[Federal Register Volume 67, Number 205 (Wednesday, October 23, 2002)]
[Notices]
[Pages 65157-65163]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26933]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25772; 812-12518]


BLDRS Index Funds Trust, Series 1, et al.; Notice of Application

October 17, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under (a) section 6(c) of 
the Investment Company Act of 1940 (the ``Act'') for an exemption from 
sections 2(a)(32), 4(2), 14(a), 22(d), 24(d) and

[[Page 65158]]

26(a)(2)(C) of the Act and rule 22c-1 under the Act, (b) sections 6(c) 
and 17(b) of the Act for an exemption from sections 17(a)(1) and (2) of 
the Act, and (c) section 17(d) of the Act and rule 17d-1 under the Act 
to permit certain joint transactions.

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    Applicants: BLDRS Index Funds Trust, Series 1, 2, 3, 4, 5, 6 and 7 
(the ``Fund''), Nasdaq Financial Products 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 Financial Products Services, Inc., ``Sponsor''), and ALPS 
Distributors, Inc. (``Distributor'').
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    \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 
permit the following: (a) The Fund, a unit investment trust (``UIT'') 
with multiple series (each series, a ``Trust'') whose portfolios will 
consist of the component stocks of various specified indices 
(collectively, the ``Benchmark Indices,'' and each, a ``Benchmark 
Index''), to issue shares (``Trust Shares'') that are only redeemable 
in Creation Unit aggregations (as defined below); (b) secondary market 
transactions in Trust Shares to occur at negotiated prices; (c) dealers 
to sell Trust 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) the Trust, 
rather than the Sponsor, to bear certain expenses associated with its 
creation and maintenance; (e) certain ``affiliated persons'' of the 
Trust to deposit securities into, and receive securities from, the 
Trust in connection with the purchase and redemption of Trust Shares; 
and (f) the Trust to reimburse the Sponsor for payment of an annual 
licensing fee to The Bank of New York (``BoNY''). The order also would 
exempt the Sponsor from the Act's requirement that it purchase, or 
place with others, $100,000 worth of Trust Shares.
    Filing Dates: The application was filed on May 15, 2001, and 
amended on October 15, 2002. 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 November 7, 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, c/o John L. Jacobs, Executive Vice President, 
The Nasdaq Stock Market, Inc., 1735 K Street, NW., Washington, DC 
20006-1500.

FOR FURTHER INFORMATION CONTACT: Stacy L. Fuller, Senior Counsel, or 
Michael W. Mundt, Senior Special Counsel, 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. Each Trust is a unit investment trust that will be organized 
under the laws of the State of New York. Sponsor is a wholly owned 
subsidiary of The Nasdaq Stock Market, Inc. (``Nasdaq''). The Bank of 
New York (``BoNY'') will act as trustee to the Trusts (``Trustee'') 
pursuant to a trust agreement entered into by and between BoNY and the 
Sponsor (the ``Trust Agreement''). Distributor is registered as a 
broker-dealer under the Securities Exchange Act of 1934 (``Exchange 
Act'') and will serve, on an agency basis, as principal underwriter of 
the Trusts.
    2. Each Trust will hold a portfolio of securities (``Portfolio 
Securities'') consisting of substantially all of the securities in 
substantially the same weighting as the component securities of the 
Benchmark Index that it tracks (the ``Index Securities''). There are 
seven initial Trusts. The Benchmark Indices for the seven initial 
Trusts (the ``Initial Benchmark Indices'') will be compiled by BoNY 
(the ``BoNY Index Provider'').\2\ Pursuant to guidelines adopted by 
BoNY for the Index Provider, the BoNY personnel involved in compiling 
the Benchmark Indices cannot include any BoNY employees who are members 
of the BoNY division that provides trustee services to the Trusts, any 
broker-dealer affiliated with BoNY, BoNY's asset management division, 
or BoNY's private banking group.
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    \2\ The Initial Benchmark Indices are the (a) BoNY Asia 50 ADR 
Index, (b) BoNY Developed Markets 100 ADR Index, (c) BoNY Emerging 
Markets 50 ADR Index, (d) BoNY Europe 100 ADR Index, (e) BoNY Latin 
America 35 ADR Index, (f) BoNY International 100 Index, and (g) BoNY 
International Telecom 35 ADR Index. The Initial Benchmark Indices 
are sub-indices of the BoNY ADR Index, which is an index of all U.S. 
exchange-listed Depositary Receipts (``DRs''), subject to certain 
eligibility requirements. Applicants note that BoNY is a prominent 
participant in the DR market, and receives various fees and 
commissions in connection with its DR program functions. BoNY has 
informed applicants that the index compilation is bound by objective 
criteria, and that the identity of the depositary bank for a DR is 
never a criterion in the selection of Index Securities. As discussed 
in the application, BoNY represents that its DR sales efforts are 
not coordinated with the compilation of the Benchmark Indices.
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    3. In the future, applicants may offer additional Trusts based on 
other Benchmark Indices (``Future Trusts''). Any Future Trust will (a) 
be organized under New York state law pursuant to a trust agreement 
substantially identical to the Trust Agreement, (b) be sponsored by the 
Sponsor, and (c) comply with the terms and conditions of the requested 
order. No entity that creates, compiles, sponsors or maintains a 
Benchmark 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 Sponsor, Distributor or promoter of the Trust.
    4. Trust Shares, units of beneficial interest in the Trusts, are 
designed to provide investors with an instrument that closely tracks 
the Benchmark Indices, trades like a share of common stock, and pays 
periodic dividends proportionate to those paid by the Portfolio 
Securities held by the Trust.\3\ The Trustee will make adjustments to 
the Portfolio Securities to reflect changes made by the BoNY Index 
Provider to the composition and weighting of the Index Securities.\4\ 
All adjustments to the Portfolio Securities will be made by the Trustee 
as set forth in the Trust Agreement and will be non-discretionary. 
Applicants state that the Trustee, consistent with its fiduciary

[[Page 65159]]

duties, may utilize a broker-dealer that is an ``affiliated person,'' 
as defined in section 2(a)(3) of the Act, of the Trustee (each, an 
``Affiliated Broker-Dealer'') in executing the transactions that are 
necessitated by the required adjustment(s). Applicants state that 
neither BoNY nor any Affiliated Broker-Dealer purchases or sells DRs on 
a principal basis, or intends to sell DRs or any other securities to 
any Trust on a principal basis. BoNY and its Affiliated Broker-Dealers 
would engage in transactions with a Trust on an agency basis only.\5\
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    \3\ The Trusts will make quarterly distributions when dividends 
on the Portfolio Securities and other income of the Trust, if any, 
exceed fees and expenses accrued by the Trust during the previous 
quarter. The Trustee may vary the frequency of dividend 
distributions under certain circumstances.
    \4\ The BoNY Index Provider determines, comprises and calculates 
Benchmark Indices without regard to any Trust. BoNY has instituted 
formal firewall procedures to ensure that no BoNY personnel involved 
in providing trustee services to the Trusts have access to 
information regarding changes to the Benchmark Indices prior to 
their public announcement.
    \5\ BoNY has adopted firewall procedures that prohibit 
communications regarding changes or proposed changes to the 
Benchmark Indices between any Affiliated Broker-Dealer and the BoNY 
personnel involved in the compilation of the Benchmark Indices.
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    5. Each Trust will pay the Trustee a fee ranging from 0.06% to 
0.10% of the net asset value (``NAV'') of the Trust on an annualized 
basis, such percentage to vary based on the NAV of the Trust. The 
Trustee in its discretion may waive all or any portion of such fee. 
Trust fees and expenses will be paid first out of income received by 
the Trust in the form of dividends and other distributions on Portfolio 
Securities.\6\
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    \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. Pursuant to a license agreement (``License Agreement''), the 
BoNY Index Provider has granted Sponsor a license to use the Benchmark 
Indices and certain trademarks of BoNY. Sponsor will pay the BoNY Index 
Provider an annual licensing fee for each Benchmark Index and will seek 
reimbursement from each Trust for the fee charged in connection with 
its Benchmark Index. Sponsor will pay Distributor a flat annual fee for 
services provided to the Trusts. Sponsor will not seek reimbursement 
from any Trust for such payment without obtaining prior exemptive 
relief from the Commission.
    7. Trust Shares will be issued in aggregations of 50,000 shares 
(``Creation Units''). The price of a Creation Unit for each of the 
initial Trusts will be approximately $2,500,000. Orders to purchase 
Creation Units generally must be delivered to the Distributor through a 
party that has executed a participant agreement with the Distributor 
and Trustee, and is either (a) a participant in the Continuous Net 
Settlement System of the National Securities Clearing Corporation 
(``NSCC,'' and the NSCC process of placing orders, the ``Trust Shares 
Clearing Process''), or (b) a Depository Trust Company (``DTC'') 
participant.
    8. An investor wishing to purchase a Creation Unit from the Trust 
will have to transfer to the Trustee a ``Portfolio Deposit,'' 
consisting of the following: (a) A portfolio of securities 
substantially similar in composition and weighting to the Index 
Securities (``Deposit Securities''); (b) a cash payment equal to the 
dividends accrued on the Portfolio Securities since the last dividend 
payment on the Portfolio Securities, net of expenses and liabilities 
(``Income Net of Expense Amount''); and (c) 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 
(``Balancing Amount,'' and together with the Income Net of Expense 
Amount, the ``Cash Component'').\7\ The Sponsor, or its designee, will 
make available on each business day a list of the names and the 
required number of shares of 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 Trust Share.\8\ The Sponsor will make available on the 
Exchange, every 15 seconds of each business day, the sum of the Income 
Net of Expense Amount and the value of the Deposit Securities, on a per 
Trust Share basis. An investor making a Portfolio Deposit will be 
charged a service fee (``Transaction Fee'') to be paid to the Trustee 
to defray the Trustee's costs in processing transactions for the 
Trust.\9\
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    \7\ At the close of the market on each business day, the Trustee 
will calculate the NAV of each Trust, divide that amount by the 
total number of shares outstanding (yielding a ``Per Trust Share 
NAV''), multiply the Per Trust Share NAV by the number of Trust 
Shares in a Creation Unit (e.g., 50,000), thereby calculating the 
NAV per Creation Unit. The Trustee will then calculate the required 
number of shares of Index Securities and the Cash Component that 
will comprise a Portfolio Deposit for the following business day.
    \8\ The cash equivalent of an Index Security may be included in 
the Cash Component of a Portfolio Deposit in lieu of the Index 
Security if (a) the Trustee determines that an Index Security is 
likely to be unavailable or available in insufficient quantity for 
inclusion in a Portfolio Deposit, or (b) 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'').
    \9\ The Transaction Fee will be $10 per each security ``name'' 
(i.e., each security identified by a separate CUSIP number) in the 
Portfolio Deposit, rounded to the nearest $500 per Participating 
Party (as defined below) per day, regardless of the number of 
Creation Units purchased by such Participating Party on such day. 
``Participating Party'' means an NSCC participant who may place 
orders through the Trust Shares Clearing Process. The Transaction 
Fee may be changed by the Trustee with the Sponsor's consent, but 
will not exceed 0.20% of the value of a Creation Unit. Investors who 
purchase Creation Units outside the Trust Shares Clearing Process 
will pay the Transaction Fee plus an amount not to exceed three 
times the Transaction Fee. The amount of the Transaction Fee will be 
disclosed in the prospectus for the Trust.
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    9. Orders to purchase Creation Units will be placed with the 
Distributor, who will be responsible for transmitting orders to the 
Trustee. 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.
    10. Persons purchasing Creation Units from the Trust may hold the 
Trust Shares or sell some, or all, of them in the secondary market. 
Trust Shares will be listed either on a national securities exchange, 
as defined in section 2(a)(26) of the Act, or on the Nasdaq Stock 
Market, Inc. (``Nasdaq'') with respect to National Market Securities as 
designated by Nasdaq pursuant to rule 11Aa3-1(6) under the Exchange 
Act, which is a subset of national market system securities, as defined 
by rule 11Aa2-1 under the Exchange Act (each, an ``Exchange''). Trust 
Shares will be traded in the secondary market as individual units 
(i.e., in less than Creation Unit aggregations) in the same manner as 
other equity securities. Trust Shares of the initial Trusts will be 
listed on Nasdaq. The price of each Trust Share that trades on Nasdaq 
will be based on the current bid-offer market. Applicants expect the 
price of the initial Trust Shares trading on Nasdaq to be approximately 
$50 per Trust Share. Transactions involving Trust Shares on Nasdaq will 
be subject to customary brokerage commissions and charges. Applicants 
expect that the price at which Trust Shares trade will be disciplined 
by arbitrage opportunities created by the continuous ability to 
purchase or redeem Creation Units at their NAV, which should ensure 
that Trust Shares will not trade at a material premium or discount in 
relation to their NAV.\10\
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    \10\ Applicants do not anticipate any special liquidity issues 
as to constituents in the Initial Benchmark Indices, in light of the 
fact that constituent DRs are selected based on liquidity that is 
high relative to DRs that would otherwise fit the relevant criteria. 
The constituent DRs of the Initial Benchmark Indices are traded and 
priced on national securities exchanges and Nasdaq, as are the 
constituent securities of other indices on which exchange-traded 
funds investing in domestic securities are based. Accordingly, 
applicants believe that the pricing transparency for DRs should be 
equivalent to that of other securities that are traded and priced on 
national securities exchanges and Nasdaq. Because there are no 
apparent differences in the pricing transparency between DRs and 
such other equity securities, applicants believe that there will be 
no corresponding differences in, and no deleterious effects on, the 
arbitrage efficiency of the Trusts.

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    11. Applicants expect that purchasers of Creation Units will 
include institutional investors and arbitrageurs, which could include 
institutional investors. Nasdaq market makers also may purchase Trust 
Shares in connection with their market making activities.\11\ 
Applicants anticipate that several parties will act as market makers on 
Nasdaq, resulting in a highly efficient market for Trust Shares. 
Applicants expect that secondary market purchasers of Trust Shares will 
include both institutional and retail investors.\12\
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    \11\ The listing requirements established by Nasdaq require that 
at least two market makers be registered in Trust Shares in order 
for the Trust to maintain a listing on Nasdaq. Registered market 
makers must make a continuous two-sided market in a listing or face 
regulatory sanctions. No particular market maker will be 
contractually obligated to make a market in Trust Shares.
    \12\ Trust Shares will be registered in book-entry form only. 
DTC or its nominee will be the record owner of all outstanding Trust 
Shares. Beneficial ownership of Trust Shares will be shown on the 
records of DTC or its participants.
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    12. Applicants will make available a standard Trust Shares product 
description (``Product Description'') to members and member 
organizations of the relevant Exchange for distribution to investors 
purchasing Trust Shares in accordance with the Exchange's rules. The 
rules of the National Association of Securities Dealers (``NASD'') 
require that NASD members distribute a Product Description to all 
purchasers of Trust Shares. The Product Description will provide a 
plain English overview of the relevant Trust, including the material 
risks and potential rewards of owning Trust Shares, and disclose the 
salient aspects of Trust Shares. The Product Description will advise 
investors that a prospectus for Trust Shares is available without 
charge upon request from the investor's broker or from the Distributor. 
Applicants believe that the volume of purchase transactions in which an 
investor will not receive a Product Description will not constitute a 
significant portion of the market activity in Trust Shares.
    13. Trust Shares will not be individually redeemable, except upon 
termination of the Trust. Trust Shares will be redeemable in Creation 
Unit aggregations only. An investor redeeming a Creation Unit will 
receive a portfolio of securities typically identical in composition 
and weighting to the Deposit Securities as of the date the redemption 
request was made (``Redemption Securities''). The redeeming investor 
may receive the cash equivalent of an Index Security (a) when the 
Trustee determines that an Index Security is likely to be unavailable 
or available in insufficient quantity for delivery by the Trust, or (b) 
upon the request of the redeeming investor (because, for example, the 
redeeming investor is restricted by regulation or otherwise from 
holding an Index Security). The redeeming investor also may receive, or 
may pay, cash in an amount equal to the Cash Component in effect on the 
relevant business day for Portfolio Deposits (``Cash Redemption 
Amount''). The redeeming investor will pay a Transaction Fee, which 
will be calculated in the same manner as a Transaction Fee payable in 
connection with the purchase of a Creation Unit on the relevant 
business day.
    14. Because each Trust will ordinarily redeem in kind, rather than 
in cash, the Trustee will not have to maintain cash reserves for 
redemptions. This will allow the assets of each Trust to be committed 
as fully as possible to tracking the relevant Benchmark Index, and 
allow each Trust to track the relevant Benchmark Index more closely 
than other market basket products that must allocate a portion of their 
assets to cash for redemptions.

Applicants' Legal Analysis

    1. Applicants request an order under (a) section 6(c) of the Act 
granting an exemption from sections 2(a)(32), 4(2), 14(a), 22(d), 24(d) 
and 26(a)(2)(C) of the Act and rule 22c-1 under the Act, (b) sections 
6(c) and 17(b) of the Act granting an exemption from sections 17(a)(1) 
and (2) of the Act, and (c) section 17(d) and 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.

Sections 4(2) and 2(a)(32) 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. 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 a 
proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Trust Shares would not be individually redeemable, 
applicants request an order that would permit the Trust to register as 
a UIT and issue Trust Shares that are redeemable in Creation Units 
only. Applicants state that investors may purchase and redeem Trust 
Shares through the Trust in 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 individual 
Trust Shares in the secondary market at approximately 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 (a) firm agreements to purchase $100,000 of its securities will 
have been made by not more than 25 persons, and (b) 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 in that it is not a profit-based amount representing 
compensation to the Sponsor, but rather reimbursement of settlement 
costs incurred by the Trustee in connection with Portfolio Deposits. 
Applicants note that the Transaction Fee will be paid not

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by retail investors, but by institutional and other well-capitalized 
investors who can afford the purchase price of a Creation Unit, who are 
more sophisticated, and who do not require the protections of section 
14(a).

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 the 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 Trust 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 Trust Shares 
in the secondary market will not comply with section 22(d) and rule 
22c-1, and applicants request an exemption from these provisions.
    7. Applicants maintain that, while there is little legislative 
history regarding section 22(d), its provisions and those of rule 22c-1 
appear to have been designed to (a) prevent dilution caused by certain 
riskless trading schemes by principal underwriters and contract 
dealers, (b) prevent unjust discrimination or preferential treatment 
among buyers, and (c) assure an orderly distribution of 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. Applicants believe that none of these 
purposes will be thwarted by permitting Trust Shares to trade in the 
secondary market at negotiated prices. Applicants state that secondary 
market trading in Trust Shares does not involve the Trust and cannot, 
therefore, result in dilution of Trust assets. Applicants also state 
that, to the extent different prices exist during a trading day, or 
from day to day, for Trust Shares, such variances occur as a result of 
third-party market forces, such as supply and demand, and not as a 
result of unjust or discriminatory manipulation. Therefore, applicants 
assert that secondary market transactions in Trust 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 Trust Shares and their NAV remains narrow.

Section 24(d) of the Act

    8. 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 Trust Shares to rely on the 
prospectus delivery exemption provided by section 4(3) of the 
Securities Act.\13\
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    \13\ Applicants are not seeking relief from the prospectus 
delivery requirement for non-secondary market transactions, 
including purchases of Creation Units or those involving an issuer. 
Applicants state that persons purchasing Creation Units will be 
cautioned in the prospectus that some activities on their part may, 
depending on the facts and 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 Distributor, breaks them down into the constituent 
Trust Shares, and sells Trust Shares directly to its customers, or 
if it chooses to couple the purchase of a supply of new Trust Shares 
with an active selling effort involving solicitation of secondary 
market demand for Trust 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 
will also 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 Trust 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 the secondary market for Trust Shares is 
significantly different from the typical secondary market for UIT 
securities, which is usually maintained by the sponsor of the UIT. 
Trust Shares will be listed on an 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 are generally not required to deliver a prospectus to 
a purchaser.
    10. Applicants contend that Trust 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 Trust 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 broker's computer screens and other electronic 
services. The previous day's price and volume information also will be 
published in the financial section of newspapers. The Sponsor will 
publish daily, on a per Trust Share basis, the Income Net of Expense 
Amount. Applicants also provide that the Fund's Web site will contain 
quantitative information, updated on a daily basis, regarding the 
previous business day's NAV and the reported closing price. The Web 
site also will include for each Trust, a calculation of the premium or 
discount of the closing price against NAV and data, in chart format, 
displaying the frequency distribution of discounts and premiums of the 
closing price against the NAV, within appropriate ranges, for each of 
the four previous calendar quarters.
    11. In addition, secondary market purchasers generally will receive 
the Product Description. Applicants state that, while the Product 
Description is not intended as a substitute for a prospectus, it will 
contain pertinent information about Trust Shares. Applicants also note 
that Trust Shares will be understandable to retail investors as a 
product that tracks the Benchmark Indices.

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

    12. 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 a 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 any Trust to reimburse the Sponsor for certain licensing, 
registration, and marketing expenses.
    13. Applicants state that, ordinarily, a sponsor of a UIT has an 
opportunity to profit in connection with the creation of a trust in two 
ways--through the difference between the acquisition cost of the 
securities and their value on the date of deposit in the trust and, to 
the extent a secondary market is maintained for units, through the 
imposition of sales charges on resales of units. Expenses normally 
incurred in the creation and maintenance of a trust can then be offset 
against such profits. Applicants assert, however, that under the 
proposed structure, the usual sources of income are not available 
because the Sponsor will not impose a sales load or deposit Index 
Securities

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into the Trust. Though the Trusts will be listed on Nasdaq (the parent 
company of Sponsor), which will receive trading fees in connection with 
the trading of Trust Shares on Nasdaq, the Sponsor will not be involved 
in the maintenance of a secondary market for Trust Shares. Applicants 
contend that motivation for the limitations imposed in section 
26(a)(2)(C) of the Act was the fear that sponsors could take unfair 
advantage of a trust to profit, when profits were already being 
generated through sales charges and market gains (on the securities 
deposited by the sponsor). Applicants contend that in the proposed 
structure, no such opportunity to profit exists for Sponsor.
    14. Applicants state that permitting a Trust to reimburse the 
Sponsor for the Trust's expenses, as discussed above, would be no more 
disadvantageous to the holders of Trust 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 a Trust will 
pay the Sponsor only its actual out-of-pocket expenses. Finally, 
applicants state that the payment is capped at 30 basis points of the 
Trust's NAV on an annualized basis, with any expenses in excess of that 
amount to be absorbed by the Sponsor.

Section 17(a) of the Act

    15. 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 investment company. Section 2(a)(3) 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 
controlling, controlled by or under common control with the other 
person. Section 2(a)(9) 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, or more 
than 25%, of an issuer's outstanding voting securities, every purchaser 
of a Creation Unit will be an affiliated person of the Trust so long as 
20 or fewer Creation Units are in existence. Applicants request an 
exemption from section 17(a) under section 6(c) and 17(b) to permit 
persons that are affiliated persons solely by virtue of a 5% or more, 
or more than 25%, ownership interest in a Trust (or affiliated persons 
of such persons that are not otherwise affiliated with the Trusts) to 
purchase and redeem Creation Units through in-kind transactions.
    16. Section 17(b) authorizes the Commission to exempt a proposed 
transaction from section 17(a) if 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 
with the general provisions of the Act. Applicants assert that no 
useful purpose would be served by prohibiting the affiliated persons 
described above from making in-kind purchases and redemptions of 
Creation Units. The composition of a Portfolio Deposit made by a 
purchaser, like the Redemption Securities and Cash Redemption Amount 
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 in connection 
with determining the Trust's NAV. Therefore, applicants state that in-
kind purchases and redemptions will afford no opportunity for the 
affiliated persons described above to effect a transaction detrimental 
to other holders of Trust Shares. Applicants also believe that in-kind 
purchases and redemptions will not result in abusive self-dealing or 
overreaching by affiliated persons of the Funds.

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

    17. 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.
    18. 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 to be an affiliated 
person of a Trust because it will bear all aspects of the role of 
depositor in structuring and creating the Trust, other than that of 
actually depositing Portfolio Securities into the Trust.
    19. Applicants request an order under rule 17d-1 that would permit 
a Trust to reimburse the Sponsor for the payment to the BoNY Index 
Provider of an annual license fee under the 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) and rule 17d-1.
    20. The License Agreement allows applicants to use the Benchmark 
Indices as bases for Trust Shares and to use certain of BoNY's trade 
name and trademark rights. Applicants believe that BoNY is a valuable 
name that is well-known to investors and believe that investors will 
desire to invest in instruments that closely mirror the Benchmark 
Indices. In view of this, applicants state that it is necessary to 
obtain from BoNY the License Agreement so that appropriate reference to 
BoNY may be made in materials describing Trust 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 the BoNY 
Index Provider 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.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Applicants will not register a Future Trust 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 Trust, either exemptive relief from the 
Commission or a no action letter from the Division of Investment 
Management of the Commission, or (b) the Future Trust will

[[Page 65163]]

be listed on an Exchange without the need for filing pursuant to rule 
19b-4 under the Exchange Act.
    2. The prospectus and the Product Description of each Trust will 
clearly disclose that, for purposes of the Act, Trust Shares are issued 
by that Trust and the acquisition of Trust Shares by investment 
companies is subject to the restrictions of section 12(d)(1) of the 
Act.
    3. As long as a Trust operates in reliance on the requested order, 
the Trust Shares will be listed on an Exchange.
    4. The Web site for the Trusts, which will be publicly accessible 
at no charge, will contain the following information, on a per Trust 
Share basis, for each Trust: (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. In addition, the Product 
Description for each Trust will state that the Web site for the Trusts 
has information about the premiums and discounts at which the Trust 
Shares have traded.
    5. The prospectus and annual report for each Trust will also 
include: (a) the information listed in condition 4(b) above, (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 
Trust Share basis for one, five and ten year periods (or life of the 
Trust), (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 Benchmark Index.
    6. Before a Trust may rely on the order, the Commission will have 
approved pursuant to rule 19b-4 under the Exchange Act, an Exchange 
rule requiring Exchange members and member organizations effecting 
transactions in Trust Shares to deliver a Product Description to 
purchasers of Trust Shares.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-26933 Filed 10-22-02; 8:45 am]
BILLING CODE 8010-01-P