Document ID: SEC-2006-0485-0001
Agency: sec
Document Type: Notice
Title: Van Eck Associates Corporation, et al.; Notice of Application
Posted Date: 2006-04-13T04:00Z

[Federal Register: April 13, 2006 (Volume 71, Number 71)]
[Notices]               
[Page 19214-19221]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13ap06-125]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27283; 812-12947]

 
Van Eck Associates Corporation, et al.; Notice of Application

April 7, 2006.
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 (the ``Act'') for an exemption from 
sections 2(a)(32), 5(a)(1), 22(d), and 24(d) of the Act and rule 22c-1 
under the Act, under section 12(d)(1)(J) for an exemption from sections 
12(d)(1)(A) and (B) of 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.

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    Summary of Application: Applicants request an order that would 
permit (a) series of open-end management investment companies, to issue 
shares (``Shares'') that can be redeemed only in large aggregations 
(``Creation Units''); (b) secondary market transactions in Shares to 
occur at negotiated prices; (c) 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''); (d) certain affiliated persons of the series to deposit 
securities into, and receive securities from, the series in connection 
with the purchase and redemption of Creation Units; and (e) certain 
registered management investment companies and unit investment trusts 
outside of the same group of investment companies as the series to 
acquire Shares.
    Applicants: Van Eck Associates Corporation (the ``Adviser''); 
Market Vectors--Gold Miners ETF (the ``Trust''); and Van Eck Securities 
Corporation (the ``Distributor'').
    Filing Dates: The application was filed on March 25, 2003, and 
amended on February 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 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 1, 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, 99 Park Avenue, 8th 
Floor, New York, NY 10016.

FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel at (202) 
551-6876, or Michael W. Mundt, Senior Special Counsel, 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 
Public Reference Desk, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington DC 20549-0102, telephone (202) 551-5850.

Applicants' Representations

    1. The Trust is registered as an open-end management investment 
company and is organized as a Delaware trust authorized to issue 
multiple series. The Trust intends to offer and sell shares of one or 
more series (each an ``Index Fund''), including the Market Vectors--
Gold Miners ETF (``Initial Index Fund''). The Adviser is registered as 
an investment adviser under the Investment Advisers Act of 1940, as 
amended (the ``Advisers Act'') and will serve as the investment adviser 
to each Index Fund. In the future, the Adviser may enter into sub-
advisory agreements with other investment advisers to act as ``sub-
advisers'' with respect to particular Index Funds. Any sub-adviser will 
be registered under the Advisers Act or exempt from registration. The

[[Page 19215]]

Distributor, a broker-dealer registered under the Securities Exchange 
Act of 1934 (the ``Exchange Act''), will serve as the principal 
underwriter and distributor for the Index Funds.
    2. Each Index Fund will hold certain securities (``Portfolio 
Securities'') selected to correspond generally to the price and yield 
performance, before fees and expenses, of a specified equity securities 
index (each an ``Underlying Index''). No entity that creates, compiles, 
sponsors or maintains an Underlying Index is or 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 Trust, the Adviser, the 
Distributor, promoter or any sub-adviser to an Index Fund. The 
Underlying Index for the Initial Index Fund is the Amex Gold Miners 
Index, a modified market capitalization weighted index comprised of 
publicly-traded companies involved primarily in mining for gold and 
silver. The Trust may offer additional Index Funds in the future based 
on other Underlying Indexes (``Future Index Funds''). Any Future Index 
Funds will (a) comply with the terms and conditions of any order 
granted pursuant to the application and (b) be advised by the Adviser.
    3. The investment objective of each Index Fund will be to provide 
investment results that correspond generally to the price and yield 
performance, before fees and expenses, of its Underlying Index. Intra-
day values of the Underlying Index will be disseminated every 15 
seconds throughout the trading day. An Index Fund will utilize either a 
``replication'' or ``representative sampling'' strategy.\1\ An Index 
Fund using a ``replication'' strategy will invest in substantially all 
of the Component Securities in its Underlying Index in approximately 
the same weightings as in the Underlying Index. In certain 
circumstances, such as when there are practical difficulties or 
substantial costs involved in holding every security in an Underlying 
Index or when a Component Security is illiquid, an Index Fund may use a 
``representative sampling'' strategy pursuant to which it will invest 
in some, but not all of the relevant Component Securities.\2\ 
Applicants anticipate that an Index Fund that utilizes a 
``representative sampling'' strategy will not track the performance of 
its Underlying Index with the same degree of accuracy as an investment 
vehicle that invests in every Component Security of the Underlying 
Index in the same weighting as the Underlying Index. Applicants expect 
that each Index Fund will have a tracking error relative to the 
performance of its Underlying Index of less than 5 percent.
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    \1\ Applicants represent that the Index Fund will normally 
invest at least 95% of its total assets in the component securities 
that comprise its Underlying Index (``Component Securities''). Each 
Index Fund also may invest up to 5% of its assets in money market 
instruments or money market funds that comply with rule 2(a)(7) 
under the Act, in futures contracts, options, options on futures 
contracts, swap contracts, cash and cash equivalents, as well as in 
stocks not included in its Underlying Index, but which the Adviser 
believes will help the Index Fund track its Underlying Index.
    \2\ Under the ``representative sampling'' strategy, the Adviser 
will seek to construct an Index Fund's portfolio so that its market 
capitalization, industry weightings, fundamental investment 
characteristics (such as return variability, earnings valuation and 
yield) and liquidity measures perform like those of the Underlying 
Index.
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    4. Shares of the Index Funds will be sold at a price of between $40 
and $50 per Share in Creation Units of 50,000 Shares. All orders to 
purchase Creation Units must be placed with the Distributor by or 
through a party that has entered into an agreement with the Trust and 
Distributor (``Authorized Participant''). An Authorized Participant 
must be either: (a) A broker-dealer or other participant in the 
continuous net settlement system of the National Securities Clearing 
Corporation (``NSCC''), a clearing agency registered with the 
Commission, or (b) a participant in the Depository Trust Company 
(``DTC'', and such participant, ``DTC Participant''). Shares of each 
Index Fund generally will be sold in Creation Units in exchange for an 
in-kind deposit by the purchaser of a portfolio of securities 
designated by the Adviser to correspond generally to the price and 
yield performance, before fees and expenses, of the relevant Underlying 
Index (the ``Deposit Securities''), together with the deposit of a 
relatively small specified cash payment (``Cash Component''). The Cash 
Component is generally an amount equal to the difference between (a) 
the net asset value (``NAV'') (per Creation Unit) of the Index Fund and 
(b) the total aggregate market value (per Creation Unit) of the Deposit 
Securities.\3\ Applicants state that in some circumstances it may not 
be practicable or convenient for an Index Fund to operate exclusively 
on an ``in-kind'' basis. The Trust reserves the right to permit, under 
certain circumstances, a purchaser of Creation Units to substitute cash 
in lieu of depositing some or all of the requisite Deposit Securities. 
An investor purchasing a Creation Unit from an Index Fund will be 
charged a fee (``Transaction Fee'') to prevent the dilution of the 
interests of the remaining shareholders resulting from costs in 
connection with the purchase of Creation Units.\4\ The maximum 
Transaction Fees relevant to each Index Fund will be fully disclosed in 
the prospectus (``Prospectus'') of such Index Fund or statement of 
additional information (``SAI''). All orders to purchase Creation Units 
will be placed with the Distributor by or through an Authorized 
Participant and it will be the Distributor's responsibility to transmit 
such orders to the Trust. The Distributor also will be responsible for 
delivering the Prospectus to those persons purchasing Creation Units, 
and for maintaining records of both the orders placed with it and the 
confirmations of acceptance furnished by it. In addition, the 
Distributor will maintain a record of the instructions given to the 
Trust to implement the delivery of Shares.
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    \3\ The Trust will sell Creation Units of each Index Fund on any 
day that an Index Fund is open for business, including as required 
by section 22(e) of the Act (a ``Business Day''). In addition to the 
list of names and amount of each security constituting the current 
Deposit Securities, it is intended that, on each Business Day, the 
Cash Component effective as of the previous Business Day, per 
outstanding Share of each Index Fund, will be made available. The 
Exchanges intend to disseminate, every 15 seconds, during their 
respective regular trading hours, through the facilities of the 
Consolidated Tape Association (``CTA''), an approximate amount per 
Share representing the sum of the estimated Cash Component effective 
through and including the previous Business Day, plus the current 
value of the Deposit Securities, on a per Share basis.
    \4\ Where an Index Fund permits a purchaser to substitute cash 
in lieu of depositing a portion of the requisite Deposit Securities, 
the purchaser may be assessed a higher Transaction Fee to cover the 
cost of purchasing such Deposit Securities, including brokerage 
costs, and part or all of the spread between the expected bid and 
the offer side of the market relating to such Deposit Securities.
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    5. Purchasers of Shares in Creation Units may hold such Shares or 
may sell such Shares into the secondary market. Shares will be listed 
and traded on the American Stock Exchange, LLC, (``Amex''), another 
U.S. national securities exchange as defined in section 2(a)(26) of the 
Act, and Nasdaq Stock Market (``Nasdaq'') (each, an ``Exchange''). It 
is expected that one or more member firms of a listing Exchange will be 
designated to act as a specialist and maintain a market for Shares on 
the Exchange (the ``Exchange Specialist''), or if Nasdaq is the listing 
Exchange, one or more member firms of Nasdaq will act as a market maker 
(``Market Maker'') and maintain a market for Shares.\5\ Prices of 
Shares

[[Page 19216]]

trading on an Exchange will be based on the current bid/offer market. 
Shares sold in the secondary market will be subject to customary 
brokerage commissions and charges.
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    \5\ If Shares are listed on the Nasdaq, no particular Market 
Maker will be contractually obligated to make a market in Shares, 
although Nasdaq's listing requirements stipulate that at least two 
Market Makers must be registered as Market Makers in Shares to 
maintain the listing. Registered Market Makers are required to make 
a continuous, two-sided market at all times or be subject to 
regulatory sanctions.
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    6. Applicants expect that purchasers of Creation Units will include 
institutional investors and arbitrageurs (which could include 
institutional investors). The Exchange Specialist, or Market Maker, in 
providing a fair and orderly secondary market for the Shares, also may 
purchase Creation Units for use in its market-making activities. 
Applicants expect that secondary market purchasers of Shares will 
include both institutional investors and retail investors.\6\ 
Applicants expect that the price at which the Shares trade will be 
disciplined by arbitrage opportunities created by the ability to 
continually purchase or redeem Creation Units at their NAV, which 
should ensure that the Shares will not trade at a material discount or 
premium in relation to their NAV.
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    \6\ Shares will be registered in book-entry form only. DTC or 
its nominee will be the registered owner of all outstanding Shares. 
DTC or DTC Participants will maintain records reflecting beneficial 
owners of Shares.
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    7. Shares will not be individually redeemable, and owners of Shares 
may acquire those Shares from the Index Fund, or tender such Shares for 
redemption to the Index Fund, in Creation Units only. To redeem, an 
investor will have to accumulate enough Shares to constitute a Creation 
Unit. Redemption orders must be placed by or through an Authorized 
Participant. An investor redeeming a Creation Unit generally will 
receive (a) a portfolio of securities designated to be delivered for 
Creation Unit redemptions on the date that the request for redemption 
is submitted (``Fund Securities''), which may not be identical to the 
Deposit Securities required to purchase Creation Units on that date, 
and (b) a ``Cash Redemption Payment,'' consisting of an amount 
calculated in the same manner as the Cash Component, although the 
actual amount of the Cash Redemption Payment may differ from the Cash 
Component if the Fund Securities are not identical to the Deposit 
Securities on that day. An investor may receive the cash equivalent of 
a Fund Security in certain circumstances, such as if the investor is 
constrained from effecting transactions in the security by regulation 
or policy. A redeeming investor may pay a Transaction Fee, calculated 
in the same manner as a Transaction Fee payable in connection with 
purchases of Creation Units.
    8. Neither the Trust nor any individual Index Fund will be marketed 
or otherwise held out as an ``open-end investment company'' or a 
``mutual fund.'' Instead, each Fund will be marketed as an ``exchange-
traded fund,'' an ``investment company,'' a ``fund,'' or a ``trust.'' 
All marketing materials that describe the method of obtaining, buying 
or selling Shares, or refer to redeemability, will prominently disclose 
that Shares are not individually redeemable and that the owners of 
Shares may purchase or redeem Shares from the Index Fund in Creation 
Units only. The same approach will be followed in the SAI, shareholder 
reports and investor educational materials issued or circulated in 
connection with the Shares. The Funds will provide copies of their 
annual and semi-annual shareholder reports to DTC Participants for 
distribution to beneficial owners of Shares.

Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act for an 
exemption from sections 2(a)(32), 5(a)(1), 22(d) and 24(d) of the Act 
and rule 22c-1 under the Act, under section 12(d)(1)(J) for an 
exemption from sections 12(d)(1)(A) and (B) of the Act, and 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.
    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, from any provision of the 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 17(b) of the Act authorizes the Commission to exempt a proposed 
transaction from section 17(a) of the Act 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 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)(J) of the Act 
provides that the Commission may exempt any person, security, or 
transaction, or any class or classes of persons, securities or 
transactions, from any provisions of section 12(d)(1) if the exemption 
is consistent with the public interest and the protection of investors.

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 owner, upon 
its 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 that would permit the Trust to register as 
an open-end management investment company and issue Shares that are 
redeemable in Creation Units only. Applicants state that investors may 
purchase Shares in Creation Units and redeem Creation Units from each 
Fund. Applicants further state that because the market price of Shares 
will be disciplined by arbitrage opportunities, investors should be 
able to sell Shares in the secondary market at prices that do not vary 
substantially from 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, which is currently being offered to 
the public by or through a principal 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) of the Act and rule 22c-1 under the Act. Applicants request an 
exemption under section 6(c) 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 (a) prevent dilution caused by 
certain riskless-trading schemes by principal underwriters and contract 
dealers, (b) prevent unjust discrimination or

[[Page 19217]]

preferential treatment among buyers, and (c) ensure 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 that (a) secondary market trading in Shares 
does not involve the Index Funds as parties and cannot result in 
dilution of an investment in Shares, and (b) 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. 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 24(d) of the Act

    7. Section 24(d) of the Act 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 seek relief 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.\7\
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    \7\ Applicants state that they are not seeking relief from the 
prospectus delivery requirement for non-secondary market 
transactions, such as transactions in which an investor purchases 
Shares from the Trust or an underwriter. Applicants further state 
that the Prospectus will caution broker-dealers and others 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 purchases Creation Units from an Index 
Fund, breaks them down into the constituent Shares, and sells those 
Shares directly to customers, or if it chooses to couple the 
creation of a supply of new Shares with an active selling effort 
involving solicitation of secondary market demand for Shares. Each 
Index Fund's Prospectus will state that whether a person is an 
underwriter depends upon all of the facts and circumstances 
pertaining to that person's activities. Each Index Fund's Prospectus 
will caution 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, that they 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 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 an 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 will be continually 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 
will be published daily in the financial section of newspapers. In 
addition, the Trust also intends to maintain a Web site that will 
include the Prospectus and SAI, the relevant Underlying Index for each 
Index Fund and additional quantitative information that is updated on a 
daily basis, including daily trading volume, closing price, the NAV for 
each Index Fund and information about the premiums and discounts at 
which the Index Fund's Shares have traded.
    9. 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 Index Fund 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.

Section 12(d)(1)

    10. Section 12(d)(1)(A) of the Act prohibits a registered 
investment company from acquiring securities of an investment company 
if such 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 and 
any other broker-dealer from selling the investment company's 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.
    11. Applicants request an exemption to permit management investment 
companies (``Investing Management Companies'') and unit investment 
trusts (``Investing Trusts'') registered under the Act that are not 
part of the same ``group of investment companies,'' as defined in 
section 12(d)(1)(G)(ii) of the Act, as the Trust to acquire shares of 
an Index Fund beyond the limits of section 12(d)(1)(A) and (B), 
(Investing Management Companies and Investing Trusts collectively, 
``Investing Funds''). Investing Funds exclude registered investment 
companies that are, or in the future may be, part of the same group of 
investment companies within the meaning of section 12(d)(1)(G)(ii) of 
the Act as the Index Funds. In addition, applicants seek relief to 
permit an Index Fund and the Distributor or any broker or dealer 
(``Broker'') that is registered under the Exchange Act to knowingly 
sell shares of the Index Fund to an Investing Fund in excess of the 
limits of section 12(d)(1)(B). Applicants request that the relief 
sought apply to (a) Index Funds that are advised by the Adviser and in 
the same group of investment companies as the Trust, (b) each Investing 
Fund that enters into a participation agreement with the Index Fund 
(``Participation Agreement''), and (c) any Broker.\8\
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    \8\ All parties that currently intend to rely on the requested 
relief from section 12(d)(1) are named as applicants. Any other 
party that relies on this relief 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 the Index Funds and not in 
any other registered investment company.
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    12. Each Investing Management Company will be advised by an 
investment adviser within the meaning of section 2(a)(20)(A) of the Act 
(the ``Investing Fund Advisor'') and may be advised by one or more 
investment advisers within the meaning of section 2(a)(20)(B) of the 
Act (each a ``Subadviser''). Any investment adviser to an Investing 
Fund will be registered under the Advisers Act or exempt from 
registration. Each Investing Trust will be sponsored by a sponsor 
(``Sponsor'').

[[Page 19218]]

    13. Applicants submit that the proposed conditions to the relief 
requested adequately address the concerns underlying the limits in 
section 12(d)(1)(A) and (B), which include concerns about undue 
influence, excessive layering of fees and overly complex structures. 
Applicants believe that the requested exemption is consistent with the 
public interest and the protection of investors.
    14. Applicants believe that neither the Investing Funds nor an 
Investing Fund Affiliate would be able to exert undue influence over 
the Index Funds.\9\ To limit the control that an Investing Fund may 
have over an Index Fund, applicants propose a condition prohibiting an 
Investing Fund Advisor or a Sponsor, any person controlling, controlled 
by, or under common control with an Investing Fund Advisor or Sponsor, 
and any investment company and any 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 an Investing Fund Advisor or Sponsor, or any person 
controlling, controlled by, or under common control with an Investing 
Fund Advisor or Sponsor (``Investing Fund Advisor/Sponsor Group'') from 
controlling (individually or in the aggregate) an Index Fund within the 
meaning of section 2(a)(9) of the Act. The same prohibition would apply 
to any Subadviser, any person controlling, controlled by or under 
common control with the Subadviser, 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 (or portion of such investment company or issuer) 
advised or sponsored by the Subadviser or any person controlling, 
controlled by or under common control with the Subadviser (``Subadviser 
Group''). Applicants propose other conditions to limit the potential 
for undue influence over the Index Funds, 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 Index Fund) will cause an 
Index Fund 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 Advisor, 
Subadviser, employee or Sponsor of an Investing Fund, or a person which 
any such officer, director, member of an advisory board, Investing Fund 
Advisor, Subadviser, employee, or Sponsor is an affiliated person 
(except any person whose relationship to the Index Fund is covered by 
section 10(f) of the Act is not an Underwriting Affiliate.)
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    \9\ An ``Investing Fund Affiliate'' is an Investing Fund 
Advisor, Subadviser, Sponsor, promoter, and principal underwriter of 
an Investing Fund, and any person controlling, controlled by, or 
under common control with any of those entities.
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    15. Applicants do not believe the proposed arrangement will involve 
excessive layering of fees. The board of directors or trustees of any 
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 Index Fund in which the Investing 
Management Company may invest. In addition, an Investing Fund Advisor 
or a trustee or Sponsor of an Investing Trust will waive fees otherwise 
payable to it by the Investing Management Company or Investing Trust in 
an amount at least equal to any compensation (including fees received 
pursuant to any plan adopted by an Index Fund under rule 12b-1 under 
the Act) received by the Investing Fund Advisor or trustee or Sponsor 
to the Investing Trust or an affiliated person of the Investing Fund 
Advisor, trustee or Sponsor, from the Index Funds in connection with 
the investment by the Investing Management Company or Investing Trust 
in the Index Fund. Applicants state that any sales loads 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.
    16. Applicants submit that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that no Index Fund 
may acquire securities of any investment company or company relying on 
sections 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, except to the extent 
permitted by an exemptive order that allows the Index Fund to purchase 
shares of an affiliated money market fund for short-term cash 
management purposes. 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 Index Fund in reliance on the requested order will be required to 
enter into a Participation Agreement between the Index Fund and the 
Investing Fund. The Participation Agreement will require the Investing 
Fund to adhere to the terms and conditions of the requested order and 
participate in the proposed transactions in a manner that addresses 
concerns regarding the requested relief. The Participation Agreement 
also will include an acknowledgement from the Investing Fund that it 
may rely on the order only to invest in the Index Funds and not in any 
other investment company. The Participation Agreement will further 
require any Investing Fund that exceeds the 5% or 10% limitations in 
section 12(d)(1)(A)(ii) and (iii) to disclose in its prospectus that it 
may invest in Index Funds, and to disclose, in ``plain English,'' in 
its prospectus the unique characteristics of the Investing Funds 
investing in Index Funds, including but not limited to the expense 
structure and any additional expenses of investing in Index Funds.

Section 17(a)(1) and (2) of the Act

    17. Section 17(a) of the Act generally prohibits sales or purchases 
of securities between a registered investment company and any 
affiliated person of such company. Section 2(a)(3) of the Act defines 
an affiliated person to include (a) 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; (b) 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 and 
(c) any person directly or indirectly controlling, controlled by, or 
under common control with, the other person. Section 2(a)(9) of the Act 
provides that a control relationship will be presumed where one person 
owns more than 25% of another person's voting securities. Applicants 
state that if Creation Units of an Index Fund are held by twenty or 
fewer investors, including an Exchange Specialist or Market Maker, some 
or all of such investors will be 5% owners of the Index Fund, and one 
or more investors may hold in excess of 25% of the Index Fund. Such 
investors would be deemed to be affiliates of the Index Fund.
    18. Applicants request an exemption from section 17(a) of the Act 
pursuant to sections 17(b) and 6(c) of the Act to permit any persons 
that are affiliated persons of the Index Funds solely by virtue of (a) 
holding 5% or more, or in excess of 25% of the outstanding Shares of 
the Trust or one or more Index Funds (and affiliated persons of such 
persons so long as they are not otherwise

[[Page 19219]]

affiliated with the Trust or the Index Funds) or (b) holding 5% or more 
of one or more other registered investment companies (or series 
thereof) advised by the Adviser, or holding in excess of 25% of the 
outstanding shares of such registered investment company (or series 
thereof), to effectuate purchases and redemptions in-kind.
    19. Applicants assert that no useful purpose would be served by 
prohibiting these types of affiliated persons from purchasing or 
redeeming Creation Units through ``in-kind'' transactions. The deposit 
procedures for both in-kind purchases and in-kind redemptions of 
Creation Units will be the same for all purchases and redemptions. 
Deposit Securities and Fund Securities will be valued in the same 
manner as Portfolio Securities. Therefore, applicants state that in-
kind purchases and redemptions will afford no opportunity for the 
affiliated persons of an Index Fund, or the affiliated persons of such 
affiliated persons, described above, to effect a transaction 
detrimental to other holders of Shares. Applicants also believe that 
in-kind purchases and redemptions will not result in self-dealing or 
overreaching of the Index Fund.
    20. Applicants also seek relief from section 17(a) to permit an 
Index Fund that is an affiliated person of an Investing Fund because 
the Investing Fund holds 5% or more of the Index Fund's Shares to sell 
it's Shares to and redeem its Shares from an Investing Fund.\10\ 
Applicants believe that any proposed transactions directly between 
Index Funds and Investing Funds will be consistent with the policies of 
each Investing Fund. The purchase of Creation Units by an Investing 
Fund directly from an Index Fund will be accomplished in accordance 
with the investment restrictions of any such Investing Fund and will be 
consistent with the investment policies set forth in the Investing 
Fund's registration statement. The Participation Agreement will require 
any Investing Fund that purchases Creation Units directly from an Index 
Fund to represent that the purchase of Creation Units from an Index 
Fund 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.
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    \10\ Applicants believe that an Investing Fund will purchase 
Shares in the secondary market and will not purchase or redeem 
Creation Units directly from an Index Fund. Nonetheless, an 
Investing Fund that owns 5% or more of an Index Fund could seek to 
transact in Creation Units directly with an Index Fund pursuant to 
the section 17(a) relief requested.
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Applicants' Conditions

    Applicants agree that any order granting the requested relief to 
permit the operations of the Index Funds will be subject to the 
following conditions:
    1. Applicants will not register a Future Index Fund of the Trust by 
means of filing a post-effective amendment to the Trust's registration 
statement or by any other means, unless: (a) applicants have requested 
and received with respect to such Future Index Fund, either exemptive 
relief from the Commission or a no-action letter from the Division of 
Investment Management of the Commission; or (b) the Future Index Fund 
will be listed on an Exchange without the need for a filing pursuant to 
rule 19b-4 under the Exchange Act.
    2. Each Index Fund's Prospectus and Product Description will 
clearly disclose that, for purposes of the Act, Shares are issued by 
the Index Fund and that 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 Index Fund beyond the limits of 
section 12(d)(1), subject to certain terms and conditions, including 
that the registered investment company enter into a Participation 
Agreement with the Trust regarding the terms of the investment.
    3. As long as a Trust operates in reliance on the requested order, 
the Shares will be listed on an Exchange.
    4. Neither the Trust nor any Index Fund will be advertised or 
marketed as an open-end fund or a mutual fund. Each Index Fund's 
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 Fund and tender those shares for 
redemption to the Index Fund 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 purchase those 
Shares from the Index Fund and tender those Shares for redemption to 
the Index Fund in Creation Units only.
    5. The Web site for the Trust, which will be publicly accessible at 
no charge, will contain the following information, on a per Share 
basis, for each Index Fund: (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 Index Fund will state that the website for the 
Trust has information about the premiums and discounts at which Shares 
have traded.
    6. The Prospectus and annual report for each Index Fund also will 
include: (a) The information listed in 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 Index Fund): (i) the 
cumulative total return and the average annual total return based on 
NAV and closing price, and (ii) the cumulative total return of the 
relevant Underlying Index.
    7. Before an Index Fund 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 Shares to deliver a Product Description to 
purchasers of Shares.
    The Applicants agree that any order of the Commission granting the 
requested relief from section 12(d)(1) will be subject to the following 
conditions:
    8. The members of an Investing Fund Advisor/Sponsor Group will not 
control (individually or in the aggregate) an Index Fund within the 
meaning of section 2(a)(9) of the Act. The members of the Subadviser 
Group will not control (individually or in the aggregate) an Index Fund 
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 Index Fund, an 
Investing Fund Advisor/Sponsor Group or Subadviser Group, each in the 
aggregate, becomes a holder of more than 25% of the outstanding voting 
securities of an Index Fund, it will vote its shares of the Index Fund 
in the same proportion as the vote of all other holders of the Index 
Fund's shares. This condition does not apply to the Subadviser Group 
with respect to an Index Fund for which the Subadviser or a person 
controlling, controlled by, or under common control with the Subadviser 
acts as the investment adviser within the meaning of section 
2(a)(20)(A) of the Act.

[[Page 19220]]

    9. No Investing Fund or Investing Fund Affiliate will cause any 
existing or potential investment by the Investing Fund in an Index Fund 
to influence the terms of any services or transactions between the 
Investing Fund or Investing Fund Affiliate and the Index Fund or Index 
Fund Affiliate.
    10. 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 Advisor and 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 Index Fund or an Index Fund Affiliate 
in connection with any services or transactions.
    11. Once an investment by an Investing Fund in the securities of an 
Index Fund exceeds the limit in section 12(d)(1)(A)(i) of the Act, the 
board of directors/trustees of the Index Fund (``Board''), including a 
majority of the disinterested Board members, will determine that any 
consideration paid by the Index Fund to the Investing Fund or an 
Investing Fund Affiliate in connection with any services or 
transactions: (a) Is fair and reasonable in relation to the nature and 
quality of the services and benefits received by the Index Fund; (b) is 
within the range of consideration that the Index Fund would be required 
to pay to another unaffiliated entity in connection with the same 
services or transactions; and (c) 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 Index Fund and its 
investment adviser(s), or any person controlling, controlled by, or 
under common control with such investment adviser(s).
    12. An Investing Fund Advisor or a trustee or Sponsor of an 
Investing Trust will waive fees otherwise payable to it by the 
Investing Management Company or Investing Trust in an amount at least 
equal to any compensation (including fees received pursuant to any plan 
adopted by an Index Fund under rule 12b-1 under the Act) received from 
an Index Fund by the Investing Fund Advisor or trustee or Sponsor to 
the Investing Trust or an affiliated person of the Investing Fund 
Adviser, trustee or Sponsor, other than any advisory fees paid to the 
Investing Fund Advisor or trustee or Sponsor, or an affiliated person 
of the Investing Fund Advisor, trustee or Sponsor by the Index Fund in 
connection with the investment by the Investing Management Company or 
Investing Trust in the Index Fund. Any Subadviser will waive fees 
otherwise payable to the Subadviser, directly or indirectly, by the 
Investing Management Company in an amount at least equal to any 
compensation received from an Index Fund by the Subadviser, or an 
affiliated person of the Subadviser, other than any advisory fees paid 
to the Subadviser or its affiliated person by the Index Fund, in 
connection with the investment by the Investing Management Company in 
the Index Fund made at the direction of the Subadviser. In the event 
that the Subadviser waives fees, the benefit of the waiver will be 
passed through to the Investing Management Company.
    13. No Investing Fund or Investing Fund Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to an 
Index Fund) will cause an Index Fund to purchase a security in any 
Affiliated Underwriting.
    14. The Board, including a majority of the disinterested Board 
members, will adopt procedures reasonably designed to monitor any 
purchases of securities by an Index Fund in an Affiliated Underwriting 
once an investment by the Investing Fund in the securities of the Index 
Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act, including 
any purchases made directly from an Underwriting Affiliate. The Board 
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 Index Fund. The Board will 
consider, among other things: (a) Whether the purchases were consistent 
with the investment objectives and policies of the Index Fund; (b) how 
the performance of securities purchased in an Affiliated Underwriting 
compares to the performances 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 
(c) whether the amount of securities purchased by the Index Fund in 
Affiliated Underwritings and the amount purchased directly from an 
Underwriting Affiliate have changed significantly from prior years. The 
Board 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 
interests of shareholders.
    15. The Index Fund 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 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 securities of 
the Index Fund exceeds the limits 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 Board's determinations were 
made.
    16. Before investing in an Index Fund in excess of the limits in 
section 12(d)(1)(A), the Investing Fund and the Index Fund will execute 
a Participation Agreement stating, without limitation, that their 
boards of directors or trustees and their investment advisers, and the 
trustee and Sponsor of an Investing Trust, as applicable, understand 
the terms and conditions of the order, and agree to fulfill their 
responsibilities under the order. At the time of its investment in 
shares of an Index Fund in excess of the limit in section 
12(d)(1)(A)(i), an Investing Fund will notify the Index Fund of the 
investment. At such time, the Investing Fund will also transmit to the 
Index Fund a list of names of each Investing Fund Affiliate and 
Underwriting Affiliate. The Investing Fund will notify the Index Fund 
of any changes to the list of names as soon as reasonably practicable 
after a change occurs. The Index Fund and the Investing Fund will 
maintain and preserve a copy of the order, the agreement, and 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.
    17. 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 disinterested 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 Index Fund 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.

[[Page 19221]]

    18. 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.
    19. No Index Fund will acquire securities of any investment company 
or company relying on sections 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, except to 
the extent permitted by an exemptive order that allows the Index Fund 
to purchase shares of an affiliated money market fund for short-term 
cash management purposes.
    20. The board of directors or trustees of any Investing Management 
Company and any Index Fund will satisfy the fund governance standards 
as defined in rule 0-1(a)(7) under the Act by the later of (a) the 
compliance date of the rule or (b) the date on which the Investing 
Management Company and Index Fund execute a Participation Agreement.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Nancy M. Morris,
Secretary.
 [FR Doc. E6-5483 Filed 4-12-06; 8:45 am]

BILLING CODE 8010-01-P