[Federal Register: June 5, 2002 (Volume 67, Number 108)]
[Notices]
[Page 38681-38684]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05jn02-68]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 25594; 812-12390]
Barclays Global Fund Advisors, et al.; Notice of Application
May 29, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (``Act'') for an exemption from sections
2(a)(32), 5(a)(1), and 22(d) of the Act and rule 22c-1 under the Act,
and under sections 6(c) and 17(b) of the Act for an exemption from
sections 17(a)(1) and (a)(2) of the Act.
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Summary of Application: Applicants request an order that would
permit: (a) Series of an open-end management investment company, whose
portfolios will consist of the component securities of certain fixed
income indices, to issue shares of limited redeemability; (b) secondary
market transactions in the shares of the series at negotiated prices;
and (c) affiliated persons of the series to deposit securities into,
and receive securities from, the series in connection with the purchase
and redemption of aggregations of the series' shares.
Applicants: Barclays Global Fund Advisors (``Adviser''), iShares
Trust (``Trust'') and SEI Investments Distribution Co.
(``Distributor'').
Filing Dates: The application was filed on January 2, 2001 and was
amended on November 20, 2001, May 17, 2002, and May 28, 2002.
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 June 24, 2002 and should be accompanied by proof of
service on applicants, in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons may request notification of a hearing by writing to
the Commission's Secretary.
ADDRESSES: Secretary, Commission, 450 5th Street, NW, Washington, DC
20549-0609. Applicants: Joanne T. Medero, Esq., Barclays Global Fund
Advisors, c/o Barclays Global Investors, 45 Fremont Street, San
Francisco, CA 94105; Susan C. Mosher, Esq., iShares Trust, c/o
Investors Bank & Trust Company, 200 Clarendon Street, Boston, MA 02116;
and William Zitelli, Esq., SEI Investments Distribution Co., One
Freedom Valley Drive, Oaks, PA 19456.
FOR FURTHER INFORMATION CONTACT: Laura J. Riegel, Senior Counsel, at
(202) 942-0567, or Michael W. Mundt, Senior Special Counsel, at (202)
942-0564 (Division of Investment Management).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
Commission's Public Reference Branch, 450 5th Street, NW, Washington,
DC 20549-0102 (tel. 202-942-8090).
Applicants' Representations
1. The Trust is an open-end management investment company
registered under the Act and established in the state of Delaware. The
Trust is organized as a series fund with multiple series.\1\ The
Company intends to offer seven (7) new series of shares (each, a ``New
Fund''). The Adviser, an investment adviser registered under the
Investment Advisers Act of 1940, will serve as investment adviser to
each New Fund. The Distributor, a broker-dealer unaffiliated with the
Adviser and registered under the Securities Exchange Act of 1934
(``Exchange Act''), will serve as the principal underwriter of the New
Fund's shares.
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\1\ The existing series of the Trust operate under the terms of
three prior orders. See Barclays Global Fund Advisors, et al.,
Investment Company Act Release Nos. 24394 (Apr. 17, 2000) (notice)
and 24451 (May 12, 2000) (order); Barclays Global Fund Advisors, et
al., Investment Company Act Release Nos. 24393 (Apr. 17, 2000)
(notice) and 24452 (May 12, 2000) (order); and Barclays Global Fund
Advisors, et al., Investment Company Act Release Nos. 25078 (July
24, 2001) (notice) and 25111 (Aug. 15, 2001) (order).
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2. Each New Fund will invest in a portfolio of securities
(``Portfolio Securities'') generally consisting of the component
securities of a specified fixed income securities index (each, an
``Underlying Index'').\2\ No entity that
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creates, compiles, sponsors, or maintains an Underlying Index will be
an affiliated person, as defined in section 2(a)(3) of the Act, or an
affiliated person of an affiliated person, of the Trust, the Adviser,
the Distributor, or a promoter of a New Fund.
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\2\ The Underlying Indices for the New Funds are Lehman Brothers
1-3 Year Treasury Index, Lehman Brothers 7-10 Year Treasury Index,
Lehman Brothers 20+ Year Treasury Index, Lehman Brothers Treasury
Index, Lehman Brothers Government/Credit Index, Lehman Brothers
Credit VLI Index, and Goldman Sachs InvesTop Index.
Except for the New Funds that track the Lehman Brothers Credit
VLI Index (``Lehman Corporate Bond Fund'') and Goldman Sachs
InvesTop Index (``Goldman Sachs Corporate Bond Fund''), each New
Fund will invest at least 90% of its assets in the component
securities of its Underlying Index and may invest the remainder of
its assets in certain futures, options, and swap contracts, cash and
cash equivalents, and in bonds not included in its Underlying Index,
which the Adviser believes will help the New Fund track its
Underlying Index. Each of the Lehman Corporate Bond Fund and Goldman
Sachs Corporate Bond Fund generally will invest at least 90% of its
assets in the component securities of its Underlying Index. At
times, each of those New Funds may invest up to 20% of its assets in
certain futures, options and swap contracts, cash and cash
equivalents, as well as in bonds not included in its Underlying
Index, but which the Adviser believes will help the New Fund track
its Underlying Index and which are either: (a) Included in the
broader index upon which such Underlying Index is based; or (b) new
issues entering or about to enter the Underlying Index or the
broader index upon such Underlying Index is based.
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3. The investment objective of each New Fund will be to provide
investment results that correspond generally to the price and yield
performance of its relevant Underlying Index. Each New Fund will
utilize as an investment approach a representative sampling strategy
where each New Fund will seek to hold a representative sample of the
component securities of the Underlying Index. \3\ Applicants expect
that each New Fund will have a tracking error relative to the
performance of its respective Underlying Index of no more than 5
percent.
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\3\ The bonds selected for inclusion in a New Fund by the
Adviser will have aggregate duration, sector, credit rating, coupon,
and embedded option characteristics that closely correlate to those
characteristics of the Underlying Index as a whole.
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4. Shares of each New Fund (``Shares'') will be sold in
aggregations of 50,000 Shares or more (``Creation Unit Aggregations'').
It is currently anticipated that the price of a Creation Unit
Aggregation will be approximately $5,000,000. Creation Unit
Aggregations may be purchased only by or through a party that has
entered into a participant agreement with the Distributor (``Authorized
Participant''). Each Authorized Participant must be a participant in
the Depository Trust Company (``DTC''). Creation Unit Aggregations
generally will be issued in exchange for an in-kind deposit of
securities and cash. An investor wishing to make an in-kind purchase of
a Creation Unit Aggregation from a New Fund will have to transfer to
the New Fund a ``Portfolio Deposit'' consisting of (a) A portfolio of
securities that has been selected by the Adviser to correspond
generally to the price and yield performance of the relevant Underlying
Index (``Deposit Securities''), and (b) a cash payment to equalize any
difference between the total aggregate market value per Creation Unit
Aggregation of the Deposit Securities and the net asset value (``NAV'')
per Creation Unit Aggregation of the New Fund (the ``Balancing
Amount'').\4\ An investor purchasing a Creation Unit Aggregation from a
New Fund will be charged a fee (``Transaction Fee'') to prevent the
dilution of the interests of the remaining shareholders resulting from
the New Fund incurring costs in connection with the purchase of the
Creation Unit Aggregations.\5\ Each New Fund will disclose the maximum
Transaction Fees charged by the New Fund in its prospectus and the
method of calculating the Transaction Fees in its statement of
additional information (``SAI'').
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\4\ On each business day, the Adviser will make available
through the National Securities Clearing Corporation, immediately
prior to the opening of trading on the American Stock Exchange LLC
(``AMEX''), the list of the names and the required number of shares
of each Deposit Security for each New Fund. The Portfolio Deposit
will be applicable to purchases of Creation Unit Aggregations until
the Portfolio Deposit composition is next announced. In addition,
the Trust reserves the right to permit or require the substitution
of an amount of cash to be added to the Balancing Amount to replace
any Deposit Security that may be unavailable or unavailable in
sufficient quantity for delivery to the Trust upon the purchase of a
Creation Unit Aggregation, or which may be ineligible for trading by
an Authorized Participant or the investor on whose behalf the
Authorized Participant is acting. In addition, AMEX and Bloomberg
L.P. will disseminate every 15 seconds throughout the trading day on
AMEX Consolidated Tape B an amount representing on a per Share basis
the sum of the Balancing Amount effective through and including the
prior business day, plus the current value of the Deposit
Securities.
\5\ In situations where a New Fund permits a purchaser to
substitute cash for Deposit Securities, the purchaser may be
assessed an additional fee to offset the New Fund's brokerage and
other transaction costs associated with using cash to purchase the
requisite Deposit Securities.
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5. Orders to purchase Creation Unit Aggregations will be placed
with the Distributor, who will be responsible for transmitting the
orders to the applicable New Fund. The Distributor will issue
confirmations of acceptance, issue delivery instructions to the
applicable New Fund to implement the delivery of Creation Unit
Aggregations, and maintain records of the orders and confirmations. The
Distributor also will be responsible for delivering prospectuses to
purchasers of Creation Unit Aggregations.
6. Persons purchasing Creation Unit Aggregations from a New Fund
may hold the Shares or sell some or all of them in the secondary
market. Shares will be listed on the AMEX. One or more AMEX specialists
will be assigned to make a market in Shares. The price of Shares traded
on the AMEX will be based on a current bid/offer market, and each Share
is expected to have a market value of approximately $100. Transactions
involving the sale of Shares in the secondary market will be subject to
customary brokerage commissions and charges.
7. Applicants expect that purchasers of Creation Unit Aggregations
will include institutional investors and arbitrageurs (which could
include institutional investors). The AMEX specialist, in providing for
a fair and orderly secondary market for Shares, also may purchase
Shares for use in its market-making activities on the AMEX. Applicants
expect that secondary market purchasers of Shares will include both
institutional and retail investors. \6\ Applicants believe that
arbitrageurs and other institutional investors will purchase or redeem
Creation Unit Aggregations to take advantage of discrepancies between
the Shares' market price and the Shares' underlying NAV. Applicants
expect that this arbitrage activity will provide a market
``discipline'' that will result in a close correspondence between the
price at which Shares trade and their NAV. In other words, applicants
do not expect the Shares to trade at a significant premium or discount
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.
Records reflecting the beneficial owners of Shares will be
maintained by DTC or its participants.
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8. Shares will not be individually redeemable. Shares will only be
redeemable in Creation Unit Aggregations through each New Fund. To
redeem, an investor will have to accumulate enough Shares to constitute
a Creation Unit Aggregation. An investor redeeming a Creation Unit
Aggregation generally will receive (a) A portfolio of Portfolio
Securities specified on the date the request for redemption is made
(``Redemption Securities''), which may not be identical to the Deposit
Securities applicable to the purchase of Creation Unit Aggregations,
and (b) a ``Cash Redemption Payment,'' consisting of an amount
calculated in the same manner as the Balancing Amount, although the
actual amounts may differ if the Redemption Securities are not
identical to the Deposit Securities on the same day. An investor may
receive the cash equivalent of a Redemption Security in unusual
circumstances, such as where a redeeming entity is restrained by
[[Page 38683]]
regulation or policy from transacting in the Redemption Security. A
redeeming investor will pay a Transaction Fee to offset the New Fund's
transaction costs, whether the redemption proceeds are in-kind or cash.
An additional variable charge expressed as a percentage of the
redemption proceeds, will be made for cash redemptions.
9. Applicants state that neither the Trust nor any New Fund will be
marketed or otherwise held out as an ``open-end investment company'' or
a ``mutual fund.'' Rather, the designation of the Trust and each New
Fund in all marketing materials will be limited to the terms
``exchange-traded fund,'' ``investment company,'' ``fund'' or ``trust''
without reference to an ``open-end fund'' or ``mutual fund,'' except to
contrast the Trust and each New Fund with a conventional open-end
management investment company. Any marketing materials that describe
the purchase or sale of Creation Unit Aggregations, or refer to
redeemability, will prominently disclose that Shares are not
individually redeemable and that owners of Shares may tender Shares for
redemption to each New Fund in Creation Unit Aggregations only. The
same type of disclosure will be provided in each New Fund's prospectus,
SAI and all reports to shareholders. \7\ The New Fund will provide
copies of its annual and semi-annual shareholder reports to DTC
participants for distribution to beneficial holders of Shares.
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\7\ Applicants state that persons purchasing Creation Unit
Aggregations 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
of 1933 (``Securities Act''). For example, a broker-dealer firm and/
or its client may be deemed a statutory underwriter if it takes
Creation Unit Aggregations after placing an order with the
Distributor, breaks them down into the constituent Shares, and sells
Shares directly to its customers; or if it chooses to couple the
purchase of a supply of new Shares with an active selling effort
involving solicitation of secondary market demand for Shares. The
prospectus 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 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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10. Applicants state that the Trust's website includes quantitative
information updated on a daily basis, including, for each New Fund,
daily trading volume, the previous business day's NAV and the reported
closing price. The website will also include, for each New Fund, a
calculation of the premium or discount of the mid-point of the bid-ask
spread at the time of calculation of the NAV (the ``Bid/Ask Price'')
against NAV, and data in chart format displaying the frequency
distribution of discounts and premiums of the Bid/Ask Price against
NAV, within appropriate ranges, for each of the four previous calendar
quarters. \8\
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\8\ The Bid/Ask Price of a New Fund is determined using the
highest bid and the lowest offer on the national securities exchange
on which the Shares are listed for trading.
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Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the Act
granting an exemption from sections 2(a)(32), 5(a)(1), and 22(d) of the
Act and rule 22c-1 under the Act; and under sections 6(c) and 17(b) of
the Act granting an exemption from sections 17(a)(1) and (a)(2) of the
Act.\9\
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\9\ Applicants, along the iShares, Inc., have filed a separate
exemptive application (the ``Prospectus Delivery Application'') that
would allow dealers to sell Shares to secondary market purchasers
unaccompanied by a prospectus, when prospectus delivery is not
required by the Securities Act. The Prospectus Delivery Application
would require Applicants to make available a product description
(``Product Description'') for distribution in accordance with an
AMEX rule requiring AMEX members and member organizations effecting
transactions in Shares to deliver a Product Description to investors
purchasing those Shares.
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2. Section 6(c) of the Act provides that the Commission may exempt
any person, security, or transaction, or any class or classes of
persons, securities, or transactions, if and to the extent that such
exemption is necessary or appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Act.
Sections 5(a)(1) and 2(a)(32) of the Act
3. Section 5(a)(1) of the Act defines an ``open-end company'' as a
management company that is offering for sale or has outstanding any
redeemable security of which it is the issuer. Section 2(a)(32) of the
Act defines a redeemable security as any security, other than short-
term paper, under the terms of which the holder, upon its presentation
to the issuer, is entitled to receive approximately his proportionate
share of the issuer's current net assets, or the cash equivalent.
Because Shares will not be individually redeemable, applicants request
an order under section 6(c) of the Act that would permit the Trust to
register each New Fund as a series of an open-end management investment
company and issue Shares that are redeemable in Creation Unit
Aggregations. Applicants state that investors may purchase Shares in
Creation Unit Aggregations from each New Fund and redeem Creation Unit
Aggregations through each New Fund.
Applicants further state that because the market price of Creation
Unit Aggregations will be disciplined by arbitrage opportunities,
investors generally should be able to sell Shares in the secondary
market at approximately their NAV.
Section 22(d) of the Act and Rule 22c-1 Under the Act
4. Section 22(d) of the Act, among other things, prohibits a dealer
from selling a redeemable security that is being currently offered to
the public by or through an underwriter, except at a current public
offering price described in the prospectus. Rule 22c-1 under the Act
generally requires that a dealer selling, redeeming, or repurchasing a
redeemable security do so only at a price based on its NAV. Applicants
state that secondary market trading in Shares will take place at
negotiated prices, not at a current offering price described in the
prospectus, and not at a price based on NAV. Thus, purchases and sales
of Shares in the secondary market will not comply with section 22(d)
and rule 22c-1. Applicants request an exemption under section 6(c) of
the Act from these provisions.
5. Applicants assert that the concerns sought to be addressed by
section 22(d) of the Act and rule 22c-1 under the Act with respect to
pricing are equally satisfied by the proposed method of pricing Shares.
Applicants maintain that while there is little legislative history
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to: (a) Prevent dilution caused by
certain riskless-trading schemes by principal underwriters and contract
dealers; (b) prevent unjust discrimination or preferential treatment
among buyers resulting from sales at different prices; and (c) assure
an orderly distribution of investment company shares by eliminating
price competition from dealers offering shares at less than the
published sales price and repurchasing shares at more than the
published redemption price.
6. Applicants believe that none of these purposes will be thwarted
by permitting Shares to trade in the secondary market at negotiated
prices. Applicants state (a) that secondary market trading in Shares
would not cause dilution for owners of Shares because such transactions
do not directly involve the assets of a New
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Fund, and (b) to the extent different prices exist during a given
trading day, or from day to day, these variances will occur as a result
of third-party market forces, such as supply and demand. Therefore,
applicants assert that secondary market transactions in Shares will not
lead to discrimination or preferential treatment among purchasers.
Finally, applicants contend that the proposed distribution system will
be orderly because arbitrage activity will ensure that the difference
between the market price of Shares and their NAV remains narrow.
Section 17(a) of the Act
7. Section 17(a) of the Act makes it unlawful, except under certain
circumstances, for any affiliated person of a registered investment
company, or any affiliated person of such a person, acting as
principal, to sell any security to, or purchase any security from, such
registered investment company. Section 2(a)(3) of the Act 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
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.
8. Applicants state that any person owning 5% or more of a New
Fund's Shares or more than 25% of a New Fund's Shares will be
affiliated with the New Fund. Applicants state that section 17(a) may
prohibit such affiliated persons of a New Fund (and affiliated persons
of these affiliated persons that are not otherwise affiliated with the
Trust or the New Fund) from purchasing or redeeming Creation Unit
Aggregations in kind. Applicants request an exemption from section
17(a) under sections 6(c) and 17(b) to permit these affiliated persons
of the New Fund (and affiliated persons of these affiliated persons
that are not otherwise affiliated with the Trust or the New Fund) to
effect such transactions in Creation Unit Aggregations.
9. 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 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. Applicants contend that no useful purpose would
be served by prohibiting persons with the types of affiliations
described above from purchasing or redeeming Creation Unit
Aggregations. The deposit procedure for in-kind purchases and
redemption procedure for in-kind redemptions will be the same for all
purchases and redemptions. Deposit Securities and Redemption Securities
will be valued under the same objective standards applied to valuing
Portfolio Securities. Therefore, applicants state that in-kind
purchases and redemptions will not favor affiliated persons, and
affiliated persons of these affiliated persons, described above.
Applicants' Conditions
Applicants agree that the order granting the requested relief will
be subject to the following conditions:
1. Applicants will not register a future series of the Trust that
would rely on the requested relief, by means of filing a post-effective
amendment to the Trust's registration statement or by any other means,
unless applicants have requested and received with respect to such
future series, either exemptive relief from the Commission or a no-
action letter from the Division of Investment Management of the
Commission.
2. Each New Fund's prospectus and the Product Description will
clearly disclose that, for purposes of the Act, Shares are issued by
the New Fund and that the acquisition of Shares by investment companies
is subject to the restrictions of section 12(d)(1) of the Act.
3. As long as each New Fund operates in reliance on the requested
order, the Shares of such New Fund will be listed on a national
securities exchange.
4. Neither the Trust nor any New Fund will be advertised or
marketed as an open-end fund or a mutual fund. Each New 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 New Fund and tender those Shares for
redemption to the New Fund in Creation Unit Aggregations only. Any
advertising material that describes the purchase or sale of Creation
Unit Aggregations or refers to redeemability will prominently disclose
that Shares are not individually redeemable and that owners of Shares
may acquire those Shares from the New Fund and tender those Shares for
redemption to the New Fund in Creation Unit Aggregations only.
5. The website for the Trust, which will be publicly accessible at
no charge, will contain the following information, on a per Share
basis, for each New Fund: (a) the prior business day's NAV and the Bid/
Ask Price, and a calculation of the premium or discount of such Bid/Ask
Price against such NAV; and (b) data in chart format displaying the
frequency distribution of discounts and premiums of the daily Bid/Ask
Price against the NAV, within appropriate ranges, for each of the four
previous calendar quarters. In addition, the Product Description for
each New Fund will state that the website for the Trust has information
about the premiums and discounts at which a New Fund's Shares have
traded.
6. The prospectus and annual report for each New Fund will also
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 New Fund), (i) the
cumulative total return and the average annual total return based on
NAV and Bid/Ask Price, and (ii) the cumulative total return of the
relevant Underlying Index.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-14007 Filed 6-4-02; 8:45 am]
BILLING CODE 8010-01-P