicly accessible at no charge, will contain the following
information, on a per Fund Share basis, for each New 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 New Fund will state that the website for the New Fund has
information about the premiums and discounts at which the Fund Shares
have traded.
5. Each New Fund's Prospectus and annual report will also include:
(a) the information listed in condition 4(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 Fund Share
basis for one, five and ten year periods (or life of the New 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
applicable Underlying Index.
6. Before a New 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
[[Page 25808]]
member organizations effecting transactions in Fund Shares to deliver a
Product Description to purchasers of Fund Shares.
For the Commission, by the Division of Investment Management,
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-8599 Filed 5-4-07; 8:45 am]
BILLING CODE 8010-01-P
