[Federal Register Volume 64, Number 21 (Tuesday, February 2, 1999)]
[Notices]
[Pages 5082-5087]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2410]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23668; 812-11264]


Nasdaq-100 Trust, Series 1, Nasdaq-Amex Investment Product 
Services, Inc., and Alps Mutual Funds Services, Inc.; Notice of 
Application

January 27, 1999.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').

ACTION: Notice of application for an order under (i) section 6(c) of 
the Investment Company Act of 1940 (the ``Act'') for an exemption from 
sections 4(2) 14(a), 22(d), 24(d), and 26(a)(2)(C) of the Act an rule 
22c-1 under the Act; (ii) sections 6(c) and 17(b) of the Act for an 
exemption from sections (17(a) (1) and (2) of the Act; and (iii) 
section 17(d) of the Act and rule 17d-1 under the Act to permit certain 
joint transactions.

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APPLICANTS: Nasdaq-100 Trust, Series 1 (``Trust''), Nasdaq-Amex 
Investment Product Services, Inc. (together with its successors in 
interest \1\ and with any person, directly or indirectly, controlling, 
controlled by, or under common control with, Nasdaq-Amex Investment 
Product Services, Inc., ``Sponsor''), and ALPS Mutual Funds Services, 
Inc. (``Distributor'').

    \1\ ``Successors in interest'' means any entity or entities that 
result from a reorganization into another jurisdiction or a change 
in the type of business organization.
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SUMMARY OF APPLICATION: Applicants request an order that would (i) 
permit the Trust, a unit investment trust whose portfolio will consist 
of the component stocks of the Nasdaq-100 Index (``Index''), to issue 
non-redeemable securities (``Nasdaq-100 Shares''); (ii) permit 
secondary market transactions in Nasdaq-100 Shares at negotiated 
prices; (iii) permit dealers to sell Nasdaq-100 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''); (iv) permit certain expenses associated with the creation and 
maintenance of the Trust to be borne by the Trust rather than the 
Sponsor; (v) exempt the Sponsor from the Act's requirement that it 
purchase, or place with others, $100,000 worth of Nasdaq-100 Shares; 
(vi) permit affiliated persons of the trust to deposit securities into, 
and receive securities from, the Trust in connection with the purchase 
and redemption of Nasdaq-100 Shares; and (vii) permit the Trust to 
reimburse the Sponsor for payment of an annual licensing fee the The 
Nasdaq Stock Market, Inc. (``Nasdaq'').

Filling DATES: the application was filed on August 19, 1998. Applicants 
have agreed to file an amendment during the notice period, the 
substance of which is reflected in this notice.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on February 19, 
1999, 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 may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Trust and Sponsor, c/o John L. Jacobs, Vice President, The 
Nasdaq Stock Market, Inc., 1735 K Street, N.W., Washington, D.C. 20006-
1500; and Distributor, c/o James V. Hyatt, General Counsel, 370 17th 
Street, Suite 3100, Denver, Colorado 80202.

FOR FURTHER INFORMATION CONTACT:
Timothy R. Kane, Senior Counsel, at (202) 942-0651, or Mary Kay Frech, 
Branch Chief, at (202) 942-0564 (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 from 
the SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington 
D.C. 20549 (tel. (202) 942-8090).

Applicants' Representations

    1. The Trust is a unit investment trust (``UIT'') that will be 
organized under the laws of the State of New York. The Sponsor is a 
wholly-owned subsidiary of Nasdaq. The Bank of New York will act as 
trustee to the Trust (``Trustee''). The Distributor, a registered 
broker-dealer, will serve as principal underwriter of the Trust on an 
agency basis.
    2. The Trust will hold a portfolio of securities (the ``Portfolio 
Securities'') consisting of substantially all of the securities in 
substantially the same weighting as the component securities of the 
Nasdaq-100 Index (the ``Index Securities''). The Index is a ``modified 
capitalization-weighted'' index of securities issued by the 100 largest 
and most actively traded non-financial companies listed on the Nasdaq 
National Market Tier. The Index was first published in 1985.
    3. Nasdaq-100 Shares, units of beneficial interest in the Trust, 
are designed to provide investors with an instrument that closely 
tracks the Index, trades like a share of common stock, and pays 
periodic dividends proportionate to those paid by the Portfolio 
Securities.\2\ Applicant believe that Nasdaq-100 Shares will afford 
significant benefits in the public interest. Applicants expect the 
Trust to be able to track the Index more closely than certain other 
index products and, unlike open-end index funds, trade at negotiated 
prices throughout the business day. Applicants also state that Nasdaq-
100 Shares will compete with comparable products available on

[[Page 5083]]

foreign exchanges and attract capital to the U.S. equity markets.
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    \2\ The Trust will make quarterly distribution of an amount 
representing the dividends accumulated on Portfolio Securities 
during each quarter, net of fees and expenses, if any.
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    4. The Trustees will make adjustments to the Portfolio Securities 
to reflect changes made by Nasdaq to the composition and weighting of 
the Index Securities.\3\ All adjustments to the Portfolio Securities 
made by the Trustee will be set forth in the trust agreement and will 
be non-discretionary.
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    \3\ Nasdaq determines, comprises, and calculates the Index 
without regard to the Trust.
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    5. The Trustee will be paid a ``Trustee's Fee'' ranging from 0.06% 
to 0.10% of the net asset value (``NAV'') of the Trust on an annualized 
basis, with the minimum fee amount not to fall below $180,000.\4\ The 
Sponsor has undertaken, up to and including the fiscal year of the 
Trust ending on September 30, 2000, to reimburse the Trust or assume 
payment on behalf of the Trust for ordinary operating expenses of the 
Trust that exceed 0.18% of the daily NAV of the Trust.\5\ The Sponsor 
retains the ability to be repaid by the Trust to the extent that 
subsequently during the fiscal year expenses fall below the 0.18% per 
year level on any given day. Trust fees and expenses will be paid first 
out of income received by the Trust in the form of dividends and other 
distributions on the Portfolio Securities.\6\ Nasdaq has granted the 
Sponsor a license to use the Index and certain trademarks of Nasdaq. 
The Sponsor will pay Nasdaq an annual licensing fee and will, after 
September 30, 1999, seek reimbursement from the Trust for this fee. The 
Sponsor will pay the Distributor a flat annual fee. The Sponsor will 
not seek from the Trust reimbursement for this annual fee without 
obtaining prior exemptive relief from the Commission.
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    \4\ To the extent that the amount of the Trustee's compensation 
is less than the minimum annual fee, the Sponsor will pay the amount 
of the shortfall.
    \5\ For purposes of this undertaking, ``ordinary operating 
expenses'' will not include taxes, brokerage commissions, and 
extraordinary non-recurring expenses.
    \6\ Applicants expect that the income of the Trust may be 
insufficient to pay the fees and expenses of the Trust. In such 
circumstances, the Trustee will sell Portfolio Securities to 
generate sufficient cash to pay the Trust fees and expenses in 
excess of Trust income. The Trustee is ordinarily required to sell 
Portfolio Securities whenever the Trustee determines that accrued 
fees and expenses exceed dividends and other Trust accrued income on 
a projected basis by more than 0.01% of the NAV of the Trust.
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    6. Nasdaq-100 Shares will be issued in aggregations of 50,000 
shares (``Creation Units''). The price of a Creation Unit would be 
approximately $4,035,000 (based on the value of the Index on December 
14, 1998). All orders to purchase Creation Units must be delivered 
through a party that has executed a Nasdaq-100 participant agreement 
with the Distributor and Trustee and is either (i) a participant in the 
Continuous Net Settlement (``CNS'') System of the National Securities 
Clearing Corporation (``NSCC'') (``Nasdaq-100 Clearing Process'') or 
(ii) a Depository Trust Company (``DTC'') participant.
    7. An investor wishing to purchase a Creation Unit from the Trust 
will have to transfer to the Trustee a ``Portfolio Deposit'' consisting 
of: (i) A portfolio of securities substantially similar in composition 
and weighting to the Index Securities (``Deposit Securities''); (ii) a 
cash payment equal to the dividends accrued on the Portfolio Securities 
since the last divided payment on the Portfolio Securities, net of 
expenses and liabilities (``Income Net of Expense Amount''); and (iii) 
a cash payment or credit to equalize any differences between the market 
value of the Deposit Securities and the NAV of the Trust on a per 
Creation Unit basis (the ``Balancing Amount'').\7\ (The Balancing 
Amount and the Income Net of Expense Amount together constitute the 
``Cash Component.'') An investor making a Portfolio Deposit will be 
charged a service fee (``Transaction Fee''), paid to the Trustee, to 
defray the Trustee's costs in processing securities deposited into the 
Trust.\8\
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    \7\ At the close the market on each business day, the Trustee 
will calculate the NAV of the Trust and then divide the NAV by the 
number of outstanding Nasdaq-100 Shares in Creation Unit size 
aggregations, resulting in an NAV per Creation Unit. The Trustee 
will then calculate the required number of shares of the Index 
Securities, and the amount of cash, comprising a Portfolio Deposit 
for the Following business day.
    The Sponsor will make available each business day a list of the 
names and the required number of shares for each of the Deposit 
Securities in the current Portfolio Deposit, as well as the Income 
Net of Expense Amount effective through and including the previous 
business day, per outstanding Nasdaq-100 Share.
    The cash equivalent of an Index Security may be included in the 
Cash Component of a Portfolio Deposit in lieu of the security if (i) 
the Trustee determines that an Index Security is likely to be 
unavailable or available in insufficient quantity for inclusion in a 
Portfolio Deposit (for example, when the security is subject to a 
trading halt or stop order, or the subject of a tender offer), or 
(ii) a particular investor is restricted from investing or engaging 
in transactions in the Index Security (for example, when the 
investor is a broker-dealer restricted by regulation or internal 
policy from investing in securities issued by a company on whose 
board of directors one of its principals serves, or when the 
investor is a broker-dealer and the security is on its ``restricted 
list'').
    \8\ The Transaction Fee will be $1,000 per day, regardless of 
the number of Creation Units purchased on that day by the investor. 
The Transaction Fee may be subsequently changed by the Trustee with 
the Sponsor's consent, but it will not exceed 0.10% of the value of 
a Creation Unit. For purchases of Creation Units outside the Nasdaq-
100 Clearing Process, the Transaction Fee will be one to four times 
greater. The amount of the Transaction Fee will be disclosed in the 
prospectus for the Trust.
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    8. Orders to purchase Creation Units will be placed with the 
Distributor, who will be responsible for transmitting the orders to the 
Trustee.\9\ The Distributor will issue confirmations of acceptance, 
issue delivery instructions to the Trustee to implement the delivery of 
Creation Units, and maintain records of the orders and the 
confirmations. The Distributor also will be responsible for delivering 
prospectuses to purchasers of Creation Units and may provide certain 
other administrative services, such as those related to state 
securities law compliance.
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    \9\ The procedures for processing a purchase order will depend 
upon whether the transaction is settled through NSCC or DTC.
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    9. Persons purchasing Creation Units from the Trust may hold the 
Nasdaq-100 Shares or sell some or all of them in the secondary market. 
Nasdaq-100 Shares will be listed on the American Stock Exchange, LLC 
(``AMEX'') and traded in the secondary market as individual units 
(i.e., in less than Creation Unit size aggregations) in the same manner 
as other equity securities. An AMEX specialist will be assigned to make 
a market in Nasdaq-100 Shares. The price of Nasdaq-100 Shares on the 
AMEX will be based on a current bid/offer market and would be 
approximately $80.70 per Nasdaq-100 Share (based on the value of the 
Index as of December 14, 1998). Transactions involving the sale of 
Nasdaq-100 Shares will be subject to customary brokerage commissions 
and charges. Applicants expect that the price at which Nasdaq-100 
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 Nasdaq-100 Shares will not trade at a 
material discount or premium in relation to their NAV.
    10. Applicants expect that purchasers of Creation Units will 
include institutional investors and arbitrageurs (which could include 
institutional investors). The AMEX specialist, in providing for a fair 
and orderly secondary market for Nasdaq-100 Shares, also may purchase 
Nasdaq-100 Shares for use in its market-making activities on the AMEX. 
Applicants expect that secondary market purchasers of Nasdaq-100 Shares 
will include both institutional and retail investors.\1\\0\
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    \1\\0\ Nasdaq-100 Shares will be registered in book-entry form 
only. DTC or its nominee will be the registered owner of all 
outstanding Nasdaq-100 Shares. Records reflecting the beneficial 
owners of Nasdaq-100 Shares will be maintained by DTC or its 
participants.
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    11. Applicants will make available a standard Nasdaq-100 Shares 
product

[[Page 5084]]

description (``Product Description'') to AMEX members and member 
organizations for distribution to investors purchasing Nasdaq-100 
Shares in accordance with AMEX Rule 1000. The purpose of the Product 
Description is to provide a brief and readily understandable 
description of the salient aspects of Nasdaq-100 Shares. The Product 
Description will advise investors that a prospectus for Nasdaq-100 
Shares is available without charge upon request from the investor's 
account executive. Applicants expect that purchases of Nasdaq-100 
Shares through a non-member broker-dealer in a transaction away from 
the AMEX would not constitute a significant portion of the market 
activity in Nasdaq-100 Shares.
    12. Nasdaq-100 Shares will not be individually redeemable, except 
upon termination of the Trust. Nasdaq-100 Shares will only be 
redeemable in Creation Unit-size aggregations through the Trust. To 
redeem, an investor will have to accumulate enough Nasdaq-100 Shares to 
constitute a Creation Unit. An investor redeeming a Creation Unit will 
receive a portfolio of securities typically identical in composition 
and weighting to the securities portion of a Portfolio Deposit as of 
the date the redemption request was made. An investor may receive the 
cash equivalent of an Index Security (i) when the Trustee determines 
that an Index Security is likely to be unavailable or available in 
insufficient quantity for delivery by the Trust; (ii) upon the request 
of the redeeming investor; or (iii) upon notice of the termination of 
the Trust. A redeeming investor may receive or may pay an amount equal 
to the Income Net of Expense Amount, plus or minus the Balancing 
Amount. A redeeming investor will pay a Transaction Fee calculated in 
the same manner as a Transaction Fee payable in connection with the 
purchase of a Creation Unit.\11\ The Trustee will transfer the 
securities and cash to the redeeming investor within three business 
days of receipt of the request for redemption.
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    \11\ See note 8, supra.
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    13. Because the Trust will ordinarily redeem Creation Units in 
kind, the Trust will not have to maintain cash reserves for 
redemptions. This will allow the assets of the Trust to be committed as 
fully as possible to tracking the Index, enabling the Trust to track 
the Index more closely than other investment products that must 
allocate a greater portion of their assets for cash redemptions.
    14. The Trust will terminate on the earlier of (i) 125 years from 
the date the initial Portfolio Deposit is received by the Trustee for 
deposit into the corpus of the Trust, or (ii) the date 20 years after 
the death of the last survivor of fifteen persons named in the trust 
agreement. The Trust will also terminate if (i) Nasdaq-100 Shares are 
de-listed from the AMEX and are not subsequently re-listed on a 
national securities exchange registered under the Securities Exchange 
Act of 1934 or a quotation medium operated by a national securities 
association; or (ii) either the Sponsor or the Trustee resigns or is 
removed, and a successor is not appointed. The Trust may terminate if: 
(i) 66\2/3\% of the holders of the outstanding Nasdaq-100 Shares agree 
to terminate it; (ii) the DTC is unable or unwilling to continue to 
perform its functions and a comparable replacement is unavailable; 
(iii) NSCC no longer provides clearance services with respect to the 
Nasdaq-100 Shares, or if the Trustee is no longer a participant in 
NSCC; (iv) Nasdaq ceases to publish the Index; or (v) the license 
agreement is terminated. In addition, the Sponsor will have the 
discretionary right to direct the Trustee to terminate the Trust if at 
any time (i) after six months following and prior to three years 
following the initial receipt of Portfolio Deposits by the Trust, the 
NAV of the Trust falls below $150,000,000; or (ii) after three years, 
the NAV is less than $350,000,000, adjusted annually for inflation. The 
Sponsor may also direct the Trustee to terminate the Trust if within 90 
days from the initial receipt of Portfolio Deposits the NAV of the 
Trust is less than $100,000.
    15. Within a reasonable time after the Trust's termination, the 
Trustee will use its best efforts to sell all Portfolio Securities not 
previously distributed to investors redeeming Creation Units. Nasdaq-
100 Shares not redeemed prior to termination will be redeemed in cash 
at NAV based on the proceeds from the sale of the Portfolio Securities.

Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act 
granting an exemption from sections 4(2), 14(a), 22(d), 24(d), and 
26(a)(2)(C) of the Act and rule 22c-1 under the Act; under sections 
6(c) and 17(b) of the Act granting an exemption from sections 17(a)(1) 
and (2) of the Act; and under rule 17d-1 under the Act to permit 
certain joint transactions.
    2. Section 6(c) of the Act provides that the Commission may exempt 
any person, security, or transaction, or any class of persons, 
securities, or transactions, if and to the extent that such exemption 
is necessary or appropriate in the public interest and consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the Act.

Section 4(2) of the Act

    3. Section 4(2) of the Act defines a UIT as an investment company 
that, among other things, issues only redeemable securities. Because 
Nasdaq-100 Shares will not be individually redeemable, applicants 
request an order that would permit the Trust to register and operate as 
a UIT. Applicants state that investors may purchase Nasdaq-100 Shares 
in Creation Units from the Trust and redeem Creation Units. Applicants 
further state that because the market price of Creation Units will be 
disciplined by arbitrage opportunities, investors should be able to 
sell Nasdaq-100 Shares in the secondary market at approximately their 
NAV.

Section 14(a) of the Act

    4. Section 14(a) of the Act provides, in pertinent part, that no 
registered investment company may make an initial public offering of 
its securities unless it has a net worth of at least $100,000, or 
provision is made in connection with the registration of its securities 
that (i) firm agreements to purchase $100,000 of its securities will 
have been made by not more than 25 persons, and (ii) all proceeds, 
including sales loads, will be refunded to investors if the investment 
company's net worth is less than $100,000 within 90 days after the 
effective date of the registration statement. Applicants state that 
section 14(a) was designed to address the formation of undercapitalized 
investment companies.
    5. Rule 14a-3 under the Act exempts from section 14(a) UITs that 
invest only in ``eligible trust securities,'' which do not include 
equity securities, subject to certain safeguards, including the refund 
of any sales load collected from investors. Applicants will comply in 
all respects with rule 14a-3, except that the Trust will not restrict 
its investments to eligible trust securities and the Trustee will not 
refund the Transaction Fee. Applicants contend that the Trust's 
investment in equity securities does not negate the effectiveness of 
the rule's safeguards nor subject investors to any greater risk of loss 
due to investment in an undercapitalized investment company. With 
respect to the Transaction Fee, applicants assert that it is not a 
sales load, and therefore is not covered by the rule's refund 
provision. Applicants note that the Transaction Fee will be paid not by 
retail investors, but by institutional and other

[[Page 5085]]

sophisticated, well-capitalized investors who can afford the 
approximately $4,035,000 purchase price of a Creation Unit and who do 
not require the protections of section 14(a) of the Act.

Section 22(d) of the Act and Rule     22c-1 Under the Act

    6. Section 22(d) of the Act, among other things, prohibits a dealer 
from selling a redeemable security that is being currently offered to 
the public by or through an underwriter, except at 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 next 
computed after receipt of a tender of the security for redemption or of 
an order to purchase or sell the security. Applicants state that 
secondary market trading in Nasdaq-100 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 Nasdaq-100 Shares in the secondary market will not comply with 
section 22(d) and rule 22c-1. Applicants request an exemption from 
these provisions.
    7. 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 Nasdaq-
100 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 (i) prevent dilution caused 
by certain riskless-trading schemes by principal underwriters and 
contract dealers; (ii) prevent unjust discrimination or preferential 
treatment among buyers resulting from sales at different prices; and 
(iii) 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.
    8. Applicants believe that none of these purposes will be thwarted 
by permitting Nasdaq-100 Shares to trade in the secondary market at 
negotiated prices. Applicants state (i) that secondary market trading 
in Nasdaq-100 Shares does not involve the Trust as a party and cannot 
result in dilution of an investment in Nasdaq-100 Shares; and (ii) 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, not as a result of unjust or 
discriminatory manipulation. Therefore, applicants assert that 
secondary market transactions in Nasdaq-100 Shares will not lead to 
discrimination or preferential treatment among purchases. Finally, 
applicants contend that the proposed distribution system will be 
orderly because arbitrage activity will ensure that the difference 
between the market price of Nasdaq-100 Shares and their NAV remains 
narrow.

Section 24(d) of the Act

    9. Section 24(d) of the Act provides, in pertinent part, that the 
prospectus delivery exemption provided to dealer transactions by 
section 4(3) of the Securities Act does not apply to any transaction in 
a redeemable security issued by a UIT. Applicants request an exemption 
from section 24(d) to permit dealers in Nasdaq-100 Shares to rely on 
the prospectus delivery exemption provided by section 4(3) of the 
Securities Act.\12\ Applicants state that the imposition of prospectus 
delivery requirements on dealers in the secondary market will 
materially impede the success of Nasdaq-100 Shares.
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    \12\ Applicants state that persons purchasing Creation Units 
will be cautioned in the prospectus that some activities on their 
part may, depending on the circumstances, result in their being 
deemed statutory underwriters and subject them to the prospectus 
delivery and liability provisions of the Securities Act. For 
example, a broker-dealer firm or its client may be deemed a 
statutory underwriter if it takes Creation Units after placing an 
order with the Distributor, breaks them down into the constituent 
Nasdaq-100 Shares, and sells Nasdaq-100 Shares directly to its 
customers; or if chooses to couple the creation of a supply of new 
Nasdaq-100 Shares with an active selling effort involving 
solicitation of secondary market demand for Nasdaq-100 Shares. The 
prospectus will state that whether a person is an underwriter 
depends upon all the facts and circumstances pertaining to that 
person's activities. The prospectus also will state that broker-
dealer firms should also note that dealers who are not 
``underwriters'' but are participating in a distribution (as 
contrasted to ordinary secondary trading transactions), and thus 
dealing with Nasdaq-100 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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    10. Applicants state that the secondary market for Nasdaq-100 
Shares is significantly different from the typical secondary market for 
UIT securities, which is usually maintained by the sponsor. Nasdaq-100 
Shares will be listed on a national securities exchange and will be 
traded in a manner similar to the shares of common stock issued by 
operating companies and closed-end investment companies. Dealers 
selling shares of operating companies and closed-end investment 
companies in the secondary market generally are not required to deliver 
a prospectus to the purchaser.
    11. Applicants contend that Nasdaq-100 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 Nasdaq-100 Shares will be 
exchange-listed, prospective investors will have access to several 
types of market information about the product. Applicants state that 
quotations, last sale price, and volume information will be continually 
available on a real time basis through the consolidated tape and will 
be available throughout the day on brokers' computer screens and other 
electronic services, such as Quotron. The previous day's price and 
volume information also will be published in the financial section of 
newspapers. The Sponsor also will publish daily, on a per Nasdaq-100 
Shares basis, the amount of accumulated dividends, net of accrued 
expenses.
    12. Investors also will receive the Product Description. Applicants 
state that, while not intended as a substitute for a prospectus, the 
Product Description will contain pertinent information about Nasdaq-100 
Shares. Applicants also note that Nasdaq-100 Shares will be readily 
understandable to retail investors as a product that tracks the Nasdaq-
100 Index, which is well known to most investors and widely recognized.

Section 26(a)(2)(C) of the Act

    13. Section 26(a)(2)(C) of the Act requires, among other things, 
that a UIT's trust indenture prohibit payments to the trust's depositor 
(in the case of the Trust, the Sponsor), and any affiliated person of 
the depositor, except payments for performing certain administrative 
services. Applicants request an exemption from section 26(a)(2)(C) to 
permit the Trust to reimburse the Sponsor for certain licensing, 
registration, and marketing expenses.
    14. Applicants state that, ordinarily, a sponsor of a UIT has 
several sources of income in connection with the creation of the trust. 
Applicants assert, however, that under the proposed structure of the 
Trust, the usual sources of income are not available because the 
Sponsor will not impose a sales load, maintain a secondary market, or 
deposit Index Securities into the Trust. Although AMEX, an affiliate of 
the Sponsor, will earn some income on the trading fees imposed on 
transactions on that exchange, applicants expect that the fees will 
generate substantially less

[[Page 5086]]

revenue than what would have been generated by a normal sales charge on 
secondary market trades of Nasdaq-100 Shares.\13\ Applicants contend 
that the abuse sought to be remedied by section 26(a)(2)(C) of the 
Act--``double dipping'' by UIT sponsors collecting money from their 
captive trusts as well as the profits already generated by sales 
charges and other sources--will not be present if the requested 
exemption is granted.
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    \13\ Effective November 2, 1998, Nasdaq (the Sponsor's parent) 
and the AMEX became separate subsidiaries of the Nasdaq-Amex Market 
Group, Inc., a newly-created subsidiary of the National Association 
of Securities Dealers, Inc.
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    15. Applicants contend that permitting the Trust to reimburse the 
Sponsor for the Trust's expenses (discussed above) would be no more 
disadvantageous to the holders of Nasdaq-100 Shares than allowing the 
expenses to be imposed indirectly as offsets to sales loads and other 
charges, as is done by typical UITs. Applicants state that the Trust 
will pay the Sponsor only its actual out-of-pocket expenses and no 
component of profit will be included. Finally, applicants state that 
the payment is capped at 20 basis points of the Trust's NAV on an 
annualized basis, with any expenses in excess of that amount absorbed 
by the Sponsor.

Section 17(a) of the Act

    16. Section 17(a) of the Act generally prohibits an affiliated 
person of a registered investment company, or an affiliated person of 
such person, from selling any security to or purchasing any security 
from the company. Because purchases and redemptions of Creation Units 
will be ``in kind'' rather than cash transactions, section 17(a) may 
prohibit affiliated persons of the Trust from purchasing or redeeming 
Creation Units. Because the definition of ``affiliated person'' of 
another person in section 2(a)(3) of the Act includes any person owning 
five percent or more of an issuer's outstanding voting securities, 
every purchaser of a Creation Unit will be affiliated with the Trust so 
long as fewer than twenty Creation Units are extant. Applicants request 
an exemption from section 17(a) under sections 6(c) and 17(b), to 
permit affiliated persons of the Trust to purchase and redeem Creation 
Units.
    17. Section 17(b) authorizes the Commission to exempt a proposed 
transaction from section 17(a) if evidence establishes that the terms 
of the transaction, including the consideration to be paid or received, 
are reasonable and fair and do not involve overreaching, 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 of the Trust from purchasing or redeeming Creation 
Units. The composition of a Portfolio Deposit made by a purchaser or 
given to a redeeming investor will be the same regardless of the 
investor's identity, and will be valued under the same objective 
standards applied to valuing the Portfolio Securities. Therefore, 
applicants state that ``in kind'' purchases and redemptions will afford 
no opportunity for an affiliated person of the Trust to effect a 
transaction detrimental to the other holders of Nasdaq-100 Shares. 
Applicants also believe that ``in kind'' purchases and redemptions will 
not result in abusive self-dealing or overreaching by affiliated 
persons of the Trust.

Section 17(d) of the Act and Rule     17d-1 Under the Act

    18. Section 17(d) of the Act and rule 17d-1 under the Act prohibit 
any affiliated person of, or principal underwriter for, a registered 
investment company, or any affiliated person of the affiliated person 
or the principal underwriter, acting as principal, from effecting any 
transaction in connection with any joint enterprise or other 
arrangement or profit-sharing plan in which the investment company 
participates, unless an application regarding the joint transaction has 
been filed with the Commission and granted by order. Under rule 17d-1, 
in passing upon such applications, the Commission considers whether the 
participation of the registered investment company in the joint 
transaction is consistent with the provisions, policies and purposes of 
the Act and the extent to which such participation is on a basis 
different or less advantageous than that of other participants.
    19. Section 2(a)(3)(F) of the Act defines an ``affiliated person'' 
of another person to include, in the case of an unincorporated 
investment company not having a board of directors, its depositor. 
Applicants state that the Sponsor may be deemed an affiliated person of 
the Trust because it has borne all aspects of the role of depositor in 
structuring and creating the Trust other than actually depositing the 
Index Securities into the Trust. Moreover, because the Sponsor is a 
wholly-owned subsidiary of Nasdaq, the Nasdaq may be deemed to be an 
affiliated person of an affiliated person of the Trust.
    20. Applicants request an order under rule 17d-1 that would permit 
the Trust to reimburse the Sponsor for the payment to Nasdaq of an 
annual license fee under a license agreement. Applicants believe that 
relief is necessary because the Trust's undertaking to reimburse the 
Sponsor might be deemed a joint enterprise or other joint arrangement 
in which the Trust is a participant, in contravention of section 17(d) 
of the Act and rule     17d-1.
    21. the license agreement allows applicants to use the Index as a 
basis for Nasdaq-100 Shares and to use certain of Nasdaq's trade name 
and trademark rights. Applicants believe that Nasdaq is a valuable name 
that is well-known to investors and that investors will desire to 
invest in an instrument that closely mirrors the Index. In view of 
this, applicants state that it is necessary to obtain from Nasdaq the 
above-mentioned license agreement so that appropriate reference to 
Nasdaq and Nasdaq-100 Shares may be made in materials describing 
Nasdaq-100 Shares and the Trust. Applicants assert that the terms and 
provisions of the license agreement are comparable to the terms and 
provisions of other similar license agreements and that the annual 
license fee is for fair value, is in an amount comparable to that which 
would be charged by Nasdaq for similar arrangements, and is in an 
amount comparable to that charged by licensors in connection with the 
formation of other UITs based on other indices. For these reasons, 
applicants state that the proposed license fee arrangement satisfies 
the standards of section 17(d) and rule 17d-1.

Applicant's Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. Applicants will not register a new series of the Trust, whether 
identical or similar to the Nasdaq-100 Trust, Series 1, by means of 
filing a post-effective amendment to the Trust's registration statement 
or by any other means, unless applicants have requested and received 
with respect to such new series, either exemptive relief from the 
Commission or a no-action position from the Division of Investment 
Management of the Commission.
    2. The Trust prospectus and the Product Description will clearly 
disclose that, for purposes of the Act, Nasdaq-100 Shares are issued by 
the Trust and that the acquisition of Nasdaq-100 Shares by investment 
companies is subject to the restrictions of section 12(d)(1) of the 
Act.


[[Page 5087]]


    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2410 Filed 2-1-99; 8:45 am]
BILLING CODE 8010-01-M