Document ID: SEC-2006-1338-0001
Agency: sec
Document Type: Notice
Title: SSgA Funds Management, Inc., et al.; Notice of Application
Posted Date: 2006-10-16T04:00Z

[Federal Register: October 16, 2006 (Volume 71, Number 199)]
[Notices]               
[Page 60775-60781]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16oc06-106]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27511; 812-12993]

 
SSgA Funds Management, Inc., et al.; Notice of Application

October 6, 2006.
AGENCY: Securities and Exchange Commission.

ACTION: Notice of an application for an order under section 12(d)(1)(J) 
of the Investment Company Act of 1940 (``Act'') for an exemption from 
sections 12(d)(1)(A) and (B), under sections 6(c) and 17(b) of the Act 
for an exemption from sections 17(a)(1) and 17(a)(2) of the Act, and 
under section 6(c) of the Act to amend a previous order.

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    Summary of the Application: The order would permit certain 
management investment companies and unit investment trusts (``UITs'') 
registered under the Act to acquire shares (``Shares'') of certain 
open-end management investment companies and UITs registered under the 
Act that operate as exchange-traded funds and are outside of the same 
group of investment companies as the acquiring investment companies. 
The order also would amend a prior order (the ``Prior Order'') \1\ to 
permit: (a) Dealers to sell Shares to purchasers in the secondary 
market unaccompanied by a prospectus when prospectus delivery is not 
required by the Securities Act of 1933 (``Securities Act''); (b) under 
certain circumstances, exchange-traded funds that track certain foreign 
equity securities indexes to pay redemption proceeds more than seven 
days after the tender of Shares (in large aggregations called 
``Creation Units'') for redemption; and (c) additional exchange-traded 
funds that track certain foreign equity securities indexes to rely on 
the Prior Order. Further, the order would add certain representations 
and terms concerning the operations of exchange-traded funds that track 
certain foreign equity securities indexes, replace certain conditions, 
and add a condition, to the Prior Order.
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    \1\ State Street Bank and Trust Company, et al., Investment 
Company Act Release Nos. 24631 (Sept. 1, 2000) (notice) and 24666 
(Sept. 25, 2000) (``Prior Order''), superseding The Select Sector 
SPDR Trust, et al., Investment Company Act Release Nos. 23492 (Oct. 
20, 1998) (notice) and 23534 (Nov. 13, 1998) (order).
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    Applicants: SSgA Funds Management, Inc. (the ``Adviser''), ALPS 
Distributors, Inc., and State Street Global Markets, LLC (each, a 
``Distributor'' and together, the ``Distributors''), The Select Sector 
SPDR [supreg]Trust (``Select Sector Trust''), streetTRACKS [supreg] 
Series Trust (``Series Trust''), and streetTRACKS [supreg] Index Shares 
Funds (``Index Shares Funds'') (each of Select Sector Trust, Series 
Trust, and Index Shares Funds, a ``Trust'' and collectively, the 
``Trusts'').

DATES: The application was filed on July 29, 2003 and amended on August 
3, 2006. Applicants have agreed to file an amendment during the notice 
period, the substance of which is reflected in the notice.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested persons may request

[[Page 60776]]

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 October 
31, 2006, 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, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-1090; Applicants, c/o Scott M. 
Zoltowski, Esq., State Street Bank and Trust Company, Two Avenue de 
Lafayette-6th Floor, Boston, Massachusetts 02111.

FOR FURTHER INFORMATION CONTACT: Laura J. Riegel, Senior Counsel, at 
(202) 551-6873, or Michael W. Mundt, Senior Special Counsel, at (202) 
551-6821 (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 
Public Reference Branch, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-0102 (tel. 202-551-5850).

Applicants' Representations

    1. The Trusts are open-end management investment companies 
registered under the Act, each of which consists of separate series 
that seek to provide investment results that correspond generally to 
the price and yield performance or total return of, its specified 
equity securities index (an ``Index'') and operate as exchange-traded 
funds. Index Shares Funds is the only Trust that currently offers 
series based on Indexes comprised of foreign equity securities 
(``Foreign Indexes'').\2\ The Adviser is registered as an investment 
adviser under the Investment Advisers Act of 1940 (``Advisers Act'') 
and serves as investment adviser to each Trust. ALPS Distributors, 
Inc., a broker-dealer registered under the Securities Exchange Act of 
1934 (the ``Exchange Act'') serves as the principal underwriter for 
each series of Select Sector Trust. State Street Global Markets, LLC, a 
broker-dealer registered under the Exchange Act, serves as the 
principal underwriter for each series of Series Trust and Index Shares 
Funds.
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    \2\ These series, streetTRACKS [supreg] Dow Jones STOXX 50 Fund 
and streetTRACKS [supreg] Dow Jones EURO STOXX 50 Fund, currently 
operate in reliance on an order that is not the Prior Order. If the 
requested order is granted, those series will operate in reliance on 
the Prior Order, as amended.
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    2. Applicants request an exemption under section 12(d)(1)(J) of the 
Act to permit certain management investment companies and UITs 
registered under the Act to acquire Shares beyond the limitations in 
sections 12(d)(1)(A) and (B). Applicants request that the relief apply 
to (a) each open-end management investment company or UIT registered 
under the Act that operates as an exchange-traded fund, is currently or 
subsequently part of the same ``group of investment companies'' as the 
Trusts within the meaning of section 12(d)(1)(G)(ii) of the Act, and is 
advised or sponsored by the Adviser or an entity controlling, 
controlled by or under common control with the Adviser (such registered 
management investment companies are referred to as ``Open-End ETFs''; 
such registered UITs are referred to as ``UIT ETFs''; Open-End ETFs and 
UIT ETFs are collectively referred to as ``ETFs''),\3\ as well as any 
principal underwriter of an Open-End ETF or broker or dealer registered 
under the Exchange Act (``Broker'') selling Shares of an ETF to an 
Investing Fund (as defined below); and (b) each management investment 
company or UIT registered under the Act that is not part of the same 
``group of investment companies'' as the ETFs within the meaning of 
section 12(d)(1)(G)(ii) of the Act and that enters into a participation 
agreement with an ETF (such management investment companies are 
referred to as ``Investing Management Companies''; such UITs are 
referred to as ``Investing Trusts,'' and Investing Management Companies 
and Investing Trusts are collectively referred to as ``Investing 
Funds'').\4\ Each Investing Trust will have a sponsor (``Sponsor''). 
Each Investing Management Company will be advised by an investment 
adviser within the meaning of section 2(a)(20)(A) of the Act 
(``Investing Fund Adviser'') and may be advised by investment 
adviser(s) within the meaning of section 2(a)(20)(B) of the Act 
(``Investing Fund Subadviser''). Any investment adviser to any 
Investing Management Company will be registered as an investment 
adviser under the Advisers Act or exempt from registration. In 
addition, applicants request relief from sections 17(a)(1) and 17(a)(2) 
of the Act to permit the ETFs that are or become affiliated persons of 
an Investing Fund to sell Shares to, and redeem Shares from the 
Investing Fund.
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    \3\ Investing Funds do not include the ETFs. All existing ETFs 
are open-end management investment companies.
    \4\ 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 ETFs and not in any other registered investment 
company.
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    3. Applicants also request relief under section 6(c) of the Act to 
amend the Prior Order to: (a) Add exemptions from sections 22(e) and 
24(d) of the Act; (b) replace certain conditions and add a new 
condition, to the Prior Order; (c) add certain terms and 
representations concerning the creation and redemption of Creation 
Units of ETFs that track Foreign Indexes (``Foreign ETFs''), as 
described in the application; (d) permit Foreign ETFs to invest in 
depositary receipts as component securities and/or alternatives to 
component securities of the relevant Foreign Index \5\; and (e) permit 
additional series of Index Shares Funds that would track Foreign 
Indexes (``New Foreign ETFs''; included in the term ``Foreign ETFs'') 
\6\ to rely on the Prior Order. Applicants assert that the New Foreign 
ETFs will operate in a manner substantially similar to the existing 
Foreign ETFs and will comply with all of the terms and conditions of 
the Prior Order, as amended.
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    \5\ Any depositary receipts held by a Foreign ETF will be 
negotiable securities that represent ownership of a non-U.S. 
company's publicly traded stock. Depositary receipts will typically 
be American depositary receipts, but may include Global depositary 
receipts, and Euro depositary receipts. The Adviser may include 
depositary receipts on the list of deposit securities of an ETF when 
holding the depositary receipt will improve liquidity, tradability, 
or settlement for a Foreign ETF and may treat the depositary receipt 
of a component security of the Foreign Index as a component security 
for purposes of applicants' representations related to the 
percentage of assets of a Foreign ETF that will be invested in 
component securities.
    \6\ The Foreign Indexes for the New Foreign ETFs are S&P/
Citigroup BMI World ex-US Index, S&P/Citigroup BMI EPAC Index, S&P/
Citigroup BMI Europe Index, S&P/Citigroup BMI Asia Pacific Index, 
S&P/Citigroup BMI Emerging Markets Index, S&P/Citigroup BMI Latin 
America Index, S&P/Citigroup BMI Middle-East & Africa Index, S&P/
Citigroup BMI European Emerging Index, S&P/Citigroup BMI Asia 
Pacific Emerging Index, S&P/Citigroup BMI China Index, S&P/Citigroup 
BMI World ex-US Cap Range <  2 Billion USD Index, MSCI ACWI ex-US 
Index, Russell/Nomura PRIMETM Index, Russell/Nomura Small 
CapTM Index, Dow Jones Wilshire ex-US Real Estate 
Securities Index, and Macquarie Global Infrastructure 100 Index.
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Applicants' Legal Analysis

    1. 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, from any provision of the

[[Page 60777]]

Act, 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. Section 12(d)(1)(J) of the Act provides that the 
Commission may exempt any person, security or transaction, or any class 
or classes thereof, from any of the provisions of section 12(d)(1) if 
the exemption is consistent with the public interest and the protection 
of investors. Section 17(b) of the Act 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 fair and reasonable and do 
not involve overreaching on the part of any person concerned, and the 
proposed transaction is consistent with the policies of the registered 
investment company and the general provisions of the Act.

Section 12(d)(1) of the Act

    2. 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 Exchange Act, 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 acquired 
company's voting stock to be owned by investment companies generally. 
Applicants seek an exemption under section 12(d)(1)(J) to permit the 
Investing Funds to acquire Shares in an ETF beyond the limits of 
section 12(d)(1)(A) and Open-end ETFs and any principal underwriter of 
an Open-end ETF or Broker to sell Shares of Open-end ETFs to the 
Investing Funds beyond the limits set forth in sections 12(d)(1)(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 believe that neither the Investing Funds nor an 
Investing Fund Affiliate would be able to exert undue influence over 
the ETFs.\7\ To limit the control that an Investing Fund may have over 
an ETF, applicants propose a condition prohibiting the Investing Fund 
Adviser or Sponsor, any person controlling, controlled by, or under 
common control with the Investing Fund Adviser or Sponsor, and any 
investment company or issuer that would be an investment company but 
for sections 3(c)(1) or 3(c)(7) of the Act that is advised or sponsored 
by the Investing Fund Adviser or Sponsor, or any person controlling, 
controlled by, or under common control with the Investing Fund Adviser 
or Sponsor (``Investing Fund Adviser Group'') from controlling 
(individually or in the aggregate) an ETF within the meaning of section 
2(a)(9) of the Act. The same prohibition would apply to the Investing 
Fund Subadviser, any person controlling, controlled by or under common 
control with the Investing Fund Subadviser, and 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) 
advised or sponsored by the Investing Fund Subadviser or any person 
controlling, controlled by or under common control with the Investing 
Fund Subadviser (``Investing Fund Subadviser Group''). Applicants 
propose other conditions to limit the potential for undue influence 
over the ETFs, including that no Investing Fund or Investing Fund 
Affiliate (except to the extent it is acting in its capacity as an 
investment adviser to an Open-end ETF or sponsor to a UIT ETF) will 
cause an ETF to purchase a security in any offering of securities 
during the existence of any underwriting or selling syndicate of which 
a principal underwriter is an Underwriting Affiliate (``Affiliated 
Underwriting''). An ``Underwriting Affiliate'' is a principal 
underwriter in any underwriting or selling syndicate that is an 
officer, director, member of an advisory board, Investing Fund Adviser, 
Investing Fund Subadviser, employee or Sponsor of the Investing Fund, 
or a person which any such officer, director, member of an advisory 
board, Investing Fund Adviser, Investing Fund Subadviser, employee or 
Sponsor is an affiliated person (except any person whose relationship 
to the ETF is covered by section 10(f) of the Act is not an 
Underwriting Affiliate).
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    \7\ An ``Investing Fund Affiliate'' is an Investing Fund 
Adviser, Investing Fund Subadviser, Sponsor, promoter, principal 
underwriter of an Investing Fund, and any person controlling, 
controlled by, or under common control with any of those entities. 
An ``ETF Affiliate'' is the investment adviser(s), promoter, 
sponsor, and principal underwriter of an ETF, and any person 
controlling, controlled by, or under common control with any of 
those entities.
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    5. Applicants do not believe the proposed arrangement will involve 
excessive layering of fees. 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 to the 
Investing Management Company are based on services provided that will 
be in addition to, rather than duplicative of, services provided under 
the advisory contract(s) of any Open-end ETF in which the Investing 
Management Company may invest. In addition, an Investing Fund Adviser 
or trustee (``Trustee'') or Sponsor of an Investing Trust will waive 
fees otherwise payable to it by the Investing Management Company or 
Investing Trust, as applicable, in an amount at least equal to any 
compensation (including fees received pursuant to any plan adopted by 
an Open-end ETF under rule 12b-1 under the Act) received from an ETF by 
the Investing Fund Adviser, Trustee or Sponsor or an affiliated person 
of the Investing Fund Adviser, Trustee or Sponsor, other than advisory 
fees paid to the Adviser or its affiliated person by an ETF, in 
connection with the investment by the Investing Management Company or 
Investing Trust, as applicable, in the ETF. Applicants state that any 
sales charges or service fees charged with respect to shares of an 
Investing Fund will not exceed the limits applicable to a fund of funds 
set forth in Conduct Rule 2830 of the NASD.
    6. Applicants submit that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that no ETF may 
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. Applicants also represent that to 
ensure that Investing Funds comply with the terms and conditions of the 
requested relief from section 12(d)(1), any Investing Fund that intends 
to invest in an ETF in reliance on the requested order will be required 
to enter into a participation agreement between the relevant Trust on 
behalf of the ETF(s) and the Investing Fund. The participation 
agreement will require the Investing Fund to adhere to the terms

[[Page 60778]]

and conditions of the requested order. The participation agreement also 
will include an acknowledgement from the Investing Fund that it may 
rely on the order only to invest in the ETFs and not in any other 
investment company. The participation agreement will further require 
any Investing Fund that exceeds the 5% or 10% limitations in sections 
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.

Section 17(a) of the Act

    7. 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.
    8. Applicants seek relief from section 17(a) to permit an ETF that 
is an affiliated person of an Investing Fund because the Investing Fund 
holds 5% or more of the ETF's Shares to sell its Shares to and redeem 
its Shares from an Investing Fund (and to engage in in-kind 
transactions in conjunction with those sales and redemptions).\8\ 
Applicants believe that any proposed transactions directly between ETFs 
and Investing Funds will be consistent with the policies of each ETF 
and Investing Fund. The participation agreement will require any 
Investing Fund that purchases Creation Units directly from an ETF to 
represent that the purchase of Creation Units from an ETF by an 
Investing Fund will be accomplished in compliance with the investment 
restrictions of the Investing Fund and will be consistent with the 
investment policies set forth in the Investing Fund's registration 
statement.\9\
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    \8\ Applicants acknowledge that receipt of any compensation by 
(a) an affiliated person of an Investing Fund, or an affiliated 
person of such person, for the purchase by the Investing Fund of 
shares of an ETF or (b) an affiliated person of an ETF, or an 
affiliated person of such person, for the sale by the ETF of its 
shares to an Investing Fund is subject to section 17(e) of the Act. 
The participation agreement also will include this acknowledgment.
    \9\ Applicants believe that an Investing Fund will purchase 
Shares in the secondary market and will not purchase or redeem 
Creation Units directly from an ETF. Nonetheless, an Investing Fund 
that owns 5% or more of an ETF could seek to transact in Creation 
Units directly with an ETF pursuant to the section 17(a) relief 
requested.
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Section 22(e) of the Act

    9. Applicants seek to amend the Prior Order to add relief from 
section 22(e) of the Act. Section 22(e) generally prohibits a 
registered investment company from suspending the right of redemption 
or postponing the date of payment of redemption proceeds for more than 
seven days after the tender of a security for redemption. The principal 
reason for the requested exemption is that settlement of redemptions 
for the Foreign ETFs is contingent not only on the settlement cycle of 
the United States market, but also on currently practicable delivery 
cycles in local markets for underlying foreign securities held by the 
Foreign ETFs. Applicants state that local market delivery cycles for 
transferring certain foreign securities to investors redeeming Creation 
Units, together with local market holiday schedules, will under certain 
circumstances require a delivery process in excess of seven calendar 
days for the Foreign ETFs. Applicants request relief under section 6(c) 
from section 22(e) in such circumstances to allow the Foreign ETFs to 
pay redemption proceeds up to 14 calendar days after the tender of a 
Creation Unit for redemption. At all other times and except as 
disclosed in the relevant prospectus and/or statement of additional 
information (``SAI''), applicants expect that each Foreign ETF will be 
able to deliver redemption proceeds within seven days.\10\ With respect 
to future Foreign ETFs, applicants seek the same relief from section 
22(e) only to the extent that circumstances similar to those described 
in the application exist.
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    \10\ Rule 15c6-1 under the Exchange Act requires that most 
securities transactions be settled within three business days of the 
trade. Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will affect any obligations applicants 
may have under rule 15c6-1.
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    10. Applicants state that section 22(e) was designed to prevent 
unreasonable, undisclosed and unforeseen delays in the payment of 
redemption proceeds. Applicants assert that the requested relief will 
not lead to the problems that section 22(e) was designed to prevent. 
Applicants state that the SAI will disclose those local holidays (over 
the period of at least one year following the date of the SAI), if any, 
that are expected to prevent the delivery of redemption proceeds in 
seven calendar days, and the maximum number of days needed to deliver 
the proceeds for the relevant Foreign ETF.

Section 24(d) of the Act

    11. Applicants seek to amend the Prior Order to add relief from 
section 24(d) of the Act. Section 24(d) provides, in relevant part, 
that the prospectus delivery exemption provided to dealer transactions 
by section 4(3) of the Securities Act does not apply to any transaction 
in a redeemable security issued by an open-end investment company. 
Applicants request relief under section 6(c) from section 24(d) to 
permit dealers selling Shares to rely on the prospectus delivery 
exemption provided by section 4(3) of the Securities Act.\11\
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    \11\ Applicants state that they are not seeking seek relief from 
the prospectus delivery requirement for non-secondary market 
transactions, such as when an investor purchases Shares from the 
relevant Trust or an underwriter. Applicants state that the 
prospectus will caution broker-dealers and others purchasing 
Creation Units that some activities on their part, depending on the 
circumstances, may result in their being deemed statutory 
underwriters and subject them to the prospectus delivery and 
liability provisions of the Securities Act. For example, a broker-
dealer firm and/or its client may be deemed a statutory underwriter 
if it takes Creation Units after placing an order with the relevant 
Distributor, breaks them down into the constituent Shares and sells 
them directly to its customers, or if it chooses to couple the 
creation of new Shares with an active selling effort involving 
solicitation of secondary market demand for Shares. The prospectus 
will state that whether a person is an underwriter depends upon all 
the facts and circumstances pertaining to that person's activities. 
The prospectus also will state that dealers who are not 
``underwriters'' but are participating in a distribution (as 
contrasted to ordinary secondary market trading transactions), and 
thus dealing with Shares that are part of an ``unsold allotment'' 
within the meaning of section 4(3)(C) of the Securities Act, would 
be unable to take advantage of the prospectus delivery exemption 
provided by section 4(3) of the Securities Act.
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    12. Applicants state that Shares are bought and sold in the 
secondary market in the same manner as closed-end fund shares. 
Applicants note that transactions in closed-end fund shares are not 
subject to section 24(d), and thus closed-end fund shares are sold in 
the secondary market without a prospectus. Applicants contend that 
Shares likewise merit a reduction in the unnecessary compliance costs 
and regulatory burdens resulting from the imposition of the prospectus 
delivery obligations in the secondary market. Because Shares will be 
listed on the American Stock Exchange, the New York Stock Exchange or 
another national securities exchange as defined in section 2(a)(26) of 
the Act (each, a ``Stock Exchange''), prospective investors will have 
access to information about the product over and above what is normally 
available about an open-end security. Applicants state that information 
regarding market price and volume is available on a real time basis 
throughout the day on brokers' computer screens and other electronic 
services. The previous day's price and volume information is published 
daily in the financial section of newspapers.

[[Page 60779]]

In addition, the ETFs' websites will include a downloadable form of the 
prospectus for each ETF and additional quantitative information that is 
updated on a daily basis, including daily trading volume, closing 
price, the net asset value (``NAV'') for each ETF and information about 
the premiums and discounts at which the Shares have traded.
    13. Applicants will arrange for broker-dealers selling Shares in 
the secondary market to provide purchasers with a product description 
(``Product Description'') that describes, in plain English, the 
relevant Trust and the Shares it issues. Applicants state that a 
Product Description is not intended to substitute for a full 
prospectus. Applicants state that the Product Description will be 
tailored to meet the information needs of investors purchasing Shares 
in the secondary market.

Conditions to Prior Order

    14. Applicants also seek to amend the Prior Order by replacing 
existing conditions 2, 5, and 6 to the Prior Order and adding a new 
condition.. Existing condition 2 to the Prior Order currently provides 
that each ETF's prospectus will clearly disclose that, for purposes of 
the Act, shares are issued by the ETF and that the acquisition of 
Shares by investment companies is subject to the restrictions of 
section 12(d)(1) of the Act. In light of the requested order to permit 
Investing Funds to invest in ETFs in excess of the limits of section 
12(d)(1), applicants wish to replace this condition in the Prior Order 
with condition 13, as stated below.
    15. Existing condition 5 to the Prior Order provides that the 
website for each Trust, which will be publicly available at no charge, 
will contain the following information, on a per Share basis, for each 
ETF: (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.
    16. Existing condition 6 to the Prior Order provides that the 
prospectus and annual report for each ETF will also include: (a) The 
information listed in existing condition 5(b), (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 Share basis 
for one, five and ten year periods (or life of the ETFs): (i) The 
cumulative total return and the average annual total return based on 
NAV and market price, and (ii) the cumulative total return of the 
relevant Index.
    17. Conditions 14 and 15, as stated below, would replace conditions 
5 and 6 to the Prior Order, respectively. Under the new conditions, 
each ETF would use the mid-point of the bid/ask spread at the time of 
calculation of its NAV (the ``Bid/Ask Price'') instead of the Shares'' 
closing price for certain aspects of the data presentation required by 
the conditions.\12\
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    \12\ The Bid/Ask Price of an ETF is determined using the highest 
bid and the lowest offer on the Stock Exchange as of the time of the 
calculation of such ETF's NAV. The records relating to Bid/Ask 
Prices will be retained by the ETFs and their service providers.
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Applicants' Conditions

    Applicants agree that any order of the Commission granting the 
requested relief from sections 12(d)(1)(A) and (B) will be subject to 
the following conditions:
    1. The members of the Investing Fund Adviser Group will not control 
(individually or in the aggregate) an ETF within the meaning of section 
2(a)(9) of the Act. The members of an Investing Fund Subadviser Group 
will not control (individually or in the aggregate) an ETF 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 ETF, the Investing Fund Adviser 
Group or the Investing Fund Subadviser Group, each in the aggregate, 
becomes a holder of more than 25 percent of the outstanding voting 
securities of an ETF, it will vote its shares of the ETF in the same 
proportion as the vote of all other holders of the ETF's shares. This 
condition does not apply to the Investing Fund Subadviser Group with 
respect to an ETF for which the Investing Fund Subadviser or a person 
controlling, controlled by, or under common control with the Investing 
Fund Subadviser acts as the investment adviser within the meaning of 
section 2(a)(20)(A) of the Act (in the case of an Open-end ETF) or as 
the sponsor (in the case of a UIT ETF).
    2. No Investing Fund or Investing Fund Affiliate will cause any 
existing or potential investment by the Investing Fund in an ETF to 
influence the terms of any services or transactions between the 
Investing Fund or an Investing Fund Affiliate and the ETF or an ETF 
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 
Investing Fund Adviser and any Investing Fund 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 ETF or an ETF 
Affiliate in connection with any services or transactions.
    4. Once an investment by an Investing Fund in the securities of an 
ETF exceeds the limits in section 12(d)(1)(A)(i) of the Act, the board 
of directors/trustees of an Open-end ETF, including a majority of the 
disinterested board members, will determine that any consideration paid 
by an Open-end ETF 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 ETF; (ii) is within the range of 
consideration that the Open-end ETF 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. This condition does not apply with respect to any 
services or transactions between an Open-end ETF and its investment 
adviser(s), or any person controlling, controlled by or under common 
control with such investment adviser(s).
    5. The Investing Fund Adviser, or Trustee or Sponsor of an 
Investing Trust, will waive fees otherwise payable to it by the 
Investing Management Company or Investing Trust, as applicable, in an 
amount at least equal to any compensation (including fees received 
pursuant to any plan adopted by an Open-end ETF under rule 12b-1 under 
the Act) received from an ETF by the Investing Fund Adviser, Trustee or 
Sponsor, or an affiliated person of the Investing Fund Adviser, Trustee 
or Sponsor, other than any advisory fees paid to the Investing Fund 
Adviser, Trustee or Sponsor, or its affiliated person by the ETF, in 
connection with the investment by the Investing Management Company or 
Investing Trust, as applicable, in the ETF. Any Investing Fund 
Subadviser will waive fees otherwise payable to the Investing Fund 
Subadviser, directly or indirectly, by the Investing Management Company 
in an amount at least equal to any compensation received from an ETF by 
the Investing Fund Subadviser, or an affiliated person of the Investing 
Fund Subadviser, other than any advisory fees paid to the Investing 
Fund Subadviser

[[Page 60780]]

or its affiliated person by the ETF, in connection with any investment 
by the Investing Management Company in the ETF made at the direction of 
the Investing Fund Subadviser. In the event that the Investing Fund 
Subadviser waives fees, the benefit of the waiver will be passed 
through to the Investing Management Company.
    6. No Investing Fund or Investing Fund Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to an 
Open-end ETF or sponsor to a UIT ETF) will cause an ETF to purchase a 
security in any Affiliated Underwriting.
    7. The board of an Open-end ETF, including a majority of the 
disinterested board members, will adopt procedures reasonably designed 
to monitor any purchases of securities by the Open-end ETF in an 
Affiliated Underwriting, once an investment by an Investing Fund in the 
securities of the Open-end ETF exceeds the limit of section 
12(d)(1)(A)(i) of the Act, including any purchases made directly from 
an Underwriting Affiliate. The board of the Open-end ETF 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 the Open-end ETF. The board of the Open-end ETF 
will consider, among other things: (i) Whether the purchases were 
consistent with the investment objectives and policies of the Open-end 
ETF; (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-ETF in Affiliated Underwritings and the amount purchased 
directly from an Underwriting Affiliate have changed significantly from 
prior years. The board of the Open-end ETF will take any appropriate 
actions based on its review, including, if appropriate, the institution 
of procedures designed to assure that purchases of securities in 
Affiliated Underwritings are in the best interest of shareholders.
    8. Each Open-end ETF 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 of not less than six years from 
the end of the fiscal year in which any purchase in an Affiliated 
Underwriting occurred, the first two years in an easily accessible 
place, a written record of each purchase of securities in Affiliated 
Underwritings once an investment by an Investing Fund in the securities 
of the Open-end ETF exceeds the limit of section 12(d)(1)(A)(i) of the 
Act, 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 determinations of the board 
of the Open-end ETF were made.
    9. Before investing in an ETF in excess of the limit in section 
12(d)(1)(A), each Investing Fund and the ETF will execute an agreement 
stating, without limitation, that their boards of directors or trustees 
and their investment adviser(s), or their sponsors or trustees, 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 a Open-end ETF in excess of the limit in 
section 12(d)(1)(A)(i), an Investing Fund will notify the Open-end ETF 
of the investment. At such time, the Investing Fund will also transmit 
to the Open-end ETF a list of the names of each Investing Fund 
Affiliate and Underwriting Affiliate. The Investing Fund will notify 
the Open-end ETF of any changes to the list of the names as soon as 
reasonably practicable after a change occurs. The ETF and the Investing 
Fund will maintain and preserve a copy of the order, the agreement, 
and, in the case of an Open-end ETF, the list with any updated 
information for the duration of the investment and for a period of not 
less than six years thereafter, 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 independent directors or trustees, 
will find that the advisory fees charged under such advisory contract 
are based on services provided that will be in addition to, rather than 
duplicative of, the services provided under the advisory contract(s) of 
any Open-end ETF 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 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 NASD.
    12. No ETF 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.
    Applicants agree that conditions 2, 5 and 6 to the Prior Order, 
respectively, will be replaced with the following conditions:
    13. Each ETF's prospectus and Product Description will clearly 
disclose that, for purposes of the Act, Shares are issued by the ETF, 
which is a registered investment company, and the acquisition of 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 an ETF beyond the 
limits of section 12(d)(1), subject to certain terms and conditions, 
including that the registered investment company enter into an 
agreement with the ETF regarding the terms of the investment.
    14. The Web site for each ETF, which is and will be publicly 
accessible at no charge, will contain the following information, on a 
per Share basis, for each ETF: (a) The prior business day's NAV and the 
Bid/Ask Price, and a calculation of the premium or discount of the Bid/
Ask Price against such NAV; and (b) data in chart 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 
each ETF will state that the Web site for the ETF has information about 
the premiums and discounts at which the ETF's Shares have traded.
    15. The prospectus and annual report for each ETF will also 
include: (a) Data in chart format 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 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 Share basis for one, five and ten 
year periods (or life of the ETF): (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 relevant Index.
    Applicants agree to add the following condition to the Prior Order:
    16. Before an ETF may rely on the order, the Commission will have 
approved, pursuant to rule 19b-4 under the Exchange Act, a Stock 
Exchange rule

[[Page 60781]]

requiring Stock Exchange members and member organizations effecting 
transactions in Shares of such ETF to deliver a Product Description to 
purchasers of Shares.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E6-17060 Filed 10-13-06; 8:45 am]

BILLING CODE 8011-01-P