[Federal Register Volume 69, Number 60 (Monday, March 29, 2004)]
[Notices]
[Pages 16295-16298]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6918]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 26392; 812-13035]


SPDR Trust, Series 1, et al.; Notice of Application

March 23, 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 three prior orders.

Applicants: SPDR Trust, Series 1 (``SPDR Trust''), DIAMONDS Trust, 
Series 1 (``DIAMONDS Trust''), MidCap SPDR Trust, Series 1 (``MidCap 
SPDR Trust''), and PDR Services LLC (``PDR'').

Filing Dates: The application was filed on October 31, 2003, and 
amended on March 17, 2004. 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 April 16, 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 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: SPDR Trust, Series 1, c/o State Street Bank and 
Trust Company, 225 Franklin Street, Boston, MA 02110; DIAMONDS Trust, 
Series 1, c/o State Street Bank and Trust Company, 225 Franklin Street, 
Boston, MA 02110; MidCap SPDR Trust, Series 1, c/o The Bank of New 
York, 101 Barclay Street, New York, NY 10286; and, PDR Services LLC, c/
o American Stock Exchange LLC, 86 Trinity Place, New York, NY 10006.

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. SPDR Trust, DIAMONDS Trust and MidCap SPDR Trust (together, the 
``Trusts'') are unit investment trusts organized under New York law and 
registered under the Act. The SPDR Trust, DIAMONDS Trust and MidCap 
SPDR Trust seek to provide investment results that closely track, 
respectively, the S&P 500 Composite Stock Price Index, Dow Jones 
Industrial Average and S&P MidCap 400 Index (each, an ``Underlying 
Index,'' and together, the ``Underlying Indices''). The Trusts operate 
as exchange-traded funds (``ETFs''). PDR is the sponsor of each Trust.
    2. Applicants request relief to permit certain registered 
management investment companies and unit investment trusts to acquire 
shares of the Trusts (``Units'') beyond the limitations in section 
12(d)(1)(A). To the extent that a Purchasing Fund (as defined below) 
owns 5% or more of the Units of a Trust, applicants further request 
relief from sections 17(a)(1) and (2) of the Act to permit the Trust, 
as an affiliated person of the Purchasing Fund, to sell Units to, and 
redeem Units from, the Purchasing Fund. Applicants request that the 
relief apply to (i) the Trusts, and (ii) registered management 
investment companies (``Purchasing Management Companies'') and unit 
investment trusts (``Purchasing Trusts'') that are not sponsored or 
advised by PDR or an entity controlling, controlled by, or under common 
control with PDR 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. Purchasing Management Companies and 
Purchasing Trusts are collectively referred to as ``Purchasing Funds.'' 
\1\ Purchasing Trusts do not include the Trusts. Each Purchasing 
Management Company will be advised by an investment adviser within the 
meaning of section 2(a)(20)(A) of the Act (``Advisor'') and may be 
advised by investment adviser(s) within the meaning of section 
2(a)(20)(B) of the Act (each, a ``Subadvisor''). Any investment adviser 
to a Purchasing Management Company will be registered the Investment 
Advisers Act of 1940 or exempt from registration.
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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. A Purchasing Fund may rely on the requested order only 
to invest in the Trusts and not in any other registered investment 
company.
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    3. Applicants state that the Trusts will offer the Purchasing Funds 
simple and efficient vehicles to achieve asset allocation, 
diversification and other investment objectives, and to implement 
various investment strategies. Among other purposes, applicants assert 
that the Trusts provide instant and highly liquid exposure to the 
markets represented by each Underlying Index

[[Page 16296]]

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 Purchasing 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. 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 a Purchasing Fund or its affiliates over the 
Trusts. To limit the influence that a Purchasing Fund may have over a 
Trust, applicants propose a condition that prohibits the Advisor or a 
sponsor to a Purchasing Trust (``Sponsor'') and certain affiliates from 
controlling (individually or in the aggregate) a Trust within the 
meaning of section 2(a)(9) of the Act. The condition also prohibits any 
Subadvisor and certain affiliates from controlling (individually or in 
the aggregate) a Trust within the meaning of section 2(a)(9) of the 
Act. To limit further the potential for undue influence by the 
Purchasing Funds over the Trusts, applicants propose conditions 2, 3 
and 4, stated below, to preclude a Purchasing Fund and its affiliated 
entities from taking advantage of a Trust 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 a Purchasing Fund understands 
the implications of an investment by it in a Trust under the requested 
order, each Purchasing Fund and Trust will execute an agreement 
(``Purchasing Fund Agreement'') stating that the board of directors or 
trustees (``Board'') of, and the Advisor and any Subadvisor to, a 
Purchasing Management Company, and the Sponsor and trustee of a 
Purchasing 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 
Trust 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 
applicants propose a condition that precludes any sales charges and/or 
service fees charged with respect to shares of a Purchasing 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 a 
Purchasing Fund also will waive fees otherwise payable to it by the 
Purchasing 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 a Trust in connection with 
the investment by the Purchasing Fund in the Trust. Any Subadvisor will 
waive fees otherwise payable to it by a Purchasing Management Company 
in an amount at least equal to any compensation received by the 
Subadvisor, or its affiliate, in connection with any investment by the 
Purchasing Management Company in the Trust that is made at the 
direction of the Subadvisor.
    7. Applicants submit that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that the Trusts 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 Purchasing Fund Agreement will require a Purchasing 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 doing so, 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 a Trust could become an affiliated person 
of a Purchasing Fund if the Purchasing Fund acquires 5% or more of the 
Trust's securities. Although applicants believe that most Purchasing 
Funds will purchase Units in the secondary market and not directly from 
a Trust, a Purchasing Fund might seek to transact directly with a 
Trust.\2\ Section 17(a) could prevent a Trust from selling Units to, 
and redeeming Units from, a Purchasing Fund that owns 5% or more of the 
Trust.
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    \2\ Units are only purchased and redeemed directly from a Trust 
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 a 
Trust will be based on the net asset

[[Page 16297]]

value (``NAV'') of the Trust in accordance with the policies and 
procedures set forth in the Trust's registration statement. Applicants 
state that the proposed arrangement will be consistent with the 
policies of each Purchasing Fund and Trust, 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 3 to the 
Prior Order for the SPDR Trust and condition 2 to the Prior Orders for 
the DIAMONDS Trust and the MidCap SPDR Trust so that it is consistent 
with the relief being requested from section 12(d)(1). The condition 
currently provides that the prospectus and Product Description \4\ of 
the relevant Trust will clearly disclose that, for purposes of the Act, 
Units are issued by the Trust and that the acquisition of Units by 
investment companies is subject to the restrictions of section 
12(d)(1). Under the new condition, Purchasing Funds will instead be 
alerted that they may invest in the Trusts 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 Purchasing 
Fund Agreement with the relevant Trust regarding the terms of the 
investment. Applicants will replace the relevant condition in each of 
the Prior Orders with condition 9, as stated below. In addition, 
applicants will add conditions 10 and 11, as stated below, to each of 
the Prior Orders.
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    \3\ The Prior Orders are SPDR Trust, Series 1, et al., 
Investment Company Act Release Nos. 18959 (Sept. 23, 1992) (notice) 
and 19055 (Oct. 26, 1992) (order) (``SPDR Order''), DIAMONDS Trust, 
Series 1, et al., Investment Company Act Release Nos. 22927 (Dec. 5, 
1997) (notice) and 22979 (Dec. 30, 1997) (order) (``DIAMONDS 
Order''), and MidCap SPDR Trust, Series 1, et al., Investment 
Company Act Release Nos. 20797 (Jan. 3, 1995) (notice) and 20844 
(Jan. 18, 1995) (order) (``MidCap SPDR 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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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 ``Purchasing Fund's Advisory Group'') will not control 
(individually or in the aggregate) a Trust within the meaning of 
section 2(a)(9) of the Act. (a) Any Subadvisor, (b) any person 
controlling, controlled by, or under common control with the 
Subadvisor, and (c) any investment company or issuer that would be an 
investment 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 
Subadvisor or any person controlling, controlled by, or under common 
control with the Subadvisor (together, the ``Purchasing Fund's 
Subadvisory Group'') will not control (individually or in the 
aggregate) a Trust within the meaning of section 2(a)(9) of the Act. 
If, as a result of a decrease in the outstanding Units of a Trust, a 
Purchasing Fund's Advisory Group or a Purchasing Fund's Subadvisory 
Group, each in the aggregate, becomes a holder of more than 25 percent 
of the outstanding Units of a Trust, it will vote its Units in the same 
proportion as the vote of all other Unitholders.
    2. A Purchasing Fund and its Advisor and any Subadvisor, Sponsor, 
promoter, and principal underwriter, and any person controlling, 
controlled by, or under common control with any of those entities 
(each, a ``Purchasing Fund Affiliate'') will not cause any existing or 
potential investment by the Purchasing Fund in a Trust to influence the 
terms of any services or transactions between the Purchasing Fund or 
Purchasing Fund Affiliate and the Trust or the promoter, sponsor or 
principal underwriter of a Trust, and any person controlling, 
controlled by, or under common control with any of those entities 
(each, a ``Trust Affiliate'').
    3. The Board, including a majority of the disinterested directors 
or trustees, of a Purchasing Management Company, will adopt procedures 
reasonably designed to assure that the Advisor and any Subadvisor are 
conducting the investment program of the Purchasing Management Company 
without taking into account any consideration received by the 
Purchasing Management Company or a Purchasing Fund Affiliate from a 
Trust or a Trust Affiliate in connection with any services or 
transactions.
    4. No Purchasing Fund or Purchasing Fund Affiliate will cause a 
Trust to purchase a security from any underwriting or selling syndicate 
in which a principal underwriter is an officer, director, member of an 
advisory board, Advisor, Subadvisor, employee or Sponsor of the 
Purchasing Fund, or a person of which any such officer, director, 
member of an advisory board, Advisor, Subadvisor, employee or Sponsor 
is an affiliated person.
    5. Before investing in a Trust in excess of the limits in section 
12(d)(1)(A), each Purchasing Fund and Trust will execute a Purchasing 
Fund Agreement stating, without limitation, that the Board of, and the 
Advisor and any Subadvisor to, a Purchasing Management Company, or the 
Trustee and Sponsor of a Purchasing Trust, as applicable, understand 
the terms and conditions of the order and agree to fulfill their 
responsibilities under the order. The relevant Trust and the Purchasing 
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 a Purchasing 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 a Trust in connection with the investment by the Purchasing Fund 
in the Trust. Any Subadvisor will waive fees otherwise payable to the 
Subadvisor, directly or indirectly, by the Purchasing Management 
Company in an amount at least equal to any compensation received by the 
Subadvisor, or an affiliated person of the Subadvisor, in connection 
with any investment by the Purchasing Management Company in the Trust 
made at the direction of the Subadvisor. In the event that the 
Subadvisor waives fees, the benefit of the waiver will be passed 
through to the Purchasing Management Company.
    7. Any sales charges and/or service fees charged with respect to 
shares of a Purchasing Fund will not exceed the limits applicable to a 
fund of funds as set forth in Rule 2830.
    8. No Trust will 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 the Prior Orders

    Applicants agree to replace condition 3 of the SPDR Order, 
condition 2 of the DIAMONDS Order and condition 2 of

[[Page 16298]]

the MidCap SPDR Order with the following condition:
    9. The Trust's prospectus and Product Description will clearly 
disclose that, for purposes of the Act, the Units are issued by the 
Trust, which is a registered investment company, and the acquisition of 
Units 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 a Trust beyond the 
limits in section 12(d)(1), subject to certain terms and conditions, 
including that the registered investment company enter into a 
Purchasing Fund Agreement with the Trust regarding the terms of the 
investment.
    Applicants agree to add the following condition to each of the 
Prior Orders:
    10. The website of the American Stock Exchange (``Amex''), which is 
and will be publicly accessible at no charge, will contain the 
following information, on a per Unit basis, for the Trust: (a) The 
prior business day's NAV and the midpoint of the bid/ask price on the 
Amex at the time NAV is calculated (``Bid/Ask Price''), and a 
calculation of the premium or discount of such Bid/Ask Price against 
such NAV; and (b) data in tabular, chart or graphical format displaying 
the frequency distribution of discounts and premiums of the daily Bid/
Ask 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 Amex Web site has information about 
the premiums and discounts at which the Units have traded.
    Applicants agree to add the following condition to each of the 
Prior Orders: \5\
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    \5\ For purposes of this condition, for all dates prior to April 
3, 2001, the term ``Bid/Ask Price'' shall mean the midpoint of the 
best bid and offer prices on the Amex at the closing time of the 
regular trading session for the Units, ordinarily 4:15 p.m., rather 
than at the time NAV was calculated.
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    11. The prospectus and annual report for the Trust will also 
include: (a) Data in tabular, chart or graphical form displaying the 
frequency distribution of discounts and premiums of the daily Bid/Ask 
Price against the NAV, within appropriate ranges (i) in the case of the 
prospectus, for the most recently completed calendar year (and the most 
recently completed calendar 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 in tabular, chart 
or graphical form, calculated on a per Unit basis for one, five and ten 
year periods (or life of the Trust, if shorter), (i) the cumulative 
total return and the average annual total return based on NAV and Bid/
Ask Price, and (ii) the cumulative total return of the Underlying 
Index.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-6918 Filed 3-26-04; 8:45 am]
BILLING CODE 8010-01-P