[Federal Register Volume 65, Number 77 (Thursday, April 20, 2000)]
[Notices]
[Pages 21219-21223]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-9939]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24394, 812-11600]


Barclays Global Fund Advisors, et al.; Notice of Application

April 17, 2000.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (``Act'') for an exemption from sections 
2(a)(32), 5(a)(1), and 22(d) of the Act and rule 22c-1 under the Act, 
and under sections 6(c) and 17(b) of the Act for an exemption from 
sections 17(a)(1) and (a)(2) of the Act.

-----------------------------------------------------------------------

SUMMARY OF APPLICATION: Applicants request an order that would permit 
an open-end management investment company, whose portfolios will 
consist of the component securities of certain domestic indices, to 
issue shares of limited redeemability; permit secondary market 
transactions in the shares of the portfolios at negotiated prices on 
the American Stock Exchange LLC (``AMEX''); and permit affiliated 
persons of the portfolios to deposit securities into, and receive 
securities from, the portfolios in connection with the purchase and 
redemption of aggregations of the portfolios' shares.

Applicants: Barclays Global Fund Advisors (``Adviser''), iShares Trust 
(``Fund'') and its current index series (``Initial Index Series'') and 
future index series (``Future Index Series,'' and together with the 
Initial Index Series, the ``Index Series''), and SEI Investments 
Distribution Company (``Distributor'').

Filing Dates: The application was filed on April 30, 1999. 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 requested 
relief 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 May 5, 2000 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 may request notification of a

[[Page 21220]]

hearing by writing to the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 5th Street, NW, Washington, D.C. 
20549-0609. Adviser, 45 Fremont Street, San Francisco, CA 94105; Fund, 
c/o Investors Bank & Trust Company, 200 Clarendon Street, Boston, MA 
02116; and Distributor, 1 Freedom Valley Drive, Oaks, PA 19456.

FOR FURTHER INFORMATION CONTACT: Anu Dubey, Senior Counsel, at (202) 
942-0687, or Michael Mundt, Branch Chief, at (202) 942-0564 (Division 
of Investment Management, Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Branch, 450 5th Street, NW, Washington, 
D.C. 20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. The Fund is an open-end management investment company registered 
under the Act and established in the state of Delaware. The Adviser, an 
investment adviser registered under the Investment Advisers Act of 
1940, will serve as investment adviser to the Fund. The Distributor, a 
broker-dealer unaffiliated with the Adviser and registered under the 
Securities Exchange Act of 1934 (``Exchange Act''), will serve as the 
principal underwriter of the Fund's shares on an agency basis.
    Each Index Series will invest in a portfolio of securities 
(``Portfolio Securities'') generally consisting of the component 
securities of a specified domestic securities index (``Subject 
Index'').\1\ There are 42 Initial Index Series.\2\ No entity that 
creates, compiles, sponsors, or maintains a Subject 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 Fund, Adviser, any 
subadviser to an Index Series, or the Distributor.
---------------------------------------------------------------------------

    \1\ At least 90% of each Index Series' assets will be invested 
in the component securities of its Subject Index. An Index Series 
may invest up to 10% of its assets in certain futures, option and 
swap contracts, cash and cash equivalents, as well as certain 
securities not included in the Subject Index under limited 
circumstances.
    \2\ The Subject Indices for the Initial Index Series are the 
Standard & Poor's (``S&P'') 500 Index; S&P 100 Index; S&P MidCap 400 
Index; S&P SmallCap 600 Index; S&P Super Composite 1500 Index; S&P 
500/BARRA Value Index; S&P 500/BARRA Growth Index; S&P MidCap 400/
BARRA Value Index; S&P MidCap 400/BARRA Growth Index; S&P SmallCap 
600/BARRA Value Index; S&P SmallCap 600/BARRA Growth Index; S&P 
Super Composite 1500/BARRA Value Index; S&P Super Composite 1500/
BARRA Growth Index; Dow Jones US Total Market Index; Dow Jones US 
SmallCap Index; Dow Jones US Mid-Cap Index; Dow Jones US Large-Cap 
Index; Dow Jones US Basic Materials Sector Index; Dow Jones US 
Consumer Cyclical Sector Index; Dow Jones US Consumer Non-Cyclical 
Sector Index; Dow Jones US Energy Sector Index; Dow Jones US 
Financial Sector Index; Dow Jones US Industrial Sector Index; Dow 
Jones US Technology Sector Index; Dow Jones US Utilities Sector 
index; Dow Jones US Telecommunications Sector Index; Dow Jones 
Internet Index; Dow Jones US Healthcare Sector Index; Dow Jones US 
Real Estate Index; Dow Jones US Financial Services Composite Index; 
Dow Jones US Chemicals Index; Russell 1000 Index; Russell 2000 
Index; Russell Top 200 Index; Russell MidCap Index; Russell 3000 
Index; Russell 3000 Growth Index; Russell 3000 Value Index; Russell 
1000 Growth Index; Russell 1000 Value Index; Russell 2000 Growth 
Index; and Russell 2000 Value Index.
---------------------------------------------------------------------------

    3. The investment objective of each Index Series will be to provide 
investment results that correspond generally to the price and yield 
performance of its relevant Subject Index. Intra-day values of each 
Subject Index will be disseminated every 15 seconds throughout the 
trading day. An Index Series will utilize as an investment approach 
either a replication strategy or a representative sampling strategy. An 
Index Series using a replication strategy generally will hold most of 
the component securities of its Subject Index, but may not hold all of 
the underlying securities that comprise a Subject Index in certain 
instances. This may be the case when, for example, a potential 
component security is illiquid or when there are practical difficulties 
or substantial costs involved in holding every security in a Subject 
Index. An Index Series using a representative sampling strategy seeks 
to hold a representative sample of the component securities of the 
Subject Index and will invest in some but not all of the component 
securities of its Subject Index.\3\ Applicants anticipate that an Index 
Series that utilizes the representative sampling technique will not 
track its Subject Index with the same degree of accuracy as an 
investment vehicle that invested in every component security of the 
Subject Index with the same weighting as the Subject Index. Applicants 
expect that each Index Series will have a tracking error relative to 
the performance of its respective Subject Index of no more than 5 
percent.
---------------------------------------------------------------------------

    \3\ The stocks selected for inclusion in an Index Series by the 
Adviser will have aggregate investment characteristics (based on 
market capitalization and industry weightings), fund characteristics 
(such as return variability, earnings valuation and yield) and 
liquidity measures similar to those of the Subject index taken in 
its entirety.
---------------------------------------------------------------------------

    4. Shares of an Index Series (``Shares'' will be sold in 
aggregations of 50,000 Shares (``Creation Units'') as specified in the 
relevant prospectus. The price of a Creation Unit will range from 
$1,000,000 to $8,500,000. Creation Units may be purchased only by or 
through a participation in the Continuous Net Settlement (``CNS'') 
System of the National Securities Clearing Corporation (``NSCC'') (such 
process, the ``Shares Clearing Process''), or a Depository Trust 
Company (``DTC'') participant. In either case, the participant must 
enter into a participant agreement with the Distributor. Creation Units 
generally will be issued in exchange for an in-kind deposit of 
securities and cash. The Index Series also may sell Creation Units on a 
``cash only'' basis in limited circumstances. An investor wishing to 
make an in-kind purchase of a Creation Unit from an Index Series will 
have to transfer to the Fund a ``Portfolio Deposit'' consisting of (i) 
a portfolio of securities that has been selected by the Adviser to 
correspond generally to the price and yield performance of the relevant 
Subject Index (``Deposit Securities''), and (ii) a cash payment to 
equalize any difference between (a) the total aggregate market value 
per Creation Unit of the Deposit Securities and (b) the net asset value 
(``NAV'') per Creation Unit of the Index Series (the ``Balancing 
Amount'').\4\ An investor purchasing a Creation Unit from an Index 
Series will be charged a fee (``Transaction Fee'') to prevent the 
dilution of the interests of the remaining shareholders resulting from 
the Index Series incurring costs in connection with the purchase of the 
Creation Units.\5\ Each Index Series will disclose

[[Page 21221]]

the maximum Transaction Fees charged by the Index Series in its 
prospectus and the method of calculating the Transaction Fees in its 
statement of additional information (``SAI'').
---------------------------------------------------------------------------

    \4\ On each business day, the Advisor will make available 
through NSCC, immediately prior to the opening of trading on the 
AMEX, the list of names and the required number of shares of each 
Deposit Security for each Index Series. The Portfolio Deposit will 
be applicable to purchases of Creation Units until the Portfolio 
Deposit composition is next announced. In addition, each Index 
Series reserves the right to permit or require the substitution of 
an amount of cash to be added to the Balancing Amount to replace any 
Deposit Security that may be unavailable or unavailable in 
sufficient quantity for delivery to the Fund upon the purchase of a 
Creation Unit, or which may be ineligible for transfer through the 
Shares Clearing Process or ineligible for trading by an NSCC 
participant or a DTC participant or the investor on whose behalf the 
participant is acting. In addition, the AMEX will disseminate every 
15 seconds throughout the trading day via the facilities of the 
Consolidated Tape Association an amount representing on a per Share 
basis the sum of the Balancing Amount effective through and 
including the prior business day, plus the current value of the 
Deposit Securities.
    \5\ In situations where an Index Series permits a purchaser to 
substitute cash for Deposit Securities, the purchaser may be 
assessed an additional fee to offset the Fund's brokerage and other 
transaction costs associated with using cash to purchase the 
requisite Deposit Securities. Brokerage commissions incurred by an 
Index Series in connection with the acquisition of any Deposit 
Securities ineligible for transfer through the systems of DTC and 
therefore ineligible for transfer through the Shares Clearing 
Process will be charged to the Index Series and will affect the 
value of all Shares of the Fund, unless the Adviser adjusts the 
Transaction Fee.
---------------------------------------------------------------------------

    5. Orders to purchase Creation Units will be placed with the 
Distributor who will be responsible for transmitting the orders to the 
Fund. The Distributor will issue confirmations of acceptance, issue 
delivery instructions to the Fund to implement the delivery of Creation 
Units, and maintain records of the orders and confirmations. The 
Distributor also will be responsible for delivering prospectuses to 
purchasers of Creation Units.
    6. Persons purchasing Creation Units from an Index Series may hold 
the Shares or sell some or all of them in the secondary market. Shares 
will be listed on the AMEX and traded in the secondary market in the 
same manner or other equity securities. One or more AMEX specialists 
will be assigned to make a market in Shares. The price of Shares traded 
on the AMEX will be based on a current bid/offer market, and each Share 
is expected to have a market value of between $20 and $170. 
Transactions involving the sale of Shares in the secondary market will 
be subject to customary brokerage commissions and charges.
    7. Applicants expect that purchasers of Creation Units will include 
institutional investors and arbitrageurs (which could include 
institutional investors). The AMEX Specialist, in providing for a fair 
and orderly secondary market for Shares, also may purchase Shares for 
use in its market-making activities on the AMEX. Applicants expect that 
secondary market purchasers of Shares will include both institutional 
and retail investors.\6\ Applicants believe that arbitrageurs and other 
institutional investors will purchase or redeem Creation Units to take 
advantage of discrepancies between Shares' market price and the Shares' 
underlying NAV. Applicants expect that this arbitrage activity will 
provide a market ``discipline'' that will result in a close 
correspondence between the price at which the Shares trade and their 
NAV. In other words, applicants do not expect the Shares to trade a 
significant premium or discount to their NAV.
---------------------------------------------------------------------------

    \6\ Shares will be registered in book-entry form only. DTC or 
its nominee will be the registered owner of all outstanding Shares. 
Records reflecting the beneficial owners of Shares will be 
maintained by DTC or its participants.
---------------------------------------------------------------------------

    8. Shares will not be individually redeemable. Shares will only be 
redeemable in Creation Unit-size aggregations through each Index 
Series.\7\ To redeem, an investor will have to accumulate enough Shares 
to constitute a Creation Unit. An investor redeeming a Creation Unit 
generally will receive (i) a portfolio of Portfolio Securities in 
effect on the date the request for redemption is made (``Redemption 
Securities''), which may not be identical to the Deposit Securities 
applicable to the purchase of Creation Units, and (ii) a ``Cash 
Redemption Payment,'' consisting of an amount calculated in the same 
manner as the Balancing Amount, although the actual amounts may differ 
if the Redemption Securities are not identical to the Deposit 
Securities on the same day. An investor also may receive the cash 
equivalent of a Redemption Security in unusual circumstances, such as a 
case in which the investor is constrained from effecting transactions 
in the Portfolio Security by regulation or policy. A redeeming investor 
will pay a Transaction Fee to offset the Fund's transaction costs, 
whether the redemption proceeds are in-kind or cash.
---------------------------------------------------------------------------

    \7\ Creation Unites may be redeemed through either NSCC or DTC. 
Investors who redeem through DTC will pay a higher Transaction Fee.
---------------------------------------------------------------------------

    9. Because each Index Series will redeem Creation Unites in-kind, 
an Index Series will not have to maintain cash reserves for 
redemptions. This will allow the assets of each Index Series to be 
committed as fully as possible to tracking its Subject Index. 
Accordingly, applicants state that each Index Series will be able to 
track its Subject Index more closely than certain other investment 
products that must allocate a greater portion of their assets for cash 
redemptions.
    10. Applicants state that neither the Fund nor any Index Series 
will be marketed or otherwise held out as an ``open-end investment 
company'' or a ``mutual fund.'' Rather, the designation of the Fund and 
the Index Series in all marketing materials will be limited to the 
terms ``exchange-traded fund,'' ``investment company,'' ``fund'' or 
``trust'' without reference to an ``open-end fund'' or ``mutual fund,'' 
except to contrast the Fund and the Index Series with a conventional 
open-end management investment company. Any marketing materials that 
describe the purchase or sale of Creation Units, or refer to 
redeemability, will prominently disclose that shares are not 
individually redeemable and that owners of Shares may tender Shares for 
redemption to the Fund in Creation Unit aggregations only. The same 
type of disclosure will be provided in each Index Series' prospectus, 
SAI and all reports to shareholders.\8\ The Fund will provide copies of 
its annual and semi-annual shareholder reports to DTC participants for 
distribution to beneficial holders of Shares.
---------------------------------------------------------------------------

    \8\ Applicants state that persons purchasing Creation Units will 
be cautioned in the prospectus or SAI that some activities on their 
part may, depending on the circumstances, result in their being 
deemed statutory underwriters and subject them to the prospectus 
delivery and liability provisions of the Securities Act of 1933 
(``Securities Act''). For example, a broker-dealer firm or its 
client may be deemed a statutory underwriter if it takes Creation 
Units after placing an order with the Distributor, breaks them down 
into the constituent Shares, and sells Shares directly to its 
customers; or if it chooses to couple the purchase of a supply of 
new Shares with an active selling effort involving solicitation of 
secondary market demand for Shares. The prospectus or SAI will state 
that whether a person is an underwriter depends upon all the facts 
and circumstances pertaining to that person's activities. The 
prospectus or SAI also will state that broker-dealer firms should 
also note that dealers who are not ``underwriters'' but are 
participating in a distribution (as contrasted to ordinary secondary 
trading transactions), and thus dealing with Shares that are part of 
an ``unsold allotment'' within the meaning of section 4(3)(C) of the 
Securities Act, would be unable to take advantage of the prospectus 
delivery exemption provided by section 4(3) of the Securities Act.
---------------------------------------------------------------------------

Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act 
granting an exemption from sections 2(a)(32), 5(a)(1), and 22(d) of the 
Act and rule 22c-1 under the Act; and under sections 6(c) and 17(b) of 
the Act granting an exemption from sections 17(a)(1) and (a)(2) of the 
Act. Applicants request relief for the Initial Index Series as well as 
Future Index Series. Any Future Index Series relying on any order 
granted pursuant to this application will comply with the terms and 
conditions stated in this application.
    2. Section 6(c) of the Act provides that the Commission may exempt 
any person, security, or transaction, or any class of persons, 
securities, or transactions, 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 5(a)(1) and 2(a)(32) of the Act

    3. Section 5(a)(1) of the Act defines an ``open-end company'' as a 
management investment company that is offering for sale or has 
outstanding any redeemable security of which it is the issuer. Section 
2(a)(32) of the Act defines a redeemable security as any security, 
other than short-term paper, under the terms of which the holder, upon 
its

[[Page 21222]]

presentation to the issuer, is entitled to receive approximately his 
proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Shares will not be individually redeemable, 
applicants request an order under section 6(c) of the Act that would 
permit the Fund to register and operate as an open-end management 
investment company and issue Shares that are redeemable in Creation 
Units. Applicants state that investors may purchase Shares in Creation 
Units from each Index Series and redeem Creation Units through each 
Index Series. Applicants further state that because the market price of 
Creation Units will be disciplined by arbitrage opportunities, 
investors generally should be able to sell Shares in the secondary 
market at approximately their NAV.

Section 22(d) of the Act and Rule 22c-1 Under the Act

    4. 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 a current public 
offering price described in the prospectus. Rule 22c-1 under the Act 
generally requires that a dealer selling, redeeming, or repurchasing a 
redeemable security do so only at a price based on its NAV. Applicants 
state that secondary market trading in Shares will take place at 
negotiated prices, not at a current offering price described in the 
prospectus, and not at a price based on NAV. Thus, purchases, and sales 
of Shares in the secondary market will not comply with section 22(d) 
and rule 22c-1. Applicants request an exemption under section 6(c) of 
the Act from these provisions.
    5. Applicants assert that the concerns sought to be addressed by 
section 22(d) of the Act and rule 22c-1 under the Act with respect to 
pricing are equally satisfied by the proposed method of pricing Shares. 
Applicants maintain that while there is little legislative history 
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to (i) prevent dilution caused by 
certain riskless-trading schemes by principal underwriters and contract 
dealers, (ii) prevent unjust discrimination or preferential treatment 
among buyers resulting from sales at different prices, and (iii) assure 
an orderly distribution of investment company 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.
    6. Applicants believe that none of these purposes will be thwarted 
by permitting Shares to trade in the secondary market at negotiated 
prices. Applicants state (i) that secondary market trading in Shares 
would not cause dilution for owners of Shares because such transactions 
do not directly involved Index Series assets, and (ii) to the extent 
different prices exist during a given trading day, or from day to day, 
these variances will occur as a result of third-party market forces, 
such as supply and demand. Therefore, applicants assert that secondary 
market transactions in Shares will not lead to discrimination or 
preferential treatment among purchasers. Finally, applicants contend 
that the proposed distribution system will be orderly because arbitrage 
activity will ensure that the difference between the market price of 
Shares and their NAV remains narrow.

Section 17(a) of the Act

    7. 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 company. Because purchases and redemptions of Creation Units 
may be ``in-kind'' rather than cash transactions, section 17(a) may 
prohibit affiliated persons of an Index Series from purchasing or 
redeeming Creation Units. Because the definition of ``affiliated 
person'' of another person in section 2(a)(3)(A) of the Act includes 
any person owning five percent or more of an issuer's outstanding 
voting securities, every purchaser of a Creation Unit will be 
affiliated with the Index Series so long as fewer than twenty Creation 
Units are in existence. In addition, any person owning more than 25% of 
the Shares of an Index Series may be deemed an affiliated person under 
section 2(a)(3)(C) of the Act. Applicants request an exemption from 
section 17(a) under sections 6(c) and 17(b), to permit these affiliated 
persons of the Index Series to purchase and redeem Creation Units.
    8. Section 17(b) authorizes the Commission to exempt a proposed 
transaction from section 17(a) if evidence establishes that the terms 
of the transaction, including the consideration to be paid or received, 
are reasonable and fair and do not involve overreaching, and the 
proposed transaction is consistent with the policies of the registered 
investment company and the general provisions of the Act. Applicants 
contend that no useful purpose would be served by prohibiting persons 
with the types of affiliations described above from purchasing or 
redeeming Creation Units. The deposit procedure for in-kind purchases 
and redemption procedures for in-kind redemptions will be the same for 
all purchases and redemptions, and Deposit Securities and Redemption 
Securities will be valued under the same objective standards applied to 
valuing the Portfolio Securities. Therefore, applicants state that in-
kind purchases and redemptions will afford no opportunity for an 
affiliated person of an Index Series to effect a transaction 
detrimental to the other holders of Shares. Applicants also believe 
that in-kind purchases and redemptions will not result in abusive self-
dealing or overreaching by affiliated persons of the Index Series.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. Applicants will not register a Future Index Series by means of 
filing a post-effective amendment to the Fund's registration statement 
or by any other means, unless (i) applicants have requested and 
received with respect to such Future Index Series, either exemptive 
relief from the Commission or a no-action letter from the Division of 
Investment Management of the Commission, or (ii) the Future Index 
Series will be listed on a national securities exchange without the 
need for a filing pursuant to rule 19b-4 under the Exchange Act.
    2. Each Index Series' prospectus will clearly disclose that, for 
purposes of the Act, Shares are issued by the Index Series and that the 
acquisition of Shares by investment companies is subject to the 
restrictions of section 12(d)(1) of the Act.
    3. As long as the Fund operates in reliance on the requested order, 
the Shares will be listed on a national securities exchange.
    4. Neither the Fund nor any Index Series will be advertised or 
marketed as an open-end fund or mutual fund. Each Index Series' 
prospectus will prominently disclose that Shares are not individually 
redeemable shares and will disclose that the owners of Shares may 
acquire those Shares from the Index Series and tender those Shares for 
redemption to the Index Series in Creation Units only. Any advertising 
material that describes the purchase or sale of Creation Units or 
refers to redeemability will prominently disclose that Shares are not 
individually redeemable and that owners of Shares may acquire those 
Shares from the Index Series and tender those Shares for

[[Page 21223]]

redemption to the Index Series in Creation Units only.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-9939 Filed 4-19-00; 8:45 am]
BILLING CODE 8010-01-M