

[Federal Register: May 7, 2007 (Volume 72, Number 87)]
[Notices]               
[Page 25802-25808]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07my07-91]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27811; 812-13335]

 
PowerShares Exchange-Traded Fund Trust, et al.; Notice of 
Application

April 30, 2007.
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), 22(e) and 24(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 open-end management investment companies, whose 
portfolios will consist of the component securities of certain foreign 
equity securities indexes or fixed income securities indexes, to issue 
shares (``Fund Shares'') that can be purchased from the investment 
companies and redeemed only in large aggregations (``Creation Units''); 
(b) secondary market transactions in Fund Shares to occur at negotiated 
prices on a national securities exchange; (c) dealers to sell Fund 
Shares to purchasers in the secondary market unaccompanied by a 
prospectus, when prospectus delivery is not required by the Securities 
Act of 1933 (the ``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) the series to pay redemption proceeds, under certain 
circumstances, more than seven days after the tender of a Creation Unit 
for redemption. In addition, the order would delete a condition related 
to future relief and expand the scope of future relief in a prior 
order.\1\
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    \1\ See PowerShares Exchange-Traded Fund Trust, Investment 
Company Act Release Nos. 25961 (March 4, 2003) (notice) and 25985 
(March 28, 2003) (order) (the ``Prior Order'').

Applicants: PowerShares Exchange-Traded Fund Trust (the ``Initial 
Trust''), PowerShares Global Exchange-Traded Fund Trust (the ``New 
Trust,'' and together with the Initial Trust, the ``Trusts''), 
PowerShares Capital Management LLC (the ``Adviser''), and AIM 
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Distributors, Inc. (the ``Distributor'').

Filing Dates: The application was filed on October 19, 2006 and amended 
on March 29, 2007 and April 26, 2007. Applicants have agreed to file an 
amendment during the notice period, the substance of which is contained 
in this 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 24, 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, Securities and Exchange Commission, 100 F Street, 
NE, Washington, DC 20549-1090. The Trusts and the Adviser: 301 West 
Roosevelt Road, Wheaton, IL 60187; the Distributor: 11 Greenway Plaza, 
Suite 100, Houston, TX 77046-1173.

FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Senior Counsel, at (202) 
551-6813, or Mary Kay Frech, 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 (telephone (202) 551-5850).

Applicants' Representations

    1. The Trusts are open-end management investment companies 
registered under the Act and organized as Massachusetts business 
trusts. The Trusts are organized as series funds (each such series, an 
``Index Fund''). The Initial Trust currently offers and sells certain 
Index Funds. The Initial Trust intends to offer nine new Index Funds 
and the New Trust intends to offer 37 new Index Funds (each, a ``New 
Fund''). The Adviser is registered as an

[[Page 25803]]

investment adviser under the Investment Advisers Act of 1940 (the 
``Advisers Act'') and will serve as the investment adviser to each New 
Fund. The Distributor, a broker-dealer registered under the Securities 
Exchange Act of 1934 (the ``Exchange Act''), will serve as the 
principal underwriter for each New Fund. The Adviser may in the future 
retain one or more sub-advisers (``Sub-Advisers'') to manage one or 
more of the New Funds for which it will act as the investment adviser. 
The Sub-Advisers will be registered under the Advisers Act or will be 
exempt from such registration.
    2. Each New Fund will invest in a portfolio of securities 
(``Portfolio Securities'') generally consisting of the component 
securities (``Component Securities'') of a specified securities index 
(the ``Underlying Indexes''). In the case of the New Funds offered by 
Initial Trust, the Underlying Indexes will be composed of fixed-income 
securities (each, a ``Fixed Income Index'') and in the case of the New 
Funds offered by the New Trust, the Underlying Indexes will be composed 
of foreign securities (each, a ``Foreign Index''). Each New Fund based 
on a Fixed Income Index is referred to as a ``Fixed Income Fund.'' \2\ 
Each New Fund based on a Foreign Index is a ``Foreign Fund.'' \3\ The 
board of trustees of each Trust or of additional open-end management 
investment companies created by the Adviser (``Board'') may establish 
additional Index Funds in the future (the ``Future Funds'') that will 
be based on other Foreign Indexes or Fixed Income Indexes. Applicants 
request that the relief requested in the application apply to any such 
Future Funds. Any Future Fund will (a) be advised by the Adviser or an 
entity controlling, controlled by or under common control with the 
Adviser and (b) comply with the terms and conditions of the order.\4\ 
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 
Trusts, the Adviser, the Sub-Adviser, the Distributor, or a promoter of 
a New Fund.
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    \2\ The Fixed Income Indexes for the Fixed Income Funds are: DB 
Emerging Markets USD Liquid Bond Index, Merrill Lynch U.S. Domestic 
Index, Merrill Lynch Global Inflation-Linked Government Index, 
Merrill Lynch 1-10 Years U.S. Inflation-Linked Treasury Index, Ryan/
Mergent 1-30 Year Laddered Treasury Index, DB U.S. Agency Mortgage 
TBA Index, Wachovia Global ex-U.S. Bond Index, Wachovia Yield 
Focused Investment Grade Bond Index, and Wachovia High Yield Bond 
Index.
    \3\ The Foreign Indexes for the Foreign Funds are: the FTSE RAFI 
Developed Markets ex-U.S. 1000 Index, FTSE RAFI Developed Markets 
ex-U.S. Small Index, FTSE RAFI Emerging Markets Index, FTSE RAFI 
Europe Index, FTSE RAFI Europe Small Index, FTSE RAFI Latin America 
Index, FTSE RAFI Asia Pacific ex-Japan Index, FTSE RAFI Asia Pacific 
ex-Japan Small Index, FTSE RAFI BRIC Index, FTSE RAFI Japan Index, 
FTSE RAFI Canada Index, FTSE RAFI Germany Index, FTSE RAFI Hong Kong 
Index, FTSE RAFI Mexico Index, FTSE RAFI South Korea Index, FTSE 
RAFI Taiwan Index, FTSE RAFI United Kingdom Index, FTSE RAFI China 
Index, FTSE RAFI Australia Index, FTSE RAFI Brazil Index, FTSE RAFI 
France Index, FTSE RAFI South Africa Index, Indus India Index, 
WilderHill New Energy Global Innovation Index, International Listed 
Private Equity Index, Palisades Global Water Index, QSG Developed 
International Opportunities Index, QSG Developed International Value 
Index, QSG Developed International Growth Index, QSG Active Japan 
Index, QSG Asia-Pacific Opportunities Index, QSG Active Europe 
Index, QSG Active Australia Index, QSG Active Canada Index, QSG 
Active France Index, QSG Active Germany Index, and QSG Active UK 
Index.
    \4\ All existing entities that currently intend to rely on the 
requested order have been named as applicants. Any other existing or 
future entity that subsequently relies on the order will comply with 
the terms and conditions of the application.
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    3. The investment objective of each New Fund will be to provide 
investment results that generally correspond, before fees and expenses, 
to the total return of the relevant Underlying Index. A Foreign Fund 
will invest at least 90% of its assets in the Component Securities of 
its Foreign Index and in Depositary Receipts (as defined below) 
representing such Component Securities. A Foreign Fund may invest up to 
10% of its assets in certain stock index futures, stock options, 
options on stock index futures, and swap contracts, in each case 
related to its respective Foreign Index and its Component Securities, 
as well as cash and cash equivalents. Each Fixed Income Fund generally 
will invest at least 90% of its assets in Component Securities of its 
respective Fixed Income Index (except with respect to the PowerShares 
Domestic Aggregate Bond Portfolio and the PowerShares Mortgage-Backed 
Securities Portfolio, as set forth below). However, each Fixed Income 
Fund may at times 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 Fixed Income Index, but which the Adviser or 
Sub-Adviser believes will help the Fixed Income Fund track its Fixed 
Income Index.
    4. The PowerShares Domestic Aggregate Bond Portfolio will seek to 
track that portion of the Merrill Lynch U.S. Domestic Index devoted to 
government mortgage-backed securities (``MBS'') by investing a 
corresponding percentage of its assets either in MBS included in the 
index or in to-be-announced (``TBA'') transactions on MBS. The 
PowerShares Mortgage-Backed Securities Portfolio will invest at least 
90% of its assets in MBS included in the DB U.S. Agency Mortgage TBA 
Index or in TBA transactions on MBS. A ``TBA transaction'' essentially 
is a purchase or sale of a pass-through security for future settlement 
at an agreed-upon date. Applicants state that most mortgage pass-
through securities trades are executed as TBA transactions. Applicants 
state that TBA transactions increase the liquidity and pricing 
efficiency of transactions in MBS because they permit similar MBS to be 
traded interchangeably pursuant to commonly observed settlement and 
delivery requirements.
    5. Each Foreign Fund will utilize as an investment approach either 
a replication strategy or a representative sampling strategy, and each 
Fixed Income Fund will use a representative sampling strategy. A 
Foreign Fund using a replication strategy generally will hold most of 
the Component Securities of the Foreign Index in the same approximate 
proportions as the Foreign Index, but may not hold all of the 
securities that comprise the Foreign Index in certain instances. A New 
Fund using a representative sampling strategy will seek to hold a 
representative sample of the Component Securities of the Underlying 
Index and will invest in some but not all of the Component Securities 
of its Underlying Index. Applicants anticipate that a New Fund that 
utilizes a representative sampling strategy will not track its 
Underlying Index with the same degree of accuracy as an investment 
vehicle that invested in every Component Security of the Underlying 
Index with the same weighting as the Underlying Index. Applicants 
expect that each New Fund will have a tracking error relative to the 
performance of its respective Underlying Index of less than 5 percent.
    6. Any Depositary Receipts held by a Foreign Fund will be 
negotiable securities that represent ownership of a non-U.S. company's 
publicly traded stock. Depositary Receipts will typically be American 
Depositary Receipts (``ADRs''), but may include Global Depositary 
Receipts (``GDRs'') and Euro Depositary Receipts (``EDRs''). ADRs, GDRs 
and EDRs are collectively referred to herein as ``Depositary 
Receipts.'' Applicants believe that, in certain cases, holding one or 
more Depositary Receipts rather than Component Securities of the 
relevant Foreign Index, will improve the liquidity, tradability and 
settlement of a Foreign Fund's then current Fund Deposit (as defined 
below) (thereby improving the efficiency of the creation and redemption 
process and facilitating efficient arbitrage activity), while at the 
same time permitting a Foreign Fund to maintain direct

[[Page 25804]]

exposure to Component Securities of its Foreign Index. Applicants 
intend that any Foreign Fund would be able to treat Depositary Receipts 
that represent Component Securities of its Foreign Index as Component 
Securities for purposes of any requirements that a percentage of a 
Foreign Fund's portfolio be invested in Component Securities of its 
Foreign Index.
    7. Creation Units will consist of either 50,000 or 100,000 Shares, 
as specified in the relevant prospectus (``Prospectus''). The price of 
a Creation Unit will range from $1,000,000 to $5,000,000. Creation 
Units may be purchased only by or through a party that has entered into 
an agreement with the Distributor regarding creations and redemptions 
of Creation Units (an ``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, a clearing agency that is registered with the 
Commission, or (b) a participant in the Depository Trust Company 
(``DTC'') system. Creation Units generally will be issued in exchange 
for an in-kind deposit of securities and cash. A New Fund also may sell 
Creation Units on a cash-only basis in limited circumstances.\5\ An 
investor wishing to purchase a Creation Unit from a New Fund will have 
to transfer to the New Fund a ``Fund Deposit'' consisting of: (a) a 
portfolio of securities that has been selected by the Adviser to 
correspond to the returns on the relevant Underlying Index (``Deposit 
Securities''), and (b) a cash payment to equalize any differences 
between the market value per Creation Unit of the Deposit Securities 
and the net asset value (``NAV'') per Creation Unit (``Cash 
Component'').\6\ An investor purchasing a Creation Unit 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 
Units.\7\ Each New Fund will disclose the Transaction Fees charged by 
the New Fund in its Prospectus and the method of calculating the 
Transaction Fees in its Prospectus or statement of additional 
information (``SAI'').
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    \5\ Over time, the Adviser or Sub-Adviser may conclude that 
operating on an exclusively in-kind basis for a New Fund may present 
operational problems for such New Fund. Therefore, each Trust may 
permit, in its discretion, with respect to a New Fund under certain 
circumstances, an in-kind purchaser to substitute cash in lieu of 
depositing some or all of the requisite Deposit Securities. For 
example, each of the PowerShares Domestic Aggregate Bond Portfolio 
and the PowerShares Mortgage-Backed Securities Portfolio will 
require purchasing investors to substitute cash in lieu of any 
Deposit Security that is a mortgage TBA transaction. This cash in 
lieu of mortgage TBAs will likely result in cash-only creations with 
respect to the PowerShares Mortgage-Backed Securities Portfolio. 
More generally, substitution might be permitted or required because 
one or more Deposit Securities may be unavailable, may not be 
available in the quantity needed to make a Portfolio Deposit, or may 
not be eligible for trading by an Authorized Participant (or the 
investor on whose behalf the Authorized Participant is acting). 
Applicants currently expect that PowerShares FTSE RAFI Taiwan 
Portfolio, PowerShares FTSE RAFI South Korea Portfolio, PowerShares 
FTSE RAFI Brazil Portfolio, PowerShares FTSE RAFI BRIC Portfolio and 
PowerShares Indus India Portfolio will utilize ``cash-only'' 
purchases and redemptions of Creation Units due to local exchange 
restrictions on short sales and/or free delivery of stocks, as well 
as difficulty associated with borrowing stocks in the applicable 
markets.
    \6\ On each business day, prior to the opening of trading on the 
Exchange (as defined below), the Adviser or Sub-Adviser will make 
available a list of the names and the required number of shares of 
each Deposit Security required for the Fund Deposit for each New 
Fund. That Fund Deposit will apply to all purchases of Creation 
Units until a new Fund Deposit for a New Fund is announced. Each New 
Fund reserves the right to permit or require the substitution of an 
amount of cash in lieu of depositing some or all of the Deposit 
Securities in certain circumstances. With respect to the Foreign 
Funds, the Exchange or other market information provider will 
disseminate every 15 seconds throughout the trading day via the 
facilities of the Consolidated Tape Association an amount 
representing on a per share basis the sum of the current value of 
the Deposit Securities and the estimated Cash Component. As the 
respective international local markets close, the market value of 
the Deposit Securities will continue to be updated for foreign 
exchange rates for the remainder of the U.S. trading day at the 
prescribed 15 second interval. With respect to the Fixed Income 
Funds, the Exchange or other market information provider will 
disseminate a calculation of the approximate NAV of a Fund Share 
(the ``Intra-day Indicative Value'' or ``IIV'') every 15 seconds 
throughout the trading day, separately from the consolidated tape.
    \7\ When a New Fund permits a purchaser to substitute cash for 
Deposit Securities, the purchaser may be assessed an additional fee 
to offset the brokerage and other transaction costs associated with 
using cash to purchase the requisite Deposit Securities.
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    8. Orders to purchase Creation Units of a New Fund will be placed 
with the Distributor who will be responsible for transmitting each 
order to each New Fund. The Distributor will issue, and maintain 
records of, confirmations of acceptance to purchasers of Creation Units 
and delivery instructions to the Trusts (to implement the delivery of 
Creation Units). The Distributor will also be responsible for 
delivering Prospectuses to purchasers of Creation Units.
    9. Persons purchasing Creation Units from a New Fund may hold the 
Fund Shares or sell some or all of them in the secondary market. Shares 
of the New Funds will be listed on a national securities exchange, as 
defined in section 2(a)(26) of the Act (an ``Exchange''), and traded in 
the secondary market in the same manner as other equity securities. An 
Exchange specialist (``Specialist'') will be assigned to make a market 
in Shares. If The NASDAQ Stock Market, Inc. (``NASDAQ'') is the listing 
Exchange, one or more member firms of NASDAQ will act as a market maker 
(``Market Maker'') and maintain a market on NASDAQ for Fund Shares 
trading on NASDAQ. The price of Fund Shares traded on an Exchange will 
be based on a current bid/offer market. Each Fund Share is currently 
expected to have a market value of between $20 and $50. Transactions 
involving the sale of Fund Shares in the secondary market will be 
subject to customary brokerage commissions and charges.
    10. Applicants expect that purchasers of Creation Units will 
include institutional investors and arbitrageurs (which could include 
institutional investors). The Specialist or Market Maker, in providing 
for a fair and orderly secondary market for Fund Shares, also may 
purchase Creation Units for use in its market-making activities. 
Applicants expect that secondary market purchasers of Fund Shares will 
include both institutional and retail investors.\8\ Applicants expect 
that the price at which the Fund 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 
Fund Shares will not trade at a material discount or premium in 
relation to their NAV.
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    \8\ Fund Shares will be registered in book-entry form only. DTC 
or its nominee will be the registered owner of all outstanding Fund 
Shares. DTC or its participants will maintain records reflecting the 
beneficial owners of Fund Shares.
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    11. Fund Shares will not be individually redeemable. Fund Shares 
will only be redeemable in Creation Units through a New Fund. To 
redeem, an investor will have to accumulate enough Fund Shares to 
constitute a Creation Unit. An investor redeeming a Creation Unit 
generally will receive (a) the Portfolio Securities designated to be 
delivered for Creation Unit redemptions on the date the request for 
redemption is made (``Fund Securities''),\9\ which

[[Page 25805]]

may not be identical to the Deposit Securities applicable to the 
purchase of Creation Units, 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 a given day. An investor may 
receive the cash equivalent of a Fund Security upon its request if, for 
example, the investor were constrained from effecting transactions in 
the Fund Security by regulation or policy.
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    \9\ The New Funds will comply with the federal securities laws 
in accepting Deposit Securities and satisfying redemptions with Fund 
Securities, including that the Deposit Securities and Fund 
Securities are sold in transactions that would be exempt from 
registration under the Securities Act. As a general matter, the 
Deposit Securities and Fund Securities will correspond pro rata to 
the securities held by the New Funds. In accepting Deposit 
Securities and satisfying redemptions with Fund Securities that are 
restricted securities eligible for resale pursuant to rule 144A 
under the Securities Act, each New Fund will comply with the 
conditions of rule 144A, including in satisfying redemptions with 
such rule 144A eligible restricted Fund Securities. The Prospectus 
for each New Fund will also state that an Authorized Participant 
that is not a Qualified Institutional Buyer (``QIB'') will not be 
able to receive Fund Securities that are restricted securities 
eligible for resale under rule 144A.
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    12. A redeeming investor will pay a Transaction Fee to offset 
transaction costs, whether the redemption proceeds are in kind or cash. 
When an investor redeems for cash rather than in kind, the investor may 
pay a higher Transaction Fee. Such Transaction Fee will be calculated 
in the same manner as a Transaction Fee payable in connection with the 
purchase of a Creation Unit.
    13. Applicants state that neither the Trusts nor any New Fund will 
be marketed or otherwise held out as a ``mutual fund.'' Rather, 
applicants state that each New Fund will be marketed as an ``exchange-
traded fund.'' No New Fund marketing materials (other than as required 
in the Prospectus) will refer to a New Fund as an ``open-end'' or 
``mutual fund,'' except to contrast a New Fund with a conventional 
open-end management investment company. In all marketing materials 
where the method of obtaining, buying, or selling Fund Shares is 
described, applicants will include a statement to the effect that Fund 
Shares are not redeemable through a New Fund except in Creation Units. 
The same type of disclosure will be provided in each New Fund's 
Prospectus, SAI, advertising materials, and all reports to 
shareholders. The New Funds will provide copies of their annual and 
semi-annual shareholder reports to DTC participants for distribution to 
beneficial holders of Fund Shares.
    14. Applicants also seek to amend the Prior Order to modify the 
terms under which the Initial Trust may offer additional series in the 
future. The Prior Order is currently subject to a condition that does 
not permit applicants to register any series by means of filing a post-
effective amendment to the Initial Trust's registration statement or by 
any other means, unless (a) applicants have requested and received with 
respect to such series, either exemptive relief from the Commission or 
a no-action letter from the Division of Investment Management of the 
Commission, or (b) the series will be listed on a national securities 
exchange without the need for filing pursuant to rule 19b-4 under the 
Exchange Act. The order would amend the Prior Order to delete this 
condition. In addition, the order would expand the relief under the 
Prior Order to include registered investment companies other than the 
Initial Trust. As amended, the Prior Order would permit the 
introduction of series of the Initial Trust and series of other open-
end management investment companies (collectively, ``Future Index 
Funds'') that (a) are advised by the Adviser or an entity controlling, 
controlled by or under common control with the Adviser; (b) track 
Underlying Indices comprised of equity securities issued by domestic 
issuers that are created, compiled, sponsored or maintained by an 
entity that is not an affiliated person, as defined in section 2(a)(3) 
of the Act, or an affiliated person of an affiliated person, of the 
Adviser, the Distributor, the Initial Trust, the New Trust or any sub-
advisor or promoter of an Index Fund, and (c) comply with the 
respective terms and conditions of the Prior Order, as amended by the 
order.
    15. Applicants believe that the modification of the future relief 
available under the Prior Order would be consistent with section 6(c) 
and 17(b) of the Act and that granting the requested relief will 
facilitate the timely creation of Future Index Funds and the 
commencement of secondary market trading of such Future Index Funds by 
removing the need to seek additional exemptive relief. Applicants 
submit that the terms and conditions of the Prior Order have been 
appropriate for the exchange-traded funds advised by the Adviser and 
would remain appropriate for Future Index Funds. Applicants also submit 
that tying exemptive relief under the Act to the ability of a Future 
Index Fund to be listed on an Exchange without the need for a rule 19b-
4 filing under the Exchange Act is not necessary to meet the standards 
under section 6(c) and 17(b) of the Act.

Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act 
granting an exemption from sections 2(a)(32), 5(a)(1), 22(d), 22(e) and 
24(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.
    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.

Sections 5(a)(1) and 2(a)(32) of the Act

    3. Section 5(a)(1) of the Act defines an ``open-end company'' as a 
management investment company that is offering for sale or has 
outstanding any redeemable security of which it is the issuer. Section 
2(a)(32) of the Act defines a redeemable security as any security, 
other than short-term paper, under the terms of which the holder, upon 
its presentation to the issuer, is entitled to receive approximately 
his proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Fund Shares will not be individually redeemable, 
applicants request an order that would permit each New Fund, as a 
series of an open-end management investment company, to issue Fund 
Shares that are redeemable in Creation Units only. Applicants state 
that investors may purchase Fund Shares in Creation Units from each New 
Fund and redeem Creation Units. Applicants further state that because 
the market price of Fund Shares will be disciplined by arbitrage 
opportunities, investors should be able to sell Fund 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 Fund 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 Fund 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.

[[Page 25806]]

    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 Fund 
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 Fund Shares to trade in the secondary market at 
negotiated prices. Applicants state that (a) secondary market trading 
in Fund Shares does not involve the New Funds as parties and cannot 
result in dilution of an investment in Fund 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 Fund 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 
Fund Shares and their NAV remains narrow.

Section 22(e) of the Act

    7. Section 22(e) generally prohibits a registered investment 
company from suspending the right of redemption or postponing the date 
of payment of redemption proceeds for more than seven days after the 
tender of a security for redemption. The principal reason for the 
requested exemption is that settlement of redemptions for the Foreign 
Funds is contingent not only on the settlement cycle of the United 
States market, but also on currently practicable delivery cycles in 
local markets for underlying foreign securities held by the Foreign 
Funds. Applicants state that local market delivery cycles for 
transferring certain foreign securities to investors redeeming Creation 
Units, together with local market holiday schedules, will under certain 
circumstances require a delivery process in excess of seven calendar 
days for the Foreign Funds. Applicants request relief under section 
6(c) of the Act from section 22(e) to allow the Foreign Funds to pay 
redemption proceeds more than seven days after the tender of Fund 
Shares for redemption. Applicants anticipate that the delivery of 
redemption proceeds would be made at the latest within 14 calendar days 
after the redemption request except to the extent that a redemption 
delivery is delayed due to the proclamation of new or special holidays, 
the treatment by market participants of certain days as ``informal 
holidays,'' the elimination of existing holidays or changes in local 
securities delivery practices. At all other times and except as 
disclosed in the relevant Prospectus, product description (``Product 
Description'') and/or SAI, applicants expect that each Foreign Fund 
will be able to deliver redemption proceeds within seven days.\10\ With 
respect to Future Funds that are Foreign Funds, applicants seek the 
same relief from section 22(e) only to the extent that circumstances 
similar to those described in the application exist. Applicants state 
that section 22(e) was designed to prevent unreasonable, undisclosed 
and unforeseen delays in the payment of redemption proceeds. Applicants 
assert that their requested relief will not lead to the problems that 
section 22(e) was designed to prevent. Applicants state that the 
Prospectus, the Product Description and/or the SAI for each Foreign 
Fund will disclose those local holidays (over the period of at least 
one year following the date of the Prospectus, Product Description or 
SAI), if any, that are expected to prevent the delivery of redemption 
proceeds in seven calendar days, and the maximum number of days needed 
to deliver the proceeds for the New Fund. Applicants are not requesting 
relief from section 22(e) with respect to Foreign Funds that do not 
effect creations and redemptions of Creation Units in-kind.
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    \10\ Rule 15c6-1 under the Exchange Act requires that most 
securities transactions be settled within three business days of the 
trade. Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will affect any obligations applicants 
may have under rule 15c6-1.
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Section 24(d) of the Act

    8. 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 request an exemption from section 24(d) to permit dealers 
selling Fund Shares to rely on the prospectus delivery exemption 
provided by section 4(3) of the Securities Act.\11\
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    \11\ Applicants do not seek relief from the prospectus delivery 
requirement for non-secondary market transactions, including 
purchases of Creation Units or those involving an underwriter. 
Applicants state that persons purchasing Creation Units will be 
cautioned in a New Fund's 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 Adviser, breaks them down into the constituent Fund 
Shares, and sells Fund Shares directly to its customers, or if it 
chooses to couple the purchase of a supply of new Fund Shares with 
an active selling effort involving solicitation of secondary market 
demand for Fund Shares. A New Fund's Prospectus will state that 
whether a person is an underwriter depends upon all the facts and 
circumstances pertaining to that person's activities. A New Fund's 
Prospectus also will state that dealers who are not ``underwriters'' 
but are participating in a distribution (as contrasted to ordinary 
secondary market trading transactions), and thus dealing with Fund 
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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    9. Applicants state that Fund Shares will be listed on an Exchange 
and will be traded in a manner similar to other equity securities, 
including the shares of closed-end investment companies. Applicants 
note that dealers selling shares of closed-end investment companies in 
the secondary market generally are not required to deliver a prospectus 
to the purchaser. Applicants contend that Fund 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 Fund Shares will be 
exchange-listed, prospective investors will have access to several 
types of market information about Fund Shares. 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 closing price 
and volume information for Fund Shares also will be published daily in 
the financial section of newspapers. The website maintained for the 
Trusts will include, for each New Fund, the prior business day's NAV, 
the mid-point of the bid-ask spread at the time of calculation of NAV 
(``Bid/Ask Price'') and calculation of the premium or discount of the 
Bid/Ask Price at the time of calculation of the NAV against such NAV, 
and data in chart format displaying the frequency distribution of

[[Page 25807]]

discounts and premiums of the Bid/Ask Price against the NAV, within 
appropriate ranges, for each of the four previous calendar 
quarters.\12\
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    \12\ The Bid/Ask Price per Fund Share of a New Fund is 
determined using the highest bid and the lowest offer on the 
Exchange at the time of calculation of such New Fund's NAV.
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    10. Investors also will receive a Product Description describing a 
New Fund and its Fund Shares. Applicants state that, while not intended 
as a substitute for a Prospectus, the Product Description will contain 
information about Fund Shares that is tailored to meet the needs of 
investors purchasing Fund Shares in the secondary market.

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

    11. Section 17(a)(1) and (2) of the Act generally prohibit an 
affiliated person of a registered investment company, or an affiliated 
person of such a person (``second tier affiliate''), from selling any 
security to or purchasing any security from the 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. The 
New Funds may be deemed to be controlled by the Adviser or an entity 
controlling, controlled by or under common control with the Adviser and 
hence affiliated persons of each other. In addition, the New Funds may 
be deemed to be under common control with any other registered 
investment company (or series thereof) advised by the Adviser or an 
entity controlling, controlled by or under common control with the 
Adviser (an ``Affiliated Fund''). Applicants state that because the 
definition of ``affiliated person'' includes any person owning 5% or 
more of an issuer's outstanding voting securities, every purchaser of a 
Creation Unit will be affiliated with the New Fund so long as fewer 
than twenty Creation Units are in existence, and any purchaser that 
owns more than 25% of a New Fund's outstanding Fund Shares will be 
affiliated with a New Fund. Applicants request an exemption from 
section 17(a) under sections 6(c) and 17(b), to permit in-kind 
purchases and redemptions by persons that are affiliated persons or 
second tier affiliates of the New Funds solely by virtue of one or more 
of the following: (1) Holding 5% or more, or more than 25%, of the 
outstanding Fund Shares of either Trust or one or more New Funds; (2) 
an affiliation with a person with an ownership interest described in 
(1); or (3) holding 5% or more, or more than 25%, of the shares of one 
or more Affiliated Funds.
    12. 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. Applicants 
contend that no useful purpose would be served by prohibiting 
affiliated persons or second tier affiliates of a New Fund from 
purchasing or redeeming Creation Units through ``in-kind'' 
transactions. The deposit procedure for in-kind purchases and the 
redemption procedure for in-kind redemptions will be the same for all 
purchases and redemptions. Deposit Securities and Fund Securities will 
be valued under the same objective standards applied to valuing 
Portfolio Securities. Therefore, applicants state that in-kind 
purchases and redemptions will afford no opportunity for the affiliated 
persons and second tier affiliates described above to effect a 
transaction detrimental to the other holders of Fund Shares. Applicants 
also believe that in-kind purchases and redemptions will not result in 
abusive self-dealing or overreaching by these persons of the New Fund.

Applicants' Conditions

    Applicants agree that the Prior Order will continue to be subject 
to the same conditions, except that condition 1 will be deleted. With 
respect to the New Funds, applicants agree that any order granting the 
requested relief will be subject to the following conditions:
    1. Each New Fund's Prospectus and Product Description will clearly 
disclose that, for purposes of the Act, the Fund Shares are issued by a 
registered investment company, and the acquisition of Fund 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 a New Fund beyond the 
limits in section 12(d)(1), subject to certain terms and conditions, 
including that the registered investment company enter into an 
agreement with the New Fund regarding the terms of the investment.
    2. As long as a Trust operates in reliance on the requested order, 
its Fund Shares will be listed on an Exchange.
    3. Neither the Trusts nor any of the New Funds will be advertised 
or marketed as an open-end fund or a mutual fund. Each New Fund's 
Prospectus will prominently disclose that Fund Shares are not 
individually redeemable shares and will disclose that the owners of 
Fund Shares may acquire those Fund Shares from the New Fund and tender 
those Fund Shares for redemption to such New 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 Fund Shares are not individually redeemable and that owners of 
Fund Shares may acquire those Fund Shares from the New Fund and tender 
those Fund Shares for redemption to the New Fund in Creation Units 
only.
    4. The Web site maintained for the Trusts, which is and will be 
publicly accessible at no charge, will contain the following 
information, on a per Fund 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 the Bid/Ask Price at the time of calculation 
of the NAV 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 New Fund has 
information about the premiums and discounts at which the Fund Shares 
have traded.
    5. Each New Fund's Prospectus and annual report 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 Fund 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 
applicable Underlying Index.
    6. Before a New 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

[[Page 25808]]

member organizations effecting transactions in Fund Shares to deliver a 
Product Description to purchasers of Fund Shares.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-8599 Filed 5-4-07; 8:45 am]

BILLING CODE 8010-01-P
