[Federal Register Volume 68, Number 59 (Thursday, March 27, 2003)]
[Notices]
[Pages 15010-15013]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7341]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25969; 812-12932]


iShares Trust, et al.; Notice of Application

March 21, 2003.
AGENCY: Securities and Exchange Commission (``Commission'')

ACTION: Notice of an application for an order under section 12(d)(1)(J) 
of the Investment Company Act of 1940 (the ``Act'') for exemption from 
sections 12(d)(1)(A) and (B) and under sections 6(c) and 17(b) of the 
Act for an exemption from section 17(a) of the Act.

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SUMMARY: The order would permit certain registered management 
investment companies and unit investment trusts to acquire shares of 
other registered open-end management investment companies and unit 
investment trusts that operate as exchange-traded funds and are outside 
the same group of investment companies. The order also would amend a 
condition in two prior orders.
    Applicants: iShares Trust (``Trust''), iShares, Inc. 
(``Corporation'') and Barclays Global Fund Advisors (``BGFA'').

DATES: The application was filed on February 26, 2003. 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 servicing 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 April 14, 2003, 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: Trust and Corporation, c/o Investors Bank & 
Trust Company, 200 Clarendon Street, Boston, MA 02116; BGFA, 45 Fremont 
Street, San Francisco, CA 94105.

FOR FURTHER INFORMATION CONTACT: John L. Sullivan, Senior Counsel, and 
Michael W. Mundt, Senior Special Counsel, at (202) 942-0564 (Office of 
Investment Company Regulation, Division of Investment Management).

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 (tel. 202-942-8090).

Applicants' Representations

    1. The Trust and the Corporation are open-end management investment 
companies registered under the Act and are comprised of separate series 
that seek to provide investment results that correspond generally to 
the performance of specified market indices and that operate as 
exchange-traded funds (``ETFs''). BGFA is a registered as an investment 
adviser under the Investment Advisers Act of 1940 (``Advisers Act'') 
and serves as investment adviser to each existing iShares Fund (as 
defined below).
    2. Applicants request relief to permit registered management 
investment companies and unit investment trusts to acquire shares of 
series of the Trust or the Corporation beyond the limitations in 
section 12(d)(1)(A) and (B). Applicants request that the relief apply 
to (i) each registered open-end management investment company or unit 
investment trust that operates as an ETF, is currently or subsequently 
part of the same ``group of investment companies'' as the Trust or the 
Corporation within the meaning of section 12(d)(1)(G)(ii) of the Act, 
and is advised or sponsored by BGFA or an entity controlling, 
controlled by or under common control with BGFA (such open-end ETFs are 
referred to as ``Open-End iShares Funds''; such unit investment trust 
ETFs are referred to as ``UIT iShares Funds'' Open-End iShares Funds 
and UIT iShares Funds are collectively referred to as ``iShares 
Funds''),\1\ as well as any broker-dealer selling shares of an iShares 
Fund to an Investing Fund (as defined below); and (ii) each registered 
management investment company or unit investment trust that is not part 
of the same ``group of investment companies'' as the iShares Funds 
within the meaning of section 12(d)(1)(G)(ii) of the Act and that 
enters into a participation agreement (``Participation Agreement'') 
with an iShares Fund (such management investment companies are referred 
to as ``Investing management Companies''; such unit investment trusts 
are referred to as ``Investing Trusts,'' and Investing Management 
Companies and Investing trusts are collectively referred to as 
``Investing Funds'').\2\ Each Investing Management Company will be 
advised by an investment adviser that is registered under the Advisers 
Act or exempt from registration (``Advisor'').
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    \1\ All existing iShares Funds are open-end management 
investment companies.
    \2\ All entities that currently intend to rely on the requested 
order are named as applicants. Any other entity that relies on the 
order in the future will comply with the terms and conditions of the 
application. An Investing Fund may rely on the requested order only 
to invest in iShares Funds and not in any other registered 
investment company.
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    3. Applicants state that the iShares Funds will offer the Investing 
Funds simple and efficient vehicles to achieve their asset allocation, 
diversification and other investment objectives, and to implement 
various investment strategies. Among other purposes, applicants assert 
that the iShares Funds provide instant and highly liquid exposure to a 
broad range of markets, sectors or subsectors, geographic regions and 
industries, and permit investors to achieve such exposure through a 
single transaction instead of the many transactions that might 
otherwise be needed to obtain comparable market exposure.

Applicants' Legal Analysis

A. Section 12(d)(1)
    1. Section 12(d)(1)(A) of the Act prohibits a registered investment 
company from acquiring shares of an investment company if the 
securities represent more than 3% of the total outstanding voting stock 
of the acquired company, more than 5% of the total assets of the 
acquiring company, or, together with the securities of any other 
investment companies, more than 10% of the total assets of the 
acquiring company. Section 12(d)(1)(B) of the Act prohibits a 
registered open-end investment company, its principal underwriter, or 
any broker or dealer registered under the Securities Exchange Act of 
1934, from selling its shares to another investment company if the sale 
will cause the acquiring company to own more than 3% of the acquired 
company's voting stock, or if the sale will cause more than 10% of the

[[Page 15011]]

acquired company's voting stock to be owned by investment companies 
generally.
    2. Section 12(d)(1)(J) of the Act provides that the Commission may 
exempt any person, security, or transaction, or any class or classes of 
persons, securities or transactions, from any provision of section 
12(d)(1) if the exemption is consistent with the public interest and 
the protection of investors. Applicants seek an exemption under section 
12(d)(1)(J) to permit the Investing Funds to acquire shares of the 
iShares Funds (``iShares'') and the iShares Funds and any broker or 
dealer to sell iShares to the Investing Funds beyond the limits set 
forth in sections 12(d)(1)(A) and (B).
    3. Applicants state that the proposed arrangement and conditions 
will adequately address the policy concerns underlying sections 
12(d)(1)(A) and (B), which include concerns about undue influence by a 
fund of funds over underlying funds, excessive layering of fees, and 
overly complex fund structures. Accordingly, applicants believe that 
the requested exemption is consistent with the public interest and the 
protection of investors.
    4. Applicants state that the proposed arrangement will not result 
in undue influence by an Investing Fund or its affiliates over the 
iShares Funds. To limit the control that an Investing Fund may have 
over an iShares Fund, applicants propose a condition prohibiting an 
Advisor, or a sponsor to an Investing Trust (``Sponsor''), and certain 
affiliates from controlling (individually or in the aggregate) an 
iShares Fund within the meaning of section 2(a)(9) of the Act. To limit 
further the potential for undue influence over the iShares Funds, 
applicants propose conditions 2, 3, 4, 6, 7 and 8, stated below, to 
preclude an Investing Fund and its affiliated entities from taking 
advantage of an iShares Fund with respect to transactions between the 
entities and to ensure the transactions will be on an arm's length 
basis.
    5. As an additional assurance that an Investing Fund understands 
the implications of an investment by an Investing Fund in an iShares 
Fund under the requested order, each Investing Fund and iShares Fund 
will execute an agreement stating that the board of directors or 
trustees of, and the investment adviser to, an Investing Management 
Company, and the trustee and Sponsor of an Investing Trust, as 
applicable, understand the terms and conditions of the order and agree 
to fulfill their responsibilities under the order.
    6. Applicants do not believe that the proposed arrangement will 
involve excessive layering of fees. The board of directors or trustees 
of any Investing Management Company, including a majority of the 
disinterested directors or trustees, will find that the advisory fees 
charged to the Investing Management Company are based on services 
provided that will be in addition to, rather than duplicative of, the 
services provided under the advisory contract of any Open-End iShares 
Fund in which the Investing Management Company may invest. In addition, 
an Advisor or a trustee or Sponsor of an Investing Trust will waive 
fees otherwise payable to it by an Investing Management Company or 
Investing Trust in an amount at least equal to any compensation 
received by the Advisor or trustee or Sponsor to the Investing Trust or 
an affiliated person of the investment adviser, trustee or Sponsor from 
the iShares Funds in connection with the investment by the Investing 
Management Company or Investing Trust in the iShares Fund. Applicants 
also state that any sales charges and/or service fees charged with 
respect to shares of an Investing Fund will not exceed the limits 
applicable to a fund of funds as set forth in Conduct Rule 2830 of the 
National Association of Securities Dealers, Inc. (``NASD'').
    7. Applicants submit that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that an iShares Fund 
will be prohibited from acquiring securities of any investment company 
in excess of the limits contained in section 12(d)(1)(A), except to the 
extent permitted by an exemptive order allowing the iShares Fund to 
purchase shares of an affiliated money market fund for short-term cash 
management purposes. Applicants also represent that the Participation 
Agreement will require an Investing Fund that exceeds the 5% or 10% 
limitations in section 12(d)(1)(A)(ii) and (iii) to disclose in its 
prospectus that it may invest in ETFs and to disclose, in ``plain 
English,'' in its prospectus the unique characteristics of the 
Investing Fund investing in ETFs, including, but not limited to, the 
expense structure and any additional expenses of investing in ETFs.

B. Section 17(a)

    1. Section 17(a) of the Act generally prohibits sales or purchases 
of securities between a registered investment company and any 
affiliated person of the company. Section 2(a)(3) of the Act defines an 
``affiliated person'' of another person to include any person 5% or 
more of whose outstanding voting securities are directly or indirectly 
owned, controlled, or held with power to vote by the other person.
    2. Applicants state that an iShares Fund could become an affiliated 
person of an Investing Fund if the Investing Fund acquires more than 5% 
of an iShares Fund's outstanding voting securities. Although applicants 
believe that most Investing Funds will purchase iShares in the 
secondary market and not directly from an iShares Fund, an Investing 
Fund that owns 5% or more of an iShares Fund might seek to transact 
directly with an iShares Fund.\3\ In light of this possible 
affiliation, section 17(a) could prevent an iShares Fund from selling 
iShares to and redeeming iShares from an Investing Fund.
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    \3\ iShares are only purchased and redeemed directly from an 
iShares Fund in large blocks of iShares (generally between 50,000 
and 600,000 shares) called ``creation units.''
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    3. Section 17(b) of the Act authorizes the Commission to grant an 
order permitting a transaction otherwise prohibited by section 17(a) if 
it finds that (i) the terms of the proposed transaction are fair and 
reasonable and do not involve overreaching on the part of any person 
concerned; (ii) the proposed transaction is consistent with the 
policies of each registered investment company involved; and (iii) the 
proposed transaction is consistent with the general purposes of the 
Act. Section 6(c) of the Act permits the Commission to exempt any 
person or transactions from any provision of the Act if 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.
    4. Applicants submit that the proposed arrangement satisfies the 
standards for relief under sections 17(b) and 6(c) of the Act. 
Applicants state that the terms of the arrangement are fair and 
reasonable and do not involve overreaching. Applicants note that any 
consideration paid for the purchase or redemption of iShares directly 
from an iShares Funds will be based on the net asset value of the 
iShares Fund. Applicants state that the proposed arrangement will be 
consistent with the policies of each Investing Fund and iShares Fund 
and with the general purposes of the Act. Applicants also believe that 
the requested exemption is appropriate in the public interest and 
submit that the exemption is consistent with the protection of 
investors and the purposes fairly intended by the policy and provisions 
of the Act.

[[Page 15012]]

C. Prior Orders
    Applicants also seek to amend a condition to certain prior 
exemptive orders (``Prior Orders'') so that the condition is consistent 
with the relief requested from section 12(d)(1).\4\ Existing condition 
2 to each of the Prior Orders currently provides that each iShares Fund 
prospectus and Product Description will clearly disclose that, for 
purposes of the Act, iShares are issued by the iShares Fund and that 
the acquisition of iShares by investment companies is subject to the 
restrictions of section 12(d)(1) of the Act.\5\ In light of the 
requested order to permit Investing Funds to invest in lShares Funds in 
excess of the limits of section 12(d)(1), applicants wish to replace 
this condition in the Prior Orders with condition 13, as stated below. 
Under the new condition, Investing Funds will be alerted that they may 
invest in iShares Funds in excess of the limits of section 12(d)(1) to 
the extent that they comply with the terms and conditions of the 
requested order granting relief from section 12(d)(1), including the 
requirement that they enter into a Participation Agreement with the 
iShares Fund regarding the terms of the investment.
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    \4\ The Prior Orders are iShares, Inc., et al., Investment 
Company Act Release Nos. 25595 (May 29, 2002) (notice) and 25623 
(June 25, 2002) (order) and Barclays Global Fund Advisors, et al., 
Investment Company Act Release Nos. 25594 (May 29, 2002) (notice) 
and 25622 (June 25, 2002) (order).
    \5\ A ``Product Description'' is a document that accompanies 
secondary market trades of iShares and provides a plain English 
overview of the iShares Fund.
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Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. An Advisor, a Sponsor, any person controlling, controlled by, or 
under common control with an Advisor or Sponsor, and any investment 
company and any issuer that would be an investment company but for 
sections 3(c)(1) or 3(c)(7) of the Act that is advised by an Advisor or 
sponsored by a Sponsor, or any person controlling, controlled by, or 
under common control with an Advisor or Sponsor (collectively, the 
``Group'') will not control (individually or in the aggregate) an 
iShares Fund within the meaning of section 2(a)(9) of the Act. If, as a 
result of a decrease in the outstanding voting securities of an iShares 
Fund, the Group, in the aggregate, becomes a holder of more than 25 
percent of the outstanding voting securities of an iShares Fund, the 
Group will vote it shares of the iShares Fund in the same proportion as 
the vote of all other holders of the iShares Fund's shares.
    2. An Investing Fund and its investment adviser, sponsor, promoter, 
and principal underwriter, and any person controlling, controlled by, 
or under common control with any of those entities (each, an 
``Investing Fund Affiliate'') will not cause any existing or potential 
investment by the Investing Fund in an iShares Fund to influence the 
terms of any services or transactions between the Investing Fund or 
Investing Fund Affiliate and the iShares Fund or its investment 
adviser, promoter, sponsor, principal underwriter, and any person 
controlling, controlled by, or under common control with any of those 
entities (each, an ``iShares Fund Affiliate'').
    3. The board of directors or trustees of an Investing Management 
Company, including a majority of the disinterested directors or 
trustees, will adopt procedures reasonably designed to assure that the 
Advisor is conducting the investment program of the Investing 
Management Company without taking into account any consideration 
received by the Investing Management Company or an Investing Fund 
Affiliate from an iShares Fund or an iShares Fund Affiliate in 
connection with any services or transactions.
    4. The board of directors/trustees of an Open-End iShares Fund 
(``Board''), including a majority of the disinterested Board members, 
will determine that any consideration paid by an Open-End iShares Fund 
to an Investing Fund or an Investing Fund Affiliate in connection with 
any services or transactions: (i) Is fair and reasonable in relation to 
the nature and quality of the services and benefits received by the 
Open-End iShares Fund; (ii) is within the range of consideration that 
the Open-End iShares Fund would be required to pay to another 
unaffiliated entity in connection with the same services or 
transactions; and (iii) does not involve overreaching on the part of 
any person concerned.
    5. An Advisor or a trustee or Sponsor of an Investing Trust will 
waive fees otherwise payable to it by the Investing Management Company 
or Investing Trust in an amount at least equal to any compensation 
(including fees received pursuant to any plan adopted by an Open-End 
iShares Fund under rule 12b-1 under the Act) received by the Advisor or 
trustee or Sponsor to the Investing Trust or an affiliated person of 
the Advisor, trustee or Sponsor from the iShares Funds in connection 
with the investment by the Investing Management Company or Investing 
Trust in the iShares Funds.
    6. No Investing Fund or Investing Fund Affiliate will cause an 
iShares Fund to purchase a security from any underwriting or selling 
syndicate in which a principal underwriter is an officer, director, 
member of an advisory board, investment adviser, employee or sponsor of 
the Investing Fund, or a person of which any such officer, director, 
member of an advisory board, investment adviser, employee or sponsor is 
an affiliated person (each, an ``Underwriting Affiliate''). An offering 
of securities during the existence of an underwriting or selling 
syndicate of which a principal underwriter is an Underwriting Affiliate 
is considered an ``Affiliated Underwriting.''
    7. The Board, including a majority of the disinterested Board 
members, will adopt procedures reasonably designed to monitor any 
purchases of securities by an Open-End iShares Fund in an Affiliated 
Underwriting, including any purchases made directly from an 
Underwriting Affiliate. The Board will review these purchases 
periodically, but no less frequently than annually, to determine 
whether the purchases were influenced by the investment by the 
Investing Fund in an Open-End iShares Fund. The Board will consider, 
among other things: (i) Whether the purchases were consistent with the 
investment objectives and policies of the Open-End iShares Fund; (ii) 
how the performance of securities purchased in an Affiliated 
Underwriting compares to the performance of comparable securities 
purchased during a comparable period of time in underwritings other 
than Affiliated Underwritings or to a benchmark such as a comparable 
market index; and (iii) whether the amount of securities purchased by 
the Open-End iShares Fund in Affiliated Underwritings and the amount 
purchased directly from an Underwriting Affiliate have changed 
significantly from prior years. The Board will take any appropriate 
actions based on its review, including, if appropriate, the institution 
of procedures designed to assure that purchases of securities from 
Affiliated Underwritings are in the best interests of shareholders.
    8. Each Open-End iShares Fund will maintain and preserve 
permanently in an easily accessible place a written copy of the 
procedures described in the preceding condition, and any modifications 
to such procedures, and will maintain and preserve for a period not 
less than six years form the end of the fiscal year in which any 
purchase from an Affiliated Underwriting occurred, the first two years 
in an easily accessible place, a written record of

[[Page 15013]]

each purchase, setting forth from whom the securities were acquired, 
the identity of the underwriting syndicate's members, the terms of the 
purchase, and the information or materials upon which the Board's 
determinations were made.
    9. Before investing in an iShares Fund in excess of the limit in 
section 12(d)(1)(A)(i), each Investing Fund and the iShares Fund will 
execute an agreement stating, without limitation, that the board of 
directors or trustees of, and the investment adviser to, an Investing 
Management Company, and the trustee and Sponsor of an Investing Trust, 
as applicable, understand the terms and conditions of the order and 
agree to fulfill their responsibilities under the order. At the time of 
its investment in shares of an Open-End iShares Fund in excess of the 
limit in section 12(d)(1)(A)(i), an Investing Fund will notify the 
Open-End iShares Fund of the investment. At such time, the Investing 
Fund will also transmit to the Open-End iShares Fund a list of the 
names of each Investing Fund Affiliate and Underwriting Affiliate. The 
Investing Fund will notify the Open-End iShares Fund of any changes to 
the list of the names as soon as reasonably practicable after a change 
occurs. The iShares Fund and the Investing Fund will maintain and 
preserve a copy of the order, the agreement, and, in the case of an 
Open-End iShares Fund, the list with any updated information for a 
period of not less than six years from the end of fiscal year in which 
any investment occurred, the first two years in an easily accessible 
place.
    10. Before approving any advisory contract under section 15 of the 
Act, the board of directors or trustees of each Investing Management 
Company, including a majority of the disinterested directors or 
trustees, will find that the advisory fees charged under such contract 
are based on services provided that will be in addition to, rather than 
duplicative of, the services provided under the advisory contract of 
any Open-End iShares Fund in which the Investing Management Company may 
invest. These findings and their basis will be recorded fully in the 
minute books of the appropriate Investing Management Company.
    11. Any sales charges and/or services fees charged with respect to 
shares of an Investing Fund will not exceed the limits applicable to a 
fund of funds as set forth in Conduct Rule 2830 of the NASD.
    12. No iShares Fund will acquire securities of any other investment 
company in excess of the limits contained in section 12(d)(1)(A) of the 
Act, except to the extent permitted by an exemptive order that allows 
the iShares Fund to purchase shares of an affiliated money market fund 
for short-term cash management purposes.

Amendment to Prior Orders

    Applicants agree to replace condition 2 of the Prior Orders with 
the following condition:
    13. Each iShares Fund's prospectus and Product Description will 
clearly disclose that, for purposes of the Act, the iShares are issued 
by an iShares Fund, which is an investment company, and that the 
acquisition of iShares by investment companies is subject to the 
restrictions of section 12(d)(1) of the Act, except as permitted by an 
exemptive order that permits investment companies to invest an iShares 
Fund beyond the limits in section 12(d)(1), subject to certain terms 
and conditions, including that the investment company enter into an 
agreement with the iShares Fund regarding the terms of the investment.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-7341 Filed 3-26-03; 8:45 am]
BILLING CODE 8010-01-M