[Federal Register Volume 76, Number 2 (Tuesday, January 4, 2011)]
[Notices]
[Pages 397-401]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-33116]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 29543; File No. 812-13601]
iShares Trust, et al.; Notice of Application
December 27, 2010.
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), 22(d) and 22(e) 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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Applicants: iShares Trust (``Trust''), iShares, Inc.
(``Corporation'') (the Trust and Corporation, together, the
``Companies'' and each a ``Company''), BlackRock Fund Advisors (``BFA''
or ``Adviser'') and SEI Investments Distribution Co. (``Distributor'').
SUMMARY: Summary of Application: Applicants request an order that
permits: (a) Series o
SUMMARY: f certain actively managed open-end management investment
companies to issue shares (``Shares'') redeemable in large aggregations
only (``Creation Units''); (b) secondary market transactions in Shares
to occur at negotiated market prices; (c) certain series to pay
redemption proceeds, under certain circumstances, more than seven days
from the tender of Shares for redemption; and (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.
DATES: Filing Dates: The application was filed on November 7, 2008 and
amended on May 4, 2009, June 17, 2010 and November 12, 2010. Applicants
have agreed to file an amendment during the notice period, the
substance of which is reflected in this notice.
HEARING OR NOTIFICATION OF HEARING: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on January 21, 2011, 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: Andrew Josef, Esq.,
BlackRock Fund Advisors, 400 Howard Street, San Francisco, CA 94105 for
the Companies and BFA, and SEI Investments Distribution Co., One
Freedom Valley Drive, Oaks, PA 19456.
FOR FURTHER INFORMATION CONTACT: Jaea F. Hahn, Senior Counsel, at (202)
551-6870 or Jennifer L. Sawin, 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 via the
Commission's Web site by searching for the file number, or an applicant
using the Company name box, at http://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicants' Representations
1. The Trust is an open-end management investment company
registered under the Act and organized as a Delaware statutory trust.
The Corporation is an open-end management investment company registered
under the Act and organized as a Maryland corporation. The Adviser, an
investment adviser registered under the Investment Advisers Act of 1940
(``Advisers Act''), will serve as investment adviser to the initial
Funds (``Initial Funds'').\1\ The Distributor, a broker-dealer
registered under the Securities Exchange Act of 1934 (``Exchange
Act''), will serve as the
[[Page 398]]
principal underwriter of the Funds' shares.
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\1\ Although BFA does not currently expect to enter into
subadvisory agreements with respect to the management of the Funds,
it may do so in the future. If BFA were to enter into a subadvisory
agreement with a BFA Affiliate (defined below) or other subadviser
(each a ``Subadviser''), such Subadviser would be registered as an
investment adviser under the Advisers Act.
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2. Applicants request that the order apply to the Initial Funds and
any future series of a Company or of other open-end management
investment companies advised by BFA or an entity controlling,
controlled by, or under common control with BFA (a ``BFA Affiliate'')
that may utilize active management strategies, subject to the terms and
conditions of the application (``Future Funds'', together with the
Initial Funds, the ``Funds'').\2\ Each Fund will have a distinct
investment objective and will attempt to achieve such objective by
utilizing an ``active'' management strategy.\3\ The Funds may invest in
equity or fixed income securities traded in the U.S or non-U.S.
markets, or a combination of equity and fixed income securities, as
well as shares of other exchange traded funds (``ETFs'') and shares of
money market mutual funds or other investment companies. Certain of the
Funds may invest in equity securities or fixed income securities traded
in international markets (the ``International Funds''). Applicants
anticipate that certain Funds, including the International Funds, will
invest a portion of their assets in depositary receipts representing
foreign securities in they seek to invest (``Depositary Receipts'').\4\
The Funds will not invest in options contracts, futures contracts or
swap agreements.
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\2\ All entities that currently intend to rely on the order are
named as applicants. Any other entity that relies on the order in
the future will comply with the terms and conditions of the
application.
\3\ Each Fund will comply with the disclosure requirements
adopted by the Commission in Investment Company Act Release No.
28584 (Jan. 13, 2009), as well as any other applicable disclosure
requirements.
\4\ A Fund will not invest in any Depositary Receipts that the
Adviser deems illiquid or for which pricing information is not
readily available. No affiliated persons of Applicant will serve as
the depositary bank for any Depositary Receipts held by a Fund.
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3. Shares of the Funds will be sold at a price between $25 and $100
per Share in Creation Units of 50,000 Shares. All orders to purchase
Creation Units must be placed with the Distributor by or through an
``Authorized Participant,'' which is either: (a) A broker-dealer or
other participant in the shares clearing process through the continuous
net settlement system of the National Securities Clearing Corporation,
or (b) a participant in the Depository Trust Company (``DTC,'' and such
participant, ``DTC Participant''), which in either case has executed an
agreement with a Company, the Distributor and the Transfer Agent, with
respect to creations and redemptions of Creation Units. Each Fund will
sell Shares in Creation Units, generally in exchange for an in-kind
deposit by the purchaser of a particular portfolio of securities
designated by the Adviser (the ``Deposit Securities''), together with
the deposit or refund of a specified cash payment as the case may be
(``Cash Component''). The Cash Component is an amount equal to the
difference between (a) the net asset value (``NAV'') per Creation Unit
and (b) the market value per Creation Unit of the Deposit
Securities.\5\ Applicants state that in some circumstances there may be
operational problems with a Fund operating exclusively on an ``in-
kind'' basis. Each Fund therefore may permit, under certain
circumstances, a purchaser of Creation Units to substitute cash in lieu
of depositing some or all of the requisite Deposit Securities.
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\5\ On each day that a Fund is open, including as required by
section 22(e) of the Act (``Business Day''), the list of names and
required number of each Deposit Security, the estimated Cash
Component for the current day and the Cash Component as of the
previous Business Day will be made available immediately prior to
the opening of trading on the listing Exchange (as defined below).
The Exchange will disseminate every 15 seconds throughout the
trading day, through the facilities of the Consolidated Tape
Association an amount representing, on a per Share basis, the sum of
current value of the Deposit Securities and the estimated Cash
Component.
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4. An investor purchasing a Creation Unit from a 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.\6\ 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 Funds. The Distributor
also will be responsible for maintaining records of both the orders
placed with it and the confirmations of acceptance furnished by it.
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\6\ Where a Fund permits an in-kind purchaser to substitute cash
in lieu of depositing a portion of the Deposit Securities, the
purchaser may be assessed a higher Transaction Fee to cover the cost
of purchasing such Deposit Securities, including brokerage costs.
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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 a national securities exchange as defined in section
2(a)(26) of the Act (``Exchange''). One or more member firms of the
Exchange will act as a specialist and maintain a market for Shares on
the Exchange (the ``Specialist''), or one or more member firms will act
as a market maker (``Market Maker'') and maintain a market for
Shares.\7\ The prices of Shares trading on the Exchange will be based
on a current bid/offer market. Shares sold in the secondary market will
be subject to customary brokerage commissions and charges.
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\7\ If Shares are listed on the NASDAQ, no particular Specialist
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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7. 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
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.\8\ Applicants expect that
the price at which the Shares trade will be disciplined by so-called
``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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\8\ 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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8. Shares will not be individually redeemable, and owners of Shares
may acquire those Shares from a Fund, or tender such Shares for
redemption to the 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. Shares generally will be redeemed in Creation Units in
exchange for a particular portfolio of securities (``Redemption
Securities'') plus or minus a ``Cash Redemption Amount,'' equal to the
difference between the NAV per Creation Unit of the Shares being
redeemed and the market value of the Redemption Securities. An investor
may receive the cash equivalent of a Redemption Security in certain
circumstances, such as if the investor is constrained from effecting
transactions in the security by regulation or policy.\9\ A redeeming
[[Page 399]]
investor may pay a Transaction Fee, calculated in the same manner as a
Transaction Fee payable in connection with the purchases of a Creation
Unit.
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\9\ Applicants state that a cash-in-lieu amount will replace any
``to-be-announced'' (``TBA'') transaction that is listed as a
Deposit Security or Redemption Security of any Fund. A TBA
transaction is a method of trading mortgage-backed securities where
the buyer and seller agree upon general trade parameters such as
agency, settlement date, par amount and price. The actual pools
delivered generally are determined two days prior to the settlement
date. The amount of substituted cash in the case of TBA transactions
will be equivalent to the value of the TBA transaction listed as a
Deposit Security or Redemption Security.
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9. Applicants state that a Fund will comply with Federal securities
laws in accepting Deposit Securities and satisfying redemptions with
Redemption Securities, including that the Deposit Securities and
Redemption Securities are sold in transactions that would be exempt
from registration under the Securities Act.\10\ For each Fund utilizing
an in-kind process, the Deposit Securities and Redemption Securities
will consist of a pro rata basket of the Fund's portfolio.\11\
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\10\ In accepting Deposit Securities and satisfying redemptions
with Redemption Securities that are restricted securities eligible
for resale pursuant to rule 144A under the Securities Act, the
relevant Funds will comply with the conditions of rule 144A,
including in satisfying redemptions with such rule 144A eligible
restricted Redemption Securities.
\11\ There may be minor differences between a basket of Deposit
Securities or Redemption Securities and a true pro rata slice of a
Fund's portfolio solely when (A) it is impossible to break up bonds
beyond certain minimum sizes needed for transfer and settlement or,
(B) in the case of equity securities, rounding is necessary to
eliminate fractional shares or lots that are not tradeable round
lots. A tradeable round lot for an equity security will be the
standard unit of trading in that particular type of security in its
primary market.
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10. No Company nor any individual Fund will be advertised or
marketed as an ``open-end investment company'' or a ``mutual fund.''
Instead, each Fund will be marketed as an ``actively-managed exchange-
traded fund.'' In all marketing materials where the features or method
of obtaining, buying or selling Shares traded on the Exchange are
described, applicants state that there will be a statement or
statements to the effect that Shares are not individually redeemable.
Any advertising materials where features of obtaining, buying or
selling Creation Units are described or where there is a reference to
redeemability will prominently disclose that Shares are not
individually redeemable and that owners of Shares may acquire Shares
from a Fund and tender those Shares for redemption to a Fund in
Creation Units only.
11. The Funds' Web site, which will be publicly available prior to
the public offering of Shares, will include, or will include links to,
the current summary prospectus, the prospectus, statement of
information (``SAI''), and most recent annual and semi-annual reports
to shareholders if required. The Web site will also include additional
quantitative information updated on a daily basis, including, on a per
Share basis, for each Fund, daily trading volume, the prior Business
Day's NAV and the market closing price or mid-point of the bid/ask
spread at the time of calculation of such NAV (``Bid/Ask Price''). On
each Business Day, before commencement of trading in Shares on the
Exchange, each Fund will disclose the identities and quantities of the
securities and other assets held by the Fund that will form the basis
for the Fund's calculation of NAV at the end of the Business Day.\12\
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\12\ Applicants note that under accounting procedures followed
by the Funds, trades made on the prior Business Day (``T'') will be
booked and reflected in NAV on the current Business Day (``T + 1'').
Accordingly, the Funds will be able to disclose at the beginning of
the Business Day the portfolio that will form the basis for the NAV
calculation at the end of the Business Day.
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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), 22(d) and 22(e)
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.
Section 17(b) of the Act provides that the Commission may approve the
sale of securities to an investment company and the purchase of
securities from an investment company, in both cases by an affiliated
person of such company, if the Commission finds 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.
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 a
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 each Fund, as an open-end
company, to issue Shares that are redeemable in Creation Units only.
Applicants state that investors may purchase Shares in Creation Units
from each Fund and that Creation Units are always redeemable in
accordance with the provisions of the Act. 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 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
[[Page 400]]
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 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 should ensure that
the difference between the market price of Shares and their NAV remains
narrow.
Section 22(e)
7. Section 22(e) of the Act 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. Applicants
state that settlement of redemptions for the International Funds is
contingent not only on the securities settlement cycle of the U.S.
market, but also on currently practicable delivery cycles in local
markets for underlying foreign securities held by the International
Funds. Applicants state that local market delivery cycles for
transferring Redemption Securities to redeeming investors, coupled with
local market holiday schedules, will, under certain circumstances,
require a delivery process longer than seven calendar days for
International Funds. Applicants request relief under section 6(c) of
the Act from section 22(e) to allow International Funds that deliver
Redemption Securities in-kind to pay redemption proceeds up to a
maximum of 14 calendar days following the tender of a Creation Unit of
such Funds. Except as disclosed in the relevant International Fund's
SAI, applicants expect that each International Fund will be able to
deliver redemption proceeds within seven days.\13\ With respect to
future International Funds, applicants seek the same relief from
section 22(e) only to the extent that circumstances similar to those
described in the application exist.
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\13\ Rule 15c6-1 under the Exchange Act requires that most
securities 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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8. Applicants state that section 22(e) was designed to prevent
unreasonable and unforeseen delays in the payment of redemption
proceeds. Applicants assert that the requested relief will not lead to
the problems that section 22(e) was designed to prevent. Applicants
state that the SAI will disclose those local holidays (over the period
of at least one year following the date of the SAI), if any, that are
expected to prevent the delivery of redemption proceeds in seven
calendar days, and the maximum number of days, up to 14 calendar days,
needed to deliver the proceeds for the relevant International Fund.
Applicants are not seeking relief from section 22(e) with respect to
International Funds that do not effect creations and redemptions of
Creation Units in-kind.
Sections 17(a)(1) and (2) of the Act
9. 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
Funds may be deemed to be controlled by BFA or any BFA Affiliate and
hence are affiliated persons of each other. In addition, the Funds may
be deemed to be under common control with any other registered
investment company (or series thereof) advised by BFA or a BFA
Affiliate (an ``Affiliated Fund'').
10. Applicants request an exemption from section 17(a) under
sections 6(c) and 17(b), to permit in-kind purchases and redemptions of
Creation Units by persons that are affiliated persons or second tier
affiliates of the Funds solely by virtue of one or more of the
following: (1) Holding 5% or more, or more than 25%, of the outstanding
Shares of a Company or one or more 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.
11. Applicants contend that no useful purpose would be served by
prohibiting such affiliated persons or second tier affiliates of a 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 Redemption Securities
will be valued under the same objective standards applied to valuing
portfolio securities. Absent the unusual circumstances described in the
application, the Fund Deposit and Redemption Securities will be the
same. Therefore, applicants state that in-kind purchases and
redemptions will create no opportunity for the affiliated persons and
second tier affiliates described above to effect a transaction
detrimental to the other holders of Shares. Applicants also believe
that in-kind purchases and redemptions will not result in abusive self-
dealing or overreaching of the Fund.
Applicants' Conditions
The applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
1. As long as a Fund operates in reliance on the requested order,
the Shares of the Fund will be listed on an Exchange.
2. Neither a Company nor any Fund will be advertised or marketed as
an open-end investment company or a mutual fund. Any advertising
material that describes the purchase or sale of Creation Units or
refers to redeemability will prominently disclose that the Shares are
not individually redeemable and that owners of the Shares may acquire
those Shares from the Fund and tender those Shares for redemption to
the Fund in Creation Units only.
3. The Web site for the Funds, which is and will be publicly
accessible at no charge, will contain, on a per Share basis, for each
Fund the prior Business Day's NAV and the market closing price or Bid/
Ask Price of the Shares, and a calculation of the premium or discount
of the market closing price or Bid/Ask Price against such NAV.
4. On each Business Day, before commencement of trading in Shares
on the Exchange, the Fund will disclose on its Web site the identities
and quantities of the portfolio securities and other assets held by the
Fund that will form the basis for the Fund's calculation of NAV at the
end of the Business Day.
5. No Adviser or Subadviser, directly or indirectly, will cause any
Authorized Participant (or any investor on whose behalf an Authorized
Participant may transact with the Fund) to acquire any
[[Page 401]]
Deposit Security for the Fund through a transaction in which the Fund
could not engage directly.
6. The requested order will expire on the effective date of any
Commission rule under the Act that provides relief permitting the
operation of actively managed exchange-traded funds.
For the Commission, by the Division of Investment Management,
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-33116 Filed 1-3-11; 8:45 am]
BILLING CODE 8011-01-P