Document ID: SEC-2007-0308-0001
Agency: sec
Document Type: Notice
Title: NASDAQ-100 Trust, Series 1, et al.; Notice of Application
Posted Date: 2007-03-02T05:00Z

[Federal Register: March 2, 2007 (Volume 72, Number 41)]
[Notices]               
[Page 9594-9599]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02mr07-101]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC--27740; 812-13345]

 
NASDAQ-100 Trust, Series 1, et al.; Notice of Application

February 27, 2007.
AGENCY: Securities and Exchange Commission.

ACTION: Notice of application for an order under section 6(c) of the 
Investment Company Act of 1940 (``Act'') for an exemption from sections 
2(a)(32), 4(2), 22(d), 24(d) and 26(a)(2)(C) of the Act and rule 22c-1 
under the Act; under sections 6(c) and 17(b) of the Act for an 
exemption from sections 17(a)(1) and (a)(2) of the Act; and under 
section 17(d) of the Act and rule 17d-1 under the Act to permit certain 
joint transactions.

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Summary of Application: Applicants request an order to permit (a) 
Nasdaq-100 Trust, Series 1 (``Trust''), a unit investment trust whose 
portfolio consists of the component stocks of the Nasdaq-100 Index 
(``Index''), to issue shares (``Nasdaq-100 Shares'') that are only 
redeemable in large aggregations; (b) secondary market transactions in 
Nasdaq-100 Shares to occur at negotiated prices; (c) dealers to sell 
Nasdaq-100 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''); (d) the Trust, rather than 
the Sponsor (defined below), to bear certain expenses associated with 
the maintenance of the Trust; (e) certain ``affiliated persons'' of the 
Trust to deposit securities into, and receive securities from, the 
Trust in connection with the purchase and redemption of Nasdaq-100 
Shares; and (f) the Trust to reimburse the Sponsor for payment of an 
annual licensing fee to The Nasdaq Stock Market, Inc. (``Nasdaq'').

Applicants: The Trust, PowerShares Capital Management LLC 
(``PowerShares,'' together with its successor in interest \1\ and with 
any person, directly or indirectly, controlling, controlled by, or 
under common control with, PowerShares, ``Sponsor''), and ALPS 
Distributors, Inc. (``Distributor'').
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    \1\ ``Successors in interest'' means any entity or entities that 
result from a reorganization into another jurisdiction or a change 
in the type of business organization.

Filing Dates: The application was filed on November 20, 2006. 
Applicants have agreed to file an amendment during the notice period, 
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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 March 19, 2007, 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: H. Bruce Bond, 
PowerShares Capital Management LLC, 301 West Roosevelt Road, Wheaton, 
IL 60187.

FOR FURTHER INFORMATION CONTACT: Jaea F. Hahn, Senior Counsel, at (202) 
551-6870, or Janet M. Grossnickle, Branch Chief, at (202) 551-6821 
(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, 100 F Street, NE., Washington, DC 
20549-0102 (tel. 202-551-5850).

Applicants' Representations

    1. The Trust is a unit investment trust (``UIT'') organized under 
the laws of the

[[Page 9595]]

state of New York. The Sponsor is a wholly owned subsidiary of AIM 
Management Group Inc.\2\ The Bank of New York acts as trustee to the 
Trust (``Trustee'') pursuant to a trust agreement entered into by and 
between the Trustee and the Initial Sponsor of the Trust, as amended 
(the ``Trust Agreement'').\3\ The Distributor is registered as a 
broker-dealer under the Securities Exchange Act of 1934 (``Exchange 
Act'') and serves, on an agency basis, as principal underwriter of the 
Trust.
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    \2\ On October 18, 2006, PowerShares entered into a Transaction 
Agreement (``Transaction Agreement'') with Nasdaq, the parent of 
Nasdaq Global Funds, Inc. (formerly named Nasdaq AMEX Investment 
Product Services, Inc., and later renamed Nasdaq Financial Product 
Services, Inc., the ``Initial Sponsor'') pursuant to which the 
Initial Sponsor will transfer sponsorship of the Trust to 
PowerShares. In connection with the Transaction Agreement, 
PowerShares is seeking exemptive relief substantially identical to 
the relief granted to the Trust pursuant to a Commission order 
(Investment Company Act Release No. 25795 (Feb. 22, 1999), as 
amended by Investment Company Act Release No. 26415 (Apr. 9, 2004)). 
The transfer of sponsorship of the Trust from the Initial Sponsor to 
PowerShares is contingent upon receipt of the exemptive relief 
requested in the application.
    \3\ If the relief requested herein is granted, the Initial 
Sponsor will assign its duties under the Trust Agreement to 
PowerShares.
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    2. The Trust holds a portfolio of securities (``Portfolio 
Securities'') consisting of substantially all of the securities in 
substantially the same weighting as the component securities of the 
Index (the ``Index Securities''). The Index is a ``modified 
capitalization-weighted'' index of securities issued by the 100 largest 
and most actively traded non-financial companies listed on the Nasdaq 
Global Select Market or the Nasdaq Global Market. The Index was first 
published in 1985.
    3. Nasdaq-100 Shares, units of beneficial interest in the Trust, 
are designed to provide investors with an instrument that closely 
tracks the Index, trades like a share of common stock, and pays 
periodic dividends proportionate to those paid by the Portfolio 
Securities.\4\ Applicants believe that Nasdaq-100 Shares afford 
significant benefits in the public interest. Applicants state that the 
Trust is able to track the Index more closely than certain other index 
products and, unlike shares of open-end index funds, Nasdaq-100 Shares 
trade at negotiated prices throughout the Business Day.\5\ Applicants 
also state that Nasdaq-100 Shares attract investors and foreign capital 
to the U.S. markets.
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    \4\ The Trust makes quarterly distributions of an amount 
representing the dividends accumulated on Portfolio Securities 
during each quarter, net of fees and expenses, if any.
    \5\ A ``Business Day'' is any day that the Nasdaq or any other 
exchange that lists Nasdaq-100 Shares is open for business and any 
day that the Trust is open for business as required by section 22(e) 
of the Act.
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    4. The Trustee adjusts the composition of the Portfolio Securities 
from time to time to reflect changes made by Nasdaq to the composition 
and weighting of the Index Securities.\6\ All adjustments to the 
Portfolio Securities are made by the Trustee as set forth in the Trust 
Agreement and are non-discretionary.
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    \6\ Nasdaq determines, comprises, and calculates the Index 
without regard to the Trust.
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    5. The Trustee is paid a ``Trustee's Fee'' at an annual rate of 
0.04% to 0.10% of the net asset value (``NAV'') of the Trust, with the 
minimum fee amount not to fall below $180,000.\7\ Until the Sponsor 
otherwise determines, the Sponsor has undertaken that the ordinary 
operating expenses of the Trust as calculated by the Trustee will not 
be permitted to exceed an amount which is 20/100 of one percent (0.20%) 
per annum of the daily NAV of the Trust.\8\ The Sponsor retains the 
ability to be repaid by the Trust to the extent that subsequently 
during the fiscal year expenses fall below the 0.20% per year level on 
any given day. Trust fees and expenses are first paid out of income 
received by the Trust in the form of dividends and other distributions 
on the Portfolio Securities.\9\
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    \7\ If the amount of the Trustee's compensation is less than the 
minimum annual fee, the Sponsor will pay the amount of the 
shortfall.
    \8\ For purposes of this undertaking, ``ordinary operating 
expenses'' will not include taxes, brokerage commissions and 
extraordinary non-recurring expenses.
    \9\ In circumstances where the Trust's income is insufficient to 
pay the fees and expenses of the Trust, the Trustee will sell 
Portfolio Securities to generate sufficient cash to pay the Trust 
fees and expenses in excess of Trust income. The Trustee is 
ordinarily required to sell Portfolio Securities whenever the 
Trustee determines that accrued fees and expenses exceed dividends 
and other Trust accrued income on a projected basis by more than 
0.01% of the NAV of the Trust.
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    6. The Sponsor will be granted a license to use the Index as a 
basis for determining the composition of the Trust and to use certain 
trademarks of Nasdaq in connection with the Trust. The Sponsor will pay 
Nasdaq an annual licensing fee for the Index and will seek 
reimbursement from the Trust for the fee charged in connection with its 
Index. The Sponsor will pay the Distributor a flat annual fee for 
services provided to the Trust. The Sponsor will not seek reimbursement 
from the Trust for such payment without first obtaining prior exemptive 
relief from the Commission.
    7. Nasdaq-100 Shares are issued in aggregations of 50,000 shares 
(``Creation Units''). The price of one Portfolio Deposit (defined 
below), exclusive of brokerage costs, was approximately $2,032,500 
(based on the market value of the Index) on September 30, 2006. All 
orders to purchase Creation Units must be delivered through a party 
that has executed a Nasdaq-100 participation agreement with the 
Distributor and Trustee and is either (i) a participant in the 
Continuous Net Settlement (``CNS'') System of the National Securities 
Clearing Corporation (``NSCC'') (``Nasdaq-100 Clearing Process'') or 
(ii) a Depository Trust Company (``DTC'') participant.
    8. An investor wishing to purchase a Creation Unit from the Trust 
has to transfer to the Trustee a ``Portfolio Deposit'' consisting of: 
(i) A portfolio of securities substantially similar in composition and 
weighting to the Index Securities (``Deposit Securities''); \10\ (ii) a 
cash payment equal to the dividends accrued on the Portfolio Securities 
since the last dividend payment on the Portfolio Securities, net of 
expenses and liabilities (``Income Net of Expense Amount''); and (iii) 
a cash payment or credit to equalize any differences between the market 
value of the Deposit Securities and the NAV of the Trust on a per 
Creation Unit basis (the ``Balancing Amount'').\11\ The Balancing 
Amount and the Income Net of Expense Amount together constitute the 
``Cash Component.'' An investor making a Portfolio Deposit will be 
charged a service fee (``Transaction Fee''), paid to the Trustee, to 
defray the Trustee's costs in processing securities deposited into the 
Trust.\12\ The Sponsor makes

[[Page 9596]]

available each Business Day a list of the names and the required number 
of shares for each of the Deposit Securities in the current Portfolio 
Deposit, as well as the Income Net of Expense Amount effective through 
and including the previous Business Day, per outstanding Nasdaq-100 
Share.\13\
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    \10\ The Trust will comply with the federal securities laws in 
accepting Deposit Securities and satisfying redemptions with 
redemption securities (``Redemption Securities''), including that 
the Deposit Securities and Redemption Securities are sold in 
transactions that would be exempt from registration under the 
Securities Act of 1933. The specified Deposit Securities and 
Redemption Securities generally will correspond pro rata to the 
Portfolio Securities.
    \11\ At the close of the market on each Business Day, the 
Trustee calculates the NAV of the Trust and then divides the NAV by 
the number of outstanding Nasdaq-100 Shares in Creation Unit size 
aggregations, resulting in an NAV per Creation Unit. The Trustee 
then calculates the required number of shares of the Index 
Securities, and the amount of cash, comprising a Portfolio Deposit 
for the following Business Day.
    \12\ The Transaction Fee is (i) $500 per ``Participating Party'' 
(defined below) per day for creations of Creation Units where there 
are also, in the same day, separate creations in any number, or 
redemptions in an amount not equal to the number of Nasdaq-100 
Shares created, of other similar exchange-traded funds based on the 
Index for which the Trustee or its affiliate acts as trustee, fund 
administrator or in any similar capacity, (ii) no fee per 
Participating Party where there is, in the same day, a redemption of 
an equal number of shares of another similar exchange-traded fund 
based on the Index, for which the Trustee or its affiliate acts as 
the Trustee, fund administrator or in a similar capacity, and (iii) 
in all other cases $1,000 per day, regardless of the number of 
Creation Units purchased on that day by such Participating Party. 
The Transaction Fee may be changed by the Trustee with the Sponsor's 
consent, but it will not exceed 0.10% of the value of a Creation 
Unit. For purchases of Creation Units outside the Nasdaq-100 
Clearing Process, the Transaction Fee will be one to four times 
greater. The amount of the Transaction Fee will be disclosed in the 
prospectus for the Trust. A ``Participating Party'' is a broker-
dealer or other NSCC participant who is a participating party in the 
Nasdaq-100 Clearing Process.
    \13\ The cash equivalent of an Index Security may be included in 
the Cash Component of a Portfolio Deposit in lieu of the security if 
(i) the Trustee determines that an Index Security is likely to be 
unavailable or available in insufficient quantity for inclusion in a 
Portfolio Deposit (for example, when the security is subject to a 
trading halt or stop order, or the subject of a tender offer), or 
(ii) a particular investor is restricted from investing or engaging 
in transactions in the Index Security (for example, when the 
investor is a broker-dealer restricted by regulation or internal 
policy from investing in securities issued by a company on whose 
board of directors one of its principals serves, or when the 
investor is a broker-dealer and the security is on its ``restricted 
list'').
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    9. Orders to purchase Creation Units are placed with the 
Distributor, who is responsible for transmitting the orders to the 
Trustee. The Distributor issues confirmations of acceptance, transmits 
delivery instructions to the Trustee to implement the delivery of 
Creation Units, and maintain records of the orders and the 
confirmations. The Distributor also is responsible for delivering 
prospectuses to purchasers of Creation Units and may provide certain 
other administrative services, such as those related to state 
securities law compliance.
    10. Persons purchasing Creation Units from the Trust may hold the 
Nasdaq-100 Shares or sell some or all of them in the secondary market. 
Nasdaq-100 Shares are listed on the Nasdaq Global Select Market and the 
Nasdaq Global Market, each part of Nasdaq, and traded in the secondary 
market as individual units (i.e., in less than Creation Units) in the 
same manner as other equity securities. One or more member firms of 
Nasdaq will act as market makers (``Market Makers'') and maintain a 
market for Nasdaq-100 shares.\14\ Transactions involving the sale of 
Nasdaq-100 Shares are subject to customary brokerage commissions and 
charges. Applicants state that the price at which Nasdaq-100 Shares 
trade is disciplined by arbitrage opportunities created by the ability 
to continually purchase or redeem Creation Units at their NAV, which 
should ensure that Nasdaq-100 Shares do not trade at a material 
discount or premium in relation to their NAV.
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    \14\ No particular Market Maker is contractually obligated to 
make a market in Nasdaq-100 Shares although Nasdaq's listing 
requirements stipulate that at least two Market Makers must be 
registered in Nasdaq-100 Shares to maintain the listing. Applicants 
do not expect that any Market Maker will be an affiliated person, or 
an affiliated person of an affiliated person of the Trust, within 
the meaning of section 2(a)(3) of the Act, except pursuant to 
section 2(a)(3)(A) or (C) of the Act due to ownership of Nasdaq-100 
Shares, as described below.
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    11. Applicants state that purchasers of Creation Units include 
institutional investors and arbitrageurs (which could include 
institutional investors). A Market Maker also may purchase Creation 
Units for use in market making activities. Applicants also state that 
secondary market purchasers of Nasdaq-100 Shares include both 
institutional and retail investors.\15\
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    \15\ Nasdaq-100 Shares are registered in book-entry form only. 
DTC or its nominee is the registered owner of all outstanding 
Nasdaq-100 Shares. Records reflecting the beneficial owners of 
Nasdaq-100 Shares are maintained by DTC or its participants.
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    12. Applicants will make available a standard product description 
for Nasdaq-100 Shares (``Product Description'') to Nasdaq members and 
member organizations for distribution to investors purchasing Nasdaq-
100 Shares in accordance with Nasdaq rules. The purpose of the Product 
Description is to provide a brief and readily understandable 
description of the salient aspects of Nasdaq-100 Shares. The Product 
Description also advises investors that a prospectus for Nasdaq-100 
Shares is available without charge upon request from the investor's 
account executive. Applicants state that purchases of Nasdaq-100 Shares 
through a non-member broker-dealer in a transaction away from the 
Nasdaq do not constitute a significant portion of the market activity 
in Nasdaq-100 Shares.
    13. Nasdaq-100 Shares are not individually redeemable, except upon 
termination of the Trust. Nasdaq-100 Shares are only redeemable in 
Creation Units through the Trust. To redeem, an investor has to 
accumulate enough Nasdaq-100 Shares to constitute a Creation Unit. An 
investor redeeming a Creation Unit will receive a portfolio of 
securities typically identical in composition and weighting to the 
securities portion of a Portfolio Deposit as of the date the redemption 
request was made. An investor may receive the cash equivalent of an 
Index Security (i) when the Trustee determines that an Index Security 
is likely to be unavailable or available in insufficient quantity for 
delivery by the Trust; (ii) upon the request of the redeeming investor; 
or (iii) upon notice of the termination of the Trust. A redeeming 
investor may receive or may pay an amount equal to the Income Net of 
Expense Amount, plus or minus the Balancing Amount. A redeeming 
investor will pay a Transaction Fee calculated in the same manner as a 
Transaction Fee payable in connection with the purchase of a Creation 
Unit. The Trustee will transfer the securities and cash to the 
redeeming investor within three Business Days of receipt of the request 
for redemption.
    14. Because the Trust ordinarily redeems Creation Units in kind, 
the Trust does not have to maintain cash reserves for redemptions. This 
allows the assets of the Trust to be committed as fully as possible to 
tracking the Index, enabling the Trust to track the Index more closely 
than other investment products that must allocate a greater portion of 
their assets for cash redemptions.
    15. The Trust will terminate on the earlier of (i) March 4, 2124, 
or (ii) the date 20 years after the death of the last survivor of 
fifteen persons named in the trust agreement, the oldest of whom was 
born in 1986 and the youngest of whom was born in 1996. The Trust will 
also terminate if (i) Nasdaq-100 Shares are de-listed from the Nasdaq 
and are not subsequently re-listed on a national securities exchange 
registered under the Exchange Act; or (ii) either the Sponsor or the 
Trustee resigns or is removed, and a successor is not appointed. The 
Trust may terminate if: (i) 66\2/3\% of the holders of the outstanding 
Nasdaq-100 Shares agree to terminate it; (ii) the DTC is unable or 
unwilling to continue to perform its functions and a suitable 
replacement is unavailable; (iii) NSCC no longer provides clearance 
services with respect to the Nasdaq-100 Shares, or if the Trustee is no 
longer a participant in NSCC; (iv) Nasdaq ceases to publish the Index; 
or (v) the license agreement is terminated.
    16. Within a reasonable time after the Trust's termination, the 
Trustee will use its best efforts to sell all Portfolio Securities not 
previously distributed to investors redeeming Creation Units. Nasdaq-
100 Shares not redeemed prior to termination will be redeemed in cash 
at NAV based on the proceeds from the sale of the Portfolio Securities.

Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act 
granting an exemption from sections 2(a)(32), 4(2),

[[Page 9597]]

22(d), 24(d), and 26(a)(2)(C) of the Act and rule 22c-1 under the Act; 
under sections 6(c) and 17(b) of the Act granting an exemption from 
sections 17(a)(1) and (2) of the Act; and under section 17(d) of the 
Act and rule 17d-1 under the Act to permit certain joint transactions.
    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 4(2) and 2(a)(32) of the Act

    3. Section 4(2) of the Act defines a UIT as an investment company 
that, among other things, issues only redeemable securities. The term 
``redeemable security'' is defined in section 2(a)(32) of the Act as 
any security, other than short-term paper, under the terms of which the 
holder, upon its presentation to the issuer is entitled to receive 
approximately a proportionate share of the issuer's current net assets 
or the cash equivalent. Because Nasdaq-100 Shares are not individually 
redeemable, applicants request an order that would permit the Trust to 
register and operate as a UIT and issue Nasdaq-100 Shares that are 
redeemable in Creation Units only. Applicants state that investors may 
purchase Nasdaq-100 Shares in Creation Units from the Trust and redeem 
Creation Units. Applicants further state that because the market price 
of Creation Units is disciplined by arbitrage opportunities, investors 
should be able to sell Nasdaq-100 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 next 
computed after receipt of a tender of the security for redemption or of 
an order to purchase or sell the security. Applicants state that 
secondary market trading in Nasdaq-100 Shares takes 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 Nasdaq-
100 Shares in the secondary market do not comply with section 22(d) and 
rule 22c-1. Applicants request an exemption 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 method of pricing Nasdaq-100 
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 are thwarted by 
permitting Nasdaq-100 Shares to trade in the secondary market at 
negotiated prices. Applicants state (i) that secondary market trading 
in Nasdaq-100 Shares does not involve the Trust as a party and cannot 
result in dilution of an investment in Nasdaq-100 Shares; and (ii) to 
the extent different prices exist during a given trading day, or from 
day to day, such variances occur as a result of third-party market 
forces, such as supply and demand, not as a result of unjust or 
discriminatory manipulation. Therefore, applicants assert that 
secondary market transactions in Nasdaq-100 Shares do not create 
discrimination or preferential treatment among purchasers. Finally, 
applicants contend that the proposed distribution system is orderly 
because arbitrage activity ensures that the difference between the 
market price of Nasdaq-100 Shares and their NAV remains narrow.

Section 24(d) of the Act

    7. Section 24(d) of the Act provides, in pertinent 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 a UIT. Applicants request an exemption 
from section 24(d) to permit dealers in Nasdaq-100 Shares to rely on 
the prospectus delivery exemption provided by section 4(3) of the 
Securities Act.\16\ Applicants state that the imposition of prospectus 
delivery requirements on dealers in the secondary market will 
materially impede the success of Nasdaq-100 Shares.
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    \16\ Applicants state that persons purchasing Creation Units 
will be cautioned in the prospectus 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. 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 Distributor, breaks them down into the constituent 
Nasdaq-100 Shares, and sells Nasdaq-100 Shares directly to its 
customers; or if it chooses to couple the creation of a supply of 
new Nasdaq-100 Shares with an active selling effort involving 
solicitation of secondary market demand for Nasdaq-100 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 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 Nasdaq-100 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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    8. Applicants state that the secondary market for Nasdaq-100 Shares 
is significantly different from the typical secondary market for UIT 
securities, which is usually maintained by the sponsor. Nasdaq-100 
Shares are listed on a national securities exchange and trade in the 
same manner as listed securities issued by operating companies and 
closed-end investment companies. Dealers selling shares of operating 
companies and closed-end investment companies in the secondary market 
generally are not required to deliver a prospectus to the purchaser.
    9. Applicants contend that Nasdaq-100 Shares, as a listed security, 
merit a reduction in the compliance costs and regulatory burdens 
resulting from the imposition of prospectus delivery obligations in the 
secondary market. Because Nasdaq-100 Shares are exchange-listed, 
prospective investors have access to several types of market 
information about them. Applicants state that quotations, last sale 
price, and volume information are continually available on a real time 
basis through the consolidated tape and are available throughout the 
day on brokers' computer screens and other electronic services, such as 
Quotron. The previous day's price and volume information is also 
published in the financial section of newspapers. The Sponsor also 
publishes daily, on a per Nasdaq-100 Share basis, the amount of 
accumulated dividends, net of accrued expenses.

[[Page 9598]]

    10. Investors also receive Product Descriptions. Applicants state 
that, while not intended as a substitute for a prospectus, the Product 
Description contains pertinent information about Nasdaq-100 Shares. 
Applicants also note that Nasdaq-100 Shares are readily understandable 
to retail investors as a product that tracks the Nasdaq-100 Index, 
which is well known to most investors and widely recognized.

Section 26(a)(2)(C) of the Act

    11. Section 26(a)(2)(C) of the Act requires, among other things, 
that a UIT's trust indenture prohibit payments to the trust's depositor 
(in the case of the Trust, the Sponsor), and any affiliated person of 
the depositor, except payments for performing certain administrative 
services. Applicants request an exemption from section 26(a)(2)(C) to 
permit the Trust to reimburse the Sponsor for certain licensing, 
registration, and marketing expenses.
    12. Applicants state that, ordinarily, a sponsor of a UIT has 
several sources of income in connection with the creation of the trust. 
Applicants assert, however, that under the structure of the Trust, the 
usual sources of income are not available because the Sponsor will not 
impose a sales load, maintain a secondary market, or deposit Index 
Securities into the Trust. Applicants contend that the abuse sought to 
be remedied by section 26(a)(2)(C) of the Act--``double dipping'' by 
UIT sponsors collecting money from their captive trusts in addition to 
the profits already generated by sales charges and other sources--will 
not be present if the requested exemption is granted.
    13. Applicants contend that permitting the Trust to reimburse the 
Sponsor for certain expenses would be no more disadvantageous to the 
holders of Nasdaq-100 Shares than allowing the expenses to be imposed 
indirectly as offsets to sales loads and other charges, as is done by 
typical UITs. Applicants state that the Trust pays the Sponsor only its 
actual out-of-pocket expenses and no component of profit is included. 
Finally, applicants state that the payment is capped at 20 basis points 
of the Trust's NAV on an annualized basis, with any expenses in excess 
of that amount absorbed by the Sponsor.

Section 17(a) of the Act

    14. 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. Section 2(a)(3) defines ``affiliated person'' to 
include any person directly or indirectly owning, controlling, or 
holding with power to vote, 5% or more of the outstanding voting 
securities of the other person, and any person controlling, controlled 
by or under common control with the other person. Section 2(a)(9) 
provides that a control relationship will be presumed where one person 
owns 25% or more of another person's voting securities. Applicants 
state that, because the definition of ``affiliated person'' includes 
any person owning 5% or more, or more than 25%, of an issuer's 
outstanding voting securities, every purchaser of a Creation Unit will 
be an affiliated person of the Trust so long as 20 or fewer Creation 
Units are in existence. Applicants request an exemption from section 
17(a) under sections 6(c) and 17(b) to permit persons that are 
affiliated persons solely by virtue of a 5% or more, or more than 25%, 
ownership interest in the Trust (or affiliated persons of such person 
that are not otherwise affiliated with the Trust) to purchase and 
redeem Creation Units through in-kind transactions.
    15. 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 
affiliated persons of the Trust from purchasing or redeeming Creation 
Units. The composition of a Portfolio Deposit made by a purchaser or 
given to a redeeming investor is the same regardless of the investor's 
identity, and is 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 the Trust to effect a transaction detrimental to 
the other holders of Nasdaq-100 Shares. Applicants also believe that 
``in kind'' purchases and redemptions do not result in abusive self-
dealing or overreaching by affiliated persons of the Trust.

Section 17(d) of the Act and Rule 17d-1 Under the Act

    16. Section 17(d) of the Act and rule 17d-1 under the Act prohibit 
any affiliated person of, or principal underwriter for, a registered 
investment company, or any affiliated person of the affiliated person 
or the principal underwriter, acting as principal, from effecting any 
transaction in connection with any joint enterprise or other 
arrangement or profit-sharing plan in which the investment company 
participates, unless an application regarding the joint transaction has 
been filed with the Commission and granted by order. Under rule 17d-1, 
in passing upon such applications, the Commission considers whether the 
participation of the registered investment company in the joint 
transaction is consistent with the provisions, policies and purposes of 
the Act and the extent to which such participation is on a basis 
different or less advantageous than that of other participants.
    17. Applicants request an order under rule 17d-1 that would permit 
the Trust to reimburse the Sponsor for the payment to Nasdaq of an 
annual license fee under a license agreement. Applicants believe that 
relief is necessary because the Trust's undertaking to reimburse the 
Sponsor might be deemed a joint enterprise or other joint arrangement 
in which the Trust is a participant, in contravention of section 17(d) 
of the Act and rule 17d-1.
    18. The license agreement allows applicants to use the Index as a 
basis for Nasdaq-100 Shares and to use certain of Nasdaq's trade name 
and trademark rights. Applicants believe that Nasdaq is a valuable name 
that is well-known to investors and that investors will desire to 
invest in an instrument that closely mirrors the Index. In view of 
this, applicants state that it is necessary to obtain from Nasdaq the 
above-mentioned license agreement so that appropriate reference to 
Nasdaq and Nasdaq-100 Shares may be made in materials describing 
Nasdaq-100 Shares and the Trust. Applicants assert that the terms and 
provisions of the license agreement are comparable to the terms and 
provisions of other similar license agreements and that the annual 
license fee is for fair value and is in an amount comparable to that 
which would be charged by Nasdaq for similar arrangements. For these 
reasons, applicants state that the proposed license fee arrangement 
satisfies the standards of section 17(d) and rule 17d-1.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. Applicants will not register a new series of the Trust by means 
of filing a post-effective amendment to the Trust's

[[Page 9599]]

registration statement or by any other means, unless applicants have 
requested and received with respect to such new series, either 
exemptive relief from the Commission or a no-action position from the 
Division of Investment Management of the Commission.
    2. The Trust's prospectus and the Product Description clearly 
disclose that, for purposes of the Act, Nasdaq-100 Shares are issued by 
the Trust and that the acquisition of Nasdaq-100 Shares by investment 
companies is subject to the restrictions of section 12(d)(1) of the 
Act, except as permitted by an exemptive order that permits registered 
investment companies to invest in the Trust beyond the limits of 
Section 12(d)(1)(A), subject to certain terms and conditions, including 
that the investment company enter into an agreement with the Trust 
regarding the terms of the investment.
    3. As long as the Trust operates in reliance on the requested 
order, the Nasdaq-100 Shares will be listed on an Exchange.
    4. The website for the Trust, which will be publicly accessible at 
no charge, will contain the following information, on a per Nasdaq-100 
Share basis, for the Trust: (a) The prior Business Day's NAV and the 
reported closing price, and a calculation of the premium or discount of 
such price against such NAV; and (b) data in chart format displaying 
the frequency distribution of discounts and premiums of the daily 
closing price against the NAV, within appropriate ranges, for each of 
the four previous calendar quarters. In addition, the Product 
Description for the Trust will state that the website for the Trust has 
information about premiums and discounts at which the Nasdaq-100 Shares 
have traded.
    5. The prospectus and annual report for the Trust will also 
include: (a) The information listed in condition 4(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 Nasdaq-100 
Share basis for one-, five- and ten-year periods (or life of the 
Trust), (i) the cumulative total return and the average annual total 
return based on NAV and closing price, and (ii) the cumulative total 
return of the Index.
    6. Before the Trust may rely on the order, the Commission will have 
approved pursuant to rule 19b-4 under the Exchange Act, an Exchange 
rule requiring Exchange members and member organizations effecting 
transactions in Nasdaq-100 Shares to deliver a Product Description to 
purchasers of Nasdaq-100 Shares.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-3677 Filed 3-1-07; 8:45 am]

BILLING CODE 8010-01-P