[Federal Register Volume 67, Number 28 (Monday, February 11, 2002)]
[Notices]
[Pages 6286-6290]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-3155]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25409; 812-12296]


Nuveen Exchange-Traded Index Trust, et al.; Notice of Application

February 5, 2002.
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) and 22(e) 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) an open-end management investment company, whose portfolios will 
consist of the component securities of certain domestic or foreign 
equity securities indices, to issue shares of limited redeemability; 
(b) secondary market transactions in the shares of the portfolios at 
negotiated prices on the American Stock Exchange LLC (``AMEX'') or 
other national securities exchange; (c) affiliated persons of the 
portfolios to deposit securities into, and receive securities from, the 
portfolios in connection with the purchase and redemption of 
aggregations of the portfolios' shares; and (d) under certain 
circumstances, certain portfolios that consist of the component 
securities of foreign equity securities indices to pay redemption 
proceeds more than seven days after the tender of shares of the 
portfolios for redemption.

Applicants: Nuveen Exchange-Traded Index Trust (``Trust''), Nuveen 
Advisory Corp. (``Advisor''), and Nuveen Investments (``Distributor'').

Filing Dates: The application was filed on October 16, 2000, and 
amended on April 24, 2001. 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 Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on March 1, 2002, 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, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicants, 333 West Wacker Drive, Chicago, IL 60606.

FOR FURTHER INFORMATION CONTACT: Stacy L. Fuller, Senior Counsel, at 
202-942-0553, 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 at the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (telephone 202-942-8090).

Applicants' Representations

    1. The Trust is an open-end management investment company 
registered under the Act and organized as a Massachusetts business 
trust with multiple series (``Index Funds,'' which term includes Future 
Index Funds, as defined below). The Advisor, a wholly owned subsidiary 
of the Distributor, is registered as an investment adviser under the 
Investment Advisers Act of 1940 and will serve as the investment 
adviser for the initial Index Funds (the ``Initial Index Funds''). The 
Advisor may in the future enter into subadvisory agreements with one or 
more subadvisors (``Sub-Advisors'') with respect to particular Index 
Funds. The Distributor, a broker-dealer registered under the Securities 
Exchange Act of 1934 (the ``Exchange Act''), will serve as the 
principal underwriter for each Index Fund and will distribute Creation 
Units (defined below) of Index Fund shares (``Shares'') on an agency 
basis.
    2. Each Index Fund will invest in a portfolio of equity securities 
(``Portfolio Securities'') generally consisting of the component 
securities of a specified domestic or foreign equity securities index 
(each, an ``Underlying Index'' and together, the ``Underlying 
Indices'').\1\ There are three Initial Index Funds, one based on a 
domestic equity securities index (the ``Initial Domestic Fund'') \2\ 
and two based on foreign equity securities indices (the ``Initial 
Foreign Funds'').\3\ In the future, the applicants may offer additional 
Index Funds based on other domestic or foreign equity securities 
indices (``Future Domestic Funds'' and ``Future Foreign Funds,'' 
respectively, and collectively ``Future Index Funds''). Any Future 
Index Fund will (a) be advised by the Advisor or an entity controlled 
by or under common control with the Advisor and (b) comply with the 
terms and conditions of the order. Future Domestic Funds together with 
the Initial Domestic Fund are referred to as ``Domestic Index Funds,'' 
and Future Foreign Funds together with the Initial Foreign Funds are 
referred to as ``Foreign Index Funds.'' No entity that creates, 
compiles, sponsors or maintains an Underlying Index will be an 
affiliated person, as defined in section 2(a)(3) of the Act, or an 
affiliated person of an affiliated person, of the Trust, the Advisor, 
any Sub-Advisor, the Distributor, or a promoter of an Index Fund.
---------------------------------------------------------------------------

    \1\ At least 90% of each Index Fund's assets will be invested in 
the component securities of its Underlying Index. An Index Fund may 
invest up to 10% of its assets in certain futures, options and swap 
contracts, cash and cash equivalents, as well as certain securities 
not included in the Underlying Index but which the Advisor believes 
will help the Index Fund track the Underlying Index.
    \2\ America's Fast Growing CompaniesTM Index (the 
``AFGC Index'') is the Underlying Index for the Initial Domestic 
Fund.
    \3\ The Salomon Smith Barney (``SSB'') Panda Index and the SSB 
Nippon Index are the Underlying Indices for the Initial Foreign 
Funds.
---------------------------------------------------------------------------

    3. The investment objective of each Index Fund will be to provide 
investment results that generally correspond, before fees and expenses, 
to the price and yield performance of the relevant Underlying Index. 
Intra-day values of each Underlying Index will be disseminated every 15 
seconds throughout the trading day. Each Index Fund will utilize as an 
investment approach either a replication strategy or a representative 
sampling strategy. An Index Fund using a replication strategy generally 
will hold most of the component securities of the Underlying Index in 
the same approximate proportions as the Underlying Index, but may not 
hold all of the securities that comprise the Underlying Index in

[[Page 6287]]

certain instances. This may be the case when, for example, a potential 
component security is illiquid or when there are practical difficulties 
or substantial costs involved in holding every security in an 
Underlying Index. An Index Fund using a representative sampling 
strategy seeks 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.\4\ Applicants 
anticipate that an Index Fund that utilizes a representative sampling 
strategy will not track the price and yield performance of its 
Underlying Index with the same degree of accuracy as an investment 
vehicle that invests in every component security of the Underlying 
Index with the same weighting as the Underlying Index. Applicants 
expect that each Index Fund will have a tracking error relative to the 
performance of its respective Underlying Index of less than 5 percent.
---------------------------------------------------------------------------

    \4\ The stocks selected for inclusion in an Index Fund by the 
Advisor will have aggregate investment characteristics (based on 
market capitalization and industry weightings), fundamental 
characteristics (such as return variability, earnings valuation and 
yield) and liquidity measures similar to those of the relevant 
Underlying Index taken in its entirety.
---------------------------------------------------------------------------

    4. Shares of the Initial Index Funds will be sold in aggregations 
of 50,000 Shares, and Shares of Future Index Funds will be sold in 
aggregations of either 25,000 or 50,000 Shares (such aggregations, 
``Creation Units''), as specified in the relevant prospectus. The price 
of a Creation Unit will range from $1,000,000 to $12,500,000. 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 (transactions effected through such a broker-
dealer are referred to as effected through the ``Fund Shares Clearing 
Process''), 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. An Index Fund also may 
sell Creation Units on a cash-only basis in limited circumstances. An 
investor wishing to make an in-kind purchase of a Creation Unit from an 
Index Fund will have to transfer to the Index Fund a ``Portfolio 
Deposit'' consisting of: (a) A portfolio of securities that has been 
selected by the Advisor or Sub-Advisor to correspond to the price and 
yield performance of the relevant Underlying Index (``Deposit 
Securities''), and (b) a cash payment to equalize any difference 
between the total aggregate market value per Creation Unit of the 
Deposit Securities and the net asset value (``NAV'') per Creation Unit 
of the Index Fund (the ``Balancing Amount'').\5\ An investor purchasing 
a Creation Unit from an Index Fund will be charged a fee (``Transaction 
Fee'') to defray transactions expenses and prevent dilution of the 
interests of the remaining shareholders resulting from the Index Fund 
incurring costs in connection with the purchase of the Creation 
Unit(s).\6\ Each Index Fund will disclose in its prospectus the maximum 
Transaction Fee charged by the Index Fund. Each Index Fund will also 
disclose the method of calculating the Transaction Fee in its 
prospectus or statement of additional information (``SAI'').
---------------------------------------------------------------------------

    \5\ On each business day, prior to the opening of trading on the 
AMEX, the Advisor or Sub-Advisor will make available a list of the 
names and the required number of shares of each Deposit Security 
required for the Portfolio Deposit for each Index Fund. That 
Portfolio Deposit will apply to all purchases of Creation Units 
until a new Portfolio Deposit for an Index Fund is announced. Each 
Index Fund reserves the right to permit or require the substitution 
of an amount of cash to be added to the Balancing Amount to replace 
any Deposit Security that may be unavailable or unavailable in the 
quantity replaced for a Portfolio Deposit, ineligible for transfer 
through the Fund Shares Clearing Process, ineligible for trading by 
an Authorized Participant or by the investor on whose behalf the 
Authorized Participant is acting, or in the case of certain Foreign 
Index Funds, not able to be delivered in-kind. The AMEX or other 
Exchange (defined below) will disseminate every 15 seconds 
throughout the trading day via the facilities of the Consolidated 
Tape Association an amount representing the sum of the Balancing 
Amount and the current value of the Deposit Securities on a per 
Share basis.
    \6\ When an Index 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.
---------------------------------------------------------------------------

    5. Orders to purchase Creation Units will be placed with the 
Distributor who will be responsible for transmitting orders to each 
Index Fund. The Distributor will issue, and maintain records of, 
confirmations of acceptance to purchasers of Creation Units and 
delivery instructions to the Trust (to implement the delivery of 
Creation Units). The Distributor also will be responsible for 
delivering prospectuses to purchasers of Creation Units.
    6. Persons purchasing Creation Units from an Index Fund may hold 
the Shares or sell some or all of them in the secondary market. Shares 
of the Initial Index Funds will be listed on the AMEX and traded in the 
secondary market in the same manner as other equity securities. Future 
Index Funds will be listed on the AMEX or other U.S. national 
securities exchange, as defined in section 2(a)(26) of the Act (each, 
including AMEX, an ``Exchange''). One or more member firms of the 
Exchange (``Specialists'') will maintain a market on the Exchange for 
the Shares trading there. The price of Shares traded on an Exchange 
will be based on a current bid/offer market. Each Share is expected to 
have a market value of between $40 and $250. Transactions involving the 
sale of Shares in the secondary market will be subject to customary 
brokerage commissions and charges.
    7. Applicants expect that purchasers of Creation Units will include 
institutional investors and arbitrageurs (which could include 
institutional investors). In providing for a fair and orderly secondary 
market for Shares on the Exchange, the Specialist also may purchase 
Creation Units. Applicants believe that arbitrageurs and other 
institutional investors will purchase or redeem Creation Units to take 
advantage of discrepancies between the Shares' market price and the 
Shares' underlying NAV. Applicants expect that this arbitrage activity, 
which is a function of Creation Units being purchased and redeemed 
primarily in kind, will provide a pricing ``discipline'' that will 
result in a close correspondence between the price at which the Shares 
trade and their NAV. In other words, applicants do not expect the 
Shares to trade at a significant premium or discount to their NAV. 
Applicants expect that secondary market purchasers of Shares will 
include both institutional and retail investors.\7\
---------------------------------------------------------------------------

    \7\ Shares will be registered in book-entry form only. DTC or 
its nominee will be the registered owner of all outstanding Shares. 
DTC or its participants will maintain records reflecting the 
beneficial ownership of Shares.
---------------------------------------------------------------------------

    8. Shares will not be individually redeemable. Shares will only be 
redeemable in Creation Unit-size aggregations through each Index Fund. 
To redeem, investors will have to accumulate enough 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 (``Redemption Securities''), which 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 Balancing Amount, although 
the actual amount of the Cash Redemption Payment may differ from the 
Balancing Amount if the Redemption Securities are not identical

[[Page 6288]]

to the Deposit Securities on a given day. An investor may receive the 
cash equivalent of a Redemption Security in certain circumstances, such 
as when the investor is constrained from effecting transactions in the 
Redemption Security by regulation or policy or when, as may be the case 
with certain Foreign Index Funds, it is not possible to effect 
transactions in kind in an applicable jurisdiction.\8\
---------------------------------------------------------------------------

    \8\ Applicants note that certain holders of Shares of a Foreign 
Index Fund may be subject to unfavorable tax treatment if they are 
entitled to receive in-kind redemption proceeds. The Trust may adopt 
a policy with respect to such Foreign Index Funds that such holders 
of Shares may redeem Creation Units solely for cash.
---------------------------------------------------------------------------

    9. 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.
    10. Because each Index Fund will principally redeem Creation Units 
in kind, an Index Fund will not have to maintain significant cash 
reserves for redemptions. This will allow the assets of each Index Fund 
to be committed as fully as possible to tracking its Underlying Index. 
Accordingly, applicants state that each Index Fund will be able to 
track its Underlying Index more closely than certain other investment 
products that must allocate a greater portion of their assets to cash 
redemptions.
    11. Applicants state that neither the Trust nor any Index Fund will 
be marketed or otherwise held out as an ``open-end investment company'' 
or a ``mutual fund.'' Rather, the designation of the Trust and the 
Index Funds in all marketing materials will be limited to the terms 
``exchange-traded fund,'' ``investment company,'' ``fund'' and 
``trust'' without reference to an ``open-end fund'' or ``mutual fund,'' 
except to contrast the Trust and the Index Funds with a conventional 
open-end management investment company. Any marketing materials that 
describe the purchase or sale of Creation Units, or refer to 
redeemability, will prominently disclose that Shares are not 
individually redeemable and that owners of Shares may tender Shares for 
redemption to the Index Fund in Creation Units only. The same type of 
disclosure will be provided in each Index Fund's prospectus, SAI and 
all reports to shareholders.\9\ The Trust will provide copies of its 
annual and semi-annual shareholder reports to DTC participants for 
distribution to beneficial holders of Shares.
---------------------------------------------------------------------------

    \9\ Applicants state that persons purchasing Creation Units will 
be cautioned in an Index Fund's prospectus or SAI 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 
of 1933 (``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 Shares, and sells Shares directly to 
its customers; or if it chooses to couple the purchase of a supply 
of new Shares with an active selling effort involving solicitation 
of secondary market demand for Shares. An Index Fund's prospectus or 
SAI will state that whether a person is an underwriter depends upon 
all the facts and circumstances pertaining to that person's 
activities. An Index Fund's prospectus or SAI 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 market trading transactions), and 
thus dealing with Shares that are part of an ``unsold allotment'' 
within the meaning of section 4(3)(C) of the Securities Act, would 
be unable to take advantage of the prospectus delivery exemption 
provided by section 4(3) of the Securities Act.
---------------------------------------------------------------------------

Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act 
granting an exemption from sections 2(a)(32), 5(a)(1), 22(d) and 22(e) 
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. Applicants request relief for the Initial Index 
Funds as well as Future Index Funds. Any Future Index Fund relying on 
any order granted pursuant to this application will comply with the 
terms and conditions stated in the application.
    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.
    3. Section 5(a)(1) of the Act defines an ``open-end company'' as a 
management investment company that is offering for sale or has 
outstanding any redeemable security of which it is the issuer. Section 
2(a)(32) of the Act defines a redeemable security as any security, 
other than short-term paper, under the terms of which the holder, upon 
its presentation to the issuer, is entitled to receive approximately 
his proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Shares will not be individually redeemable, 
applicants request an order under section 6(c) of the Act that would 
permit the Trust to register as an open-end management investment 
company and issue Shares that are redeemable in Creation Units only. 
Applicants state that investors may purchase Creation Units from each 
Index Fund and redeem Creation Units through each Index Fund. 
Applicants further state that because the market price of Creation 
Units will be disciplined by arbitrage opportunities, investors 
generally should be able to sell Shares in the secondary market at 
approximately NAV.
    4. Section 22(d) of the Act, among other things, prohibits a dealer 
from selling a redeemable security, which is currently being offered to 
the public by or through a principal underwriter, except at a current 
public offering price described in the prospectus. Rule 22c-1 under the 
Act generally requires that a dealer selling, redeeming, or 
repurchasing a redeemable security do so only at a price based on its 
NAV. Applicants state that secondary market trading in Shares will take 
place at negotiated prices, not at a current offering price described 
in the prospectus and not at a price based on NAV. Thus, purchases and 
sales of Shares in the secondary market will not comply with section 
22(d) of the Act and rule 22c-1 under the Act. Applicants request an 
exemption under section 6(c) of the Act from these provisions.
    5. Applicants assert that the concerns sought to be addressed by 
section 22(d) of the Act and rule 22c-1 under the Act with respect to 
pricing are equally satisfied by the proposed method of pricing Shares. 
Applicants maintain that 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 non-contract dealers offering shares at less 
than the published sales price and repurchasing shares at more than the 
published redemption price. Applicants believe that none of these 
purposes will be thwarted by permitting Shares to trade in the 
secondary market at negotiated prices. Applicants state that (a) 
secondary market trading in Shares would not cause dilution for owners 
of Shares because such transactions do not directly involve Index Fund 
assets, and (b) to the extent different prices exist

[[Page 6289]]

during a given trading day, or from day to day, such variances will 
occur as a result of third-party market forces, such as supply and 
demand. Therefore, applicants assert that secondary market transactions 
in Shares will not lead to discrimination or preferential treatment 
among purchasers. Finally, applicants contend that the proposed 
distribution system will be orderly because arbitrage activity will 
ensure that the difference between the market price of Shares and their 
NAV remains narrow.
    6. Section 22(e) of the Act 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. Applicants 
state that local market delivery cycles for transferring Redemption 
Securities to redeeming investors, together with local market holiday 
schedules, will require a delivery process in excess of seven calendar 
days for the Foreign Index Funds in certain circumstances during the 
calendar year. Applicants request relief under section 6(c) from 
section 22(e) so that such Foreign Index Funds may pay redemption 
proceeds up to 12 calendar days after the tender of Shares for 
redemption.\10\ At all other times and except as disclosed in the 
prospectus or SAI for a Foreign Index Fund, applicants expect that the 
Foreign Index Funds will be able to deliver redemption proceeds within 
seven days.\11\ With respect to Future Foreign Funds, applicants seek 
the same relief from section 22(e) only to the extent that 
circumstances similar to those described herein exist.
---------------------------------------------------------------------------

    \10\ Specifically, applicants request that the (i) Nuveen Panda 
Index Fund be permitted to make redemption payments up to 11 
calendar days after the tender of a Creation Unit for redemption, 
and (ii) Nuveen Japan Index Fund be permitted to make redemption 
payments up to 12 calendar days after the tender of a Creation Unit 
for redemption.
    \11\ Rule 15c6-1 under the Exchange Act requires that most 
securities transactions be settled within three business days of the 
trade. See In the Matter of WEBS Index Series, Inc., et al., 
Investment Company Act Release No. 23860, 1999 WL 3621843 (June 7, 
1999). Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will affect any obligations applicants 
may have under rule 15c6-1.
---------------------------------------------------------------------------

    7. The principal reason for the requested exemption is that 
settlement of redemptions for the Foreign Index 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 Index Funds. Applicants believe 
that the Trust will be able to comply with the delivery requirements of 
section 22(e), except where the holiday schedule applicable to the 
specific foreign market will not permit delivery of redemption proceeds 
within seven calendar days.
    8. Applicants state that section 22(e) of the Act 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 section 22(e) was designed to prevent. 
Applicants state that the local holidays relevant to each Foreign Index 
Fund, as in effect in a given year, will be listed in the relevant 
Foreign Index Fund's prospectus or SAI or both. Applicants further 
state that the SAI will disclose those local holidays (over the period 
of at least one year following the date of the SAI), if any, that are 
expected to prevent the delivery of redemption proceeds in seven 
calendar days, and state the maximum number of days needed to deliver 
the proceeds for each Foreign Index Fund.
    9. Section 17(a) of the Act makes it unlawful, except under certain 
circumstances, for any affiliated person of a registered investment 
company, or any affiliated person of such a person, acting as 
principal, to sell any security to, or purchase any security from, such 
registered investment 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 25% 
or more of another person's voting securities. Applicants state that 
because the definition of ``affiliated person'' includes any person 
owning 5% or more of an issuer's outstanding voting securities, every 
purchaser of a Creation Unit will be affiliated with the Index Fund so 
long as fewer than twenty Creation Units are in existence, and any 
purchaser that owns 25% or more of an Index Funds' outstanding Shares 
will be affiliated with the Index Fund. Applicants assert that, from 
time to time, one or more holders of Shares, including the Specialist, 
may accumulate more than 5% or more than 25% of an Index Fund's 
outstanding Shares. Applicants state that section 17(a) may prohibit 
such affiliated persons of an Index Fund (and affiliated persons of 
affiliated persons that are not otherwise affiliated with the Trust or 
the Index Fund) from purchasing or redeeming Creation Units in kind. 
Applicants request an exemption from section 17(a) under sections 6(c) 
and 17(b) to permit these affiliated persons of the Index Fund (and 
affiliated persons of these affiliated persons that are not otherwise 
affiliated with the Trust or the Index Fund) to effect such 
transactions in Creation Units.
    10. 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 persons 
with the types of affiliations described above from purchasing or 
redeeming Creation Units. The deposit procedure for in-kind purchases 
and the redemption procedure for in-kind redemptions will be the same 
for all purchases and redemptions. Deposit Securities and Redemption 
Securities will be valued 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 the affiliated persons of the affiliated persons, 
described above, of an Index Fund to effect a transaction detrimental 
to the other holders of Shares. Applicants also believe that in-kind 
purchases and redemptions will not result in abusive self-dealing or 
overreaching by these persons of the Index Fund.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Applicants will not register the Shares of a Future Index Fund 
by means of filing a post-effective amendment to the Trust's 
registration statement or by any other means, unless (a) applicants 
have requested and received with respect to such Future Index Fund, 
either exemptive relief from the Commission or a no-action letter from 
the Division of Investment Management of the Commission, or (b) the 
Future Index Fund will be listed on a national securities exchange 
without the need for a filing pursuant to rule 19b-4 under the Exchange 
Act.
    2. Each Index Fund's prospectus will clearly disclose that, for 
purposes of the Act, Shares are issued by the Index Funds and that the 
acquisition of Shares by investment companies is subject to

[[Page 6290]]

the restrictions of section 12(d)(1) of the Act.
    3. As long as the Trust operates in reliance on the requested 
order, the Shares will be listed on a national securities exchange.
    4. Neither the Trust nor any Index Fund will be advertised or 
marketed as an open-end fund or a mutual fund. Each Index Fund's 
prospectus will prominently disclose that Shares are not individually 
redeemable shares and will disclose that the owners of Shares may 
acquire those Shares from the Index Fund and tender those Shares for 
redemption to the Index Fund in Creation Units only. Any advertising 
material that describes the purchase or sale of Creation Units or 
refers to redeemability will prominently disclose that Shares are not 
individually redeemable and that owners of Shares may acquire those 
Shares from the Index Fund and tender those Shares for redemption to 
the Index Fund in Creation Units only.
    5. The website for the Trust, which will be publicly accessible at 
no charge, will contain the following information, on a per Share 
basis, for each Index Fund: (a) The prior business day's NAV and the 
reported closing price, and a calculation of the premium or discount of 
such price against such NAV; and (b) data in chart format displaying 
the frequency distribution of discounts and premiums of the daily 
closing price against the NAV, within appropriate ranges, for each of 
the four previous calendar quarters.
    6. The prospectus and annual report for each Index Fund will also 
include: (a) the information listed in condition 5(b), (i) in the case 
of the Index Fund's prospectus, for the most recently completed year 
(and the most recently completed quarter or quarters, as applicable) 
and (ii) in the case of the annual report, for the immediately 
preceding five years, as applicable; and (b) the following data, 
calculated on a per Share basis for one, five and ten year periods (or 
life of the Index Fund), (i) the cumulative total return and the 
average annual total return based on NAV and market price, and (ii) the 
cumulative total return of the relevant Underlying Index.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-3155 Filed 2-8-02; 8:45 am]
BILLING CODE 8010-01-P