[Federal Register Volume 69, Number 54 (Friday, March 19, 2004)]
[Notices]
[Pages 13072-13076]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6188]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 26386; 812-13017]


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

March 15, 2004.
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 an exemption 
from sections 12(d)(1)(A) 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 of the Application: The order would permit certain 
registered management investment companies and unit investment trusts 
to acquire shares of certain registered unit investment trusts that 
operate as exchange-traded funds and are outside the same group of 
investment companies. The order also would amend two prior orders.
    Applicants: BLDRS Index Funds Trust (``BLDRS Trust''), Nasdaq-100 
Trust, Series 1 (``Nasdaq-100 Trust''), and Nasdaq Financial Products 
Services, Inc. (``NFPS'').
    Filing Dates: The application was filed on September 11, 2003, and 
amended on March 4, 2004.
    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 April 8, 2004, 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

[[Page 13073]]

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 Nasdaq Financial Products Services, Inc., 
The Nasdaq Stock Market, 9513 Key West Avenue, Rockville, MD 20850.

FOR FURTHER INFORMATION CONTACT: Stacy L. Fuller, 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. BLDRS Trust and Nasdaq-100 Trust (together, the ``Trusts'') are 
unit investment trusts organized under New York law and registered 
under the Act. BLDRS Trust is comprised of separate series (``BLDRS 
Index Funds''). The BLDRS Index Funds and the Nasdaq-100 Trust 
(together, the ``NFPS ETFs'') seek to provide investment results that 
correspond generally, before fees and expenses, to the price and yield 
performance of specified benchmark indices (``Indices'' or ``Benchmark 
Indices''). The NFPS ETFs operate as exchange-traded funds (``ETFs''). 
NFPS is the sponsor of each NFPS ETF.
    2. Applicants request relief to permit registered management 
investment companies and unit investment trusts to acquire shares of 
the Nasdaq-100 Trust (``Nasdaq-100 Shares'') and of the BLDRS Index 
Funds (``Trust Shares,'' and together with Nasdaq-100 Shares, 
``Units'') beyond the limitations in section 12(d)(1)(A). To the extent 
that an Investing Fund (as defined below) owns 5% or more of the Units 
of an NFPS ETF, applicants further request relief from sections 
17(a)(1) and (2) of the Act to permit such an NFPS ETF, as an 
affiliated person of the Investing Fund, to sell Units to, and redeem 
Units from, the Investing Fund. Applicants request that the relief 
apply to (i) Nasdaq-100 Trust; (ii) BLDRS Trust and each registered 
unit investment trust that operates as an ETF, is currently or 
subsequently part of the same ``group of investment companies'' as 
BLDRS Trust within the meaning of section 12(d)(1)(G)(ii) of the Act, 
and is sponsored by NFPS or an entity controlling, controlled by or 
under common control with NFPS (included in the defined term ``NFPS 
ETFs''); and (iii) registered management investment companies 
(``Investing Management Companies'') and unit investment trusts 
(``Investing Trusts'') that are not sponsored or advised by NFPS or an 
entity controlling, controlled by, or under common control with NFPS 
and that are not part of the same ``group of investment companies'' as 
the Trusts within the meaning of section 12(d)(1)(G)(ii) of the Act. 
Investing Management Companies and Investing Trusts are collectively 
referred to as ``Investing Funds.'' \1\ Investing Trusts do not include 
NFPS ETFs. Each Investing Management Company will be advised by an 
investment adviser that is registered under the Advisers Act or exempt 
from registration (``Advisor'') and may be advised by investment 
adviser(s) within the meaning of section 2(a)(20)(B) of the Act (each, 
a ``Subadviser'').
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    \1\ 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 NFPS ETFs and not in any other registered investment 
company.
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    3. Applicants state that the NFPS ETFs 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 NFPS ETFs provide instant and highly liquid exposure to the 
markets represented by each Benchmark Index 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.
    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 Units beyond the 
limits set forth in section 12(d)(1)(A).
    3. Applicants state that the proposed arrangement and conditions 
will adequately address the policy concerns underlying section 
12(d)(1)(A), 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 NFPS 
ETFs. To limit the influence that an Investing Fund may have over an 
NFPS ETF, applicants propose a condition that prohibits the Advisor or 
a sponsor to an Investing Trust (``Sponsor'') and certain affiliates 
from controlling (individually or in the aggregate) an NFPS ETF within 
the meaning of section 2(a)(9) of the Act. The condition also prohibits 
any Subadviser and certain affiliates from controlling (individually or 
in the aggregate) an NFPS ETF within the meaning of section 2(a)(9) of 
the Act. To limit further the potential for undue influence by the 
Investing Funds over the NFPS ETFs, applicants propose conditions 2, 3 
and 4, stated below, to preclude an Investing Fund and its affiliated 
entities from taking advantage of an NFPS ETF 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 it in an NFPS ETF under the 
requested order, each Investing Fund and Trust will execute an 
agreement (``Investing Fund Agreement'') stating that the board of 
directors or trustees (``Board'') of, and the Advisor and any 
Subadviser to, an Investing Management Company, and the Sponsor and 
trustee of an Investing Trust (``Trustee''), 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. Applicants state that because each 
NFPS ETF is a unit investment trust that does not charge any advisory 
fee, there will be no layered or duplicative advisory fees. Further, 
applicants note that Units are sold without sales charges, and

[[Page 13074]]

applicants propose a condition that precludes any sales charges and/or 
service fees charged with respect to shares of an Investing Fund from 
exceeding the limits applicable to a fund of funds under Conduct Rule 
2830 of the National Association of Securities Dealers, Inc. (``Rule 
2830''). The Advisor, or Trustee or Sponsor, as applicable, of an 
Investing Fund also will waive fees otherwise payable to it by the 
Investing Fund in an amount at least equal to any compensation received 
by the Advisor, or Trustee or Sponsor, or an affiliated person of the 
Advisor, or Trustee or Sponsor, from an NFPS ETF in connection with the 
investment by the Investing Fund in the NFPS ETF. Any Subadviser will 
waive fees otherwise payable to it by an Investing Management Company 
in an amount at least equal to any compensation received by the 
Subadviser, or its affiliate, in connection with any investment by the 
Investing Management Company in the NFPS ETF that is made at the 
direction of the Subadviser.
    7. Applicants submit that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that the NFPS ETFs 
will be prohibited from acquiring securities of any investment company, 
or company relying on section 3(c)(1) or 3(c)(7) of the Act, in excess 
of the limits contained in section 12(d)(1)(A). Applicants also 
represent that the Investing Fund Agreement will require an Investing 
Fund that exceeds the 5% or 10% limitation in section 12(d)(1)(A)(ii) 
or (iii), respectively, 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)(B) 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 NFPS ETF could become an affiliated 
person of an Investing Fund if the Investing Fund acquires 5% or more 
of an NFPS ETF's securities. Although applicants believe that most 
Investing Funds will purchase Units in the secondary market and not 
directly from an NFPS ETF, an Investing Fund might seek to transact 
directly with an NFPS ETF.\2\ Section 17(a) could prevent an NFPS ETF 
from selling Units to, and redeeming Units from, an Investing Fund that 
owns 5% or more of an NFPS ETF.
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    \2\ Units are only purchased and redeemed directly from an NFPS 
ETF in large blocks (e.g., 50,000 Units) 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 
persons 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 6(c) and 17(b) 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 for the purchase or redemption of Units directly from an 
NFPS ETF will be based on the net asset value (``NAV'') of the NFPS 
ETF. Applicants state that the proposed arrangement will be consistent 
with the policies of each Investing Fund and NFPS ETF, and with the 
general purposes of the Act. Applicants also believe that the requested 
exemption is 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.
C. Prior Orders
    1. Applicants seek to amend certain prior exemptive orders (``Prior 
Orders'').\3\ Specifically, applicants seek to amend condition 2 to 
each of the Prior Orders so that it is consistent with the relief being 
requested from section 12(d)(1). Condition 2 currently provides that 
each NFPS ETF prospectus and Product Description \4\ will clearly 
disclose that, for purposes of the Act, Units are issued by the NFPS 
ETF and that the acquisition of Units by investment companies is 
subject to the restrictions of section 12(d)(1) of the Act. Under new 
condition 2, Investing Funds will be alerted that they may invest in 
the NFPS ETFs 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 an Investing Fund Agreement with the NFPS ETF regarding 
the terms of the investment. Applicants will replace current condition 
2 in BLDRS Trust's Prior Order with condition 9, as stated below, and 
in Nasdaq-100 Trust's Prior Order with condition 12, as stated below.
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    \3\ The Prior Orders are BLDRS Index Funds Trust, et al., 
Investment Company Act Release Nos. 25772 (Oct. 17, 2002) (notice) 
and 25797 (Nov. 8, 2002) (order) and Nasdaq-100 Trust Series 1, et 
al., Investment Company Act Release Nos. 23668 (Jan. 27, 1999) 
(notice) and 23702 (Feb. 22, 1999) (order).
    \4\ A ``Product Description'' is a document that accompanies 
secondary market trades of Units and provides a plain English 
overview of a Trust.
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    2. Applicants also seek to amend the defined term ``Business Day'' 
in each of the Prior Orders to mean any day that The Nasdaq Stock 
Market, Inc. is open for business or that the relevant NFPS ETF is open 
for business as required by section 22(e) of the Act. In connection 
with the amendment to the defined term ``Business Day,'' applicants 
seek to replace conditions 4 and 5, respectively, of BLDRS Trust's 
Prior Order with conditions 10 and 11, as stated below. Applicants also 
seek to add to Nasdaq-100 Trust's Prior Order new conditions 3 and 4, 
respectively, as stated in conditions 13 and 14 below.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. (a) The Advisor or Sponsor, (b) any person controlling, 
controlled by, or under common control with an Advisor or Sponsor, and 
(c) any investment company and any issuer that would be an investment 
company but for section 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 
(together, the ``Investing Fund's Advisory Group'') will not control 
(individually or in the aggregate) an NFPS ETF within the meaning of 
section 2(a)(9) of the Act. (a) Any Subadviser, (b) any person 
controlling, controlled by, or under common control with the 
Subadviser, and (c) any investment company or issuer that would be an 
investment

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company but for section 3(c)(1) or 3(c)(7) of the Act (or portion of 
such investment company or issuer) that is advised by the Subadviser or 
any person controlling, controlled by, or under common control with the 
Subadviser (together, the ``Investing Fund's Subadvisory Group'') will 
not control (individually or in the aggregate) an NFPS ETF within the 
meaning of section 2(a)(9) of the Act. If, as a result of a decrease in 
the outstanding Units of an NFPS ETF, an Investing Fund's Advisory 
Group or an Investing Fund's Subadvisory Group, each in the aggregate, 
becomes a holder of more than 25 percent of the outstanding Units of an 
NFPS ETF, it will vote its Units in the same proportion as the vote of 
all other Unitholders.
    2. An Investing Fund and its Advisor and any Subadviser, 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 NFPS ETF to influence 
the terms of any services or transactions between the Investing Fund or 
an Investing Fund Affiliate and an NFPS ETF or the promoter, sponsor or 
principal underwriter of an NFPS ETF, and any person controlling, 
controlled by, or under common control with any of those entities 
(each, an ``NFPS ETF Affiliate'').
    3. The Board, including a majority of the directors or trustees who 
are not interested persons (as defined in section 2(a)(19) of the Act) 
of the Investing Management Company, will adopt procedures reasonably 
designed to assure that the Advisor and any Subadviser are 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 NFPS ETF or 
an NFPS ETF Affiliate in connection with any services or transactions.
    4. No Investing Fund or Investing Fund Affiliate will cause an NFPS 
ETF 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.
    5. Before investing in an NFPS ETF in excess of the limits in 
section 12(d)(1)(A), each Investing Fund and Trust will execute an 
Investing Fund Agreement stating, without limitation, that the Board 
of, and the Advisor and any Subadviser to, an Investing Management 
Company, or 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. The NFPS ETFs and 
the Investing Fund will maintain and preserve a copy of the order and 
the agreement for a period of not less than six years from the end of 
the fiscal year in which any investment occurred, the first two years 
in an easily accessible place.
    6. An Advisor, or a Trustee or Sponsor, as applicable, will waive 
fees otherwise payable to it by an Investing Fund in an amount at least 
equal to any compensation received by the Advisor, or Trustee or 
Sponsor, or an affiliated person of the Advisor, or Trustee or Sponsor, 
from an NFPS ETF in connection with the investment by the Investing 
Fund in the NFPS ETF. Any Subadviser will waive fees otherwise payable 
to the Subadviser, directly or indirectly, by the Investing Management 
Company in an amount at least equal to any compensation received by the 
Subadviser, or an affiliated person of the Subadviser, in connection 
with any investment by the Investing Management Company in the NFPS ETF 
made at the direction of the Subadviser. In the event that the 
Subadviser waives fees, the benefit of the waiver will be passed 
through to the Investing Management Company.
    7. 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 Rule 2830.
    8. An NFPS ETF will not acquire securities of any investment 
company or company relying on section 3(c)(1) or 3(c)(7) of the Act in 
excess of the limits contained in section 12(d)(1)(A) of the Act.

Amendments to BLDRS Trust's Prior Order

    Applicants agree to replace condition 2 of BLDRS Trust's Prior 
Order with the following condition:
    9. Each Trust's prospectus and Product Description will clearly 
disclose that, for purposes of the Act, Trust Shares are issued by a 
registered investment company, and the acquisition of Trust Shares by 
investment companies is subject to the restrictions of section 12(d)(1) 
of the Act, except as permitted by an exemptive order that permits 
registered investment companies to invest in Trust Shares beyond the 
limits in section 12(d)(1)(A), subject to certain terms and conditions, 
including that the registered investment company enter into an 
agreement with the Trust regarding the terms of the investment.
    Applicants agree to replace condition 4 of BLDRS Trust's Prior 
Order with the following condition:
    10. 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.
    Applicants agree to replace condition 5 of BLDRS Trust's Prior 
Order with the following condition:
    11. 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 closing price, and (ii) the cumulative total 
return of the relevant Benchmark Index.

Amendments to Nasdaq-100 Trust's Prior Order

    Applicants agree to replace condition 2 of Nasdaq-100 Trust's Prior 
Order with the following condition:
    12. The Trust's prospectus and Product Description will clearly 
disclose that, for purposes of the Act, Nasdaq-100 Shares are issued by 
a registered investment company, and the acquisition of Nasdaq-100 
Shares by investment companies is subject to the restrictions of 
section 12(d)(1) of the Act, except as permitted by an exemptive order 
that permits registered investment companies to invest in Nasdaq-100 
Shares beyond the limits in section 12(d)(1)(A), subject to certain 
terms and conditions, including that the registered investment company 
enter

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into an agreement with the Trust regarding the terms of the investment.
    Applicants agree to add the following condition to Nasdaq-100 
Trust's Prior Order as condition 3:
    13. The Web site for the Trust or the Web site of the American 
Stock Exchange, each of which will be publicly accessible at no charge, 
will contain the following information, on a per Nasdaq-100 Share 
basis, for the 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 
the Trust will state that the relevant Web site has information about 
the premiums and discounts at which the Nasdaq-100 Shares have traded.
    Applicants agree to add the following condition to Nasdaq-100 
Trust's Prior Order as condition 4:
    14. The prospectus and annual report for the Trust will also 
include: (a) the information listed in condition 3(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 
Nasdaq-100 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 closing price and (ii) the cumulative 
total return of the Index.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-6188 Filed 3-18-04; 8:45 am]
BILLING CODE 8010-01-P