[Federal Register Volume 63, Number 207 (Tuesday, October 27, 1998)]
[Notices]
[Pages 57332-57335]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28641]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC--23492; 812-10662]
The Select Sector SPDR Trust, et al.; Notice of Application
October 20, 1998.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').
ACTION: Notice of 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), 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 (2) of the Act.
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SUMMARY OF APPLICATION: Applicants request an order that would permit
certain open-end management investment companies, whose portfolios will
consist of the component securities of certain indices, to issue shares
of limited redeemability; permit secondary market transactions in the
shares of the companies at negotiated prices; and permit affiliated
persons of the companies to deposit securities into, and receive
securities from, the companies in connection with the purchase and
redemption of aggregations of the companies' shares.
APPLICANTS: The Select Sector SPDR Trust, the Index Exchange Listed
Securities Trust (each a ``Trust'' and together, the ``Trusts''), State
Street Band and Trust Company (the ``Adviser''), and ALPS Mutual Funds
Services, Inc. (the ``Distributor'').
FILING DATES: The application was filed on May 13, 1997, and amended on
September 4, 1998. Applicants have agreed to file an amendment, the
substance of which is incorporated in this notice, during the notice
period.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on November 12,
1998, 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 SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. The Select Sector SPDR Trust, the Index Exchange Listed
Securities Trust, and State Street Bank and Trust Company, 1776,
Heritage Drive, AFB4, North Quincy, MA 02171, Attn: Joseph J. McBrien,
Esq.; and ALPS Mutual Fund Services, Inc., 370 Seventeenth Street,
Suite 2, Denver, CO 80202, Attn: Tom Carter.
FOR FURTHER INFORMATION CONTACT: Brian T. Hourihan, Senior Counsel, at
(202) 942-0526, or Mary Kay Frech, Branch Chief, at (202) 942-0564
(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 from
the SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington
D.C. 20549 (tel. (202) 942-8090).
Applicants Representations
1. Each Trust is an open-end management investment company
organized as a Massachusetts business trust and registered under the
Act. Each Trust will have separate investment portfolios (each a
``Fund''). The Adviser will act as investment adviser and custodian for
each Fund. The Distributor, a broker-dealer registered under the
Securities Exchange Act of 1934 (the ``Exchange Act''), will serve as
the principal underwriter of each Fund on an agency basis.
2. Each Fund will invest in a portfolio of equity or fixed income
securities generally consisting of the component securities of a
specified securities index (``Portfolio Securities''). The indices will
include: the Standard & Poor's 500 Basic Industries Select Sector
Index, the Standard & Poor's 500 Consumer Services Select Sector Index,
the Standard & Poor's 500 Consumer Staples Select Sector Index, the
Standard & Poor's 500 Cyclicals and Transportation Select Sector Index,
the Standard & Poor's 500 Energy Select Sector Index, the Standard &
Poor's 500 Financial Select Sector Index, the Standard & Poor's 500
Industrial Select Sector Index, the Standard & Poor's 500 Technology
Select Sector Index and the Standard & Poor's 500 Utilities Select
Sector Index (collectively, the ``Select Sector SPDR Indices''),\1\ as
well as the Merrill Lynch, Pierce, Fenner & Smith
[[Page 57333]]
Incorporated Technology 100 Index (the ``Technology 100 Index,'' and
together with the Select Sector SPDR Indices, the ``Indices'').\2\
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\1\ The Select Sector SPDR Indices track the movements of
companies that are components of the Standard & Poor's 500 Index by
industry sectors. The Select Sector SPDR Indices will be calculated
by the Index Services Group of the American Stock Exchange, Inc.
(``AMEX'') using a ``modified market capitalization'' methodology to
ensure that each component security of an Index is represented in
proportion to the percentage of the total market capitalization of
the Index represented by the Index. The Select Sector SPDR Trust is
permitted to use the Select Sector SPDR Indices pursuant to a
licensing agreement with The Standard & Poor's Corporation, the
AMEX, and Merrill Lynch, Pierce, Fenner & Smith Incorporated. The
Select Sector SPDR Indices' values will be disseminated every 15
seconds over the Consolidated Tape Association (``Consolidated
Tape'').
\2\ The Technology 100 Index tracts the movements of the 100
largest domestically traded stocks and American Depository Receipts,
by market capitalization after screening for liquidity, of companies
in technology-related industries. The Technology 100 Index will be
calculated by the Index Services Group of AMEX using an ``equal
dollar weighting'' methodology to ensure that each component
security of the Index is represented in an approximately equal
dollar amount in the Index. The Technology 100 Index's value will be
disseminated every 15 seconds over the consolidated Tape.
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3. The investment objective of each Fund will be to provide
investment results that correspond, before expenses, generally to the
price and yield performance of its relevant Index. A Fund may not hold
all of the underlying securities that comprise an Index in certain
instances. When a potential component security is illiquid, a Fund may
hold a representative sample of the component securities of the Index
determined using a technique known as ``portfolio optimization.'' \3\
Applicants anticipate that a Fund that utilizes the portfolio
optimization technique will not track its Index with the same degree of
accuracy as an investment vehicle that invested in every component
security of the Index with the same weighting. Applicants also state
that over time the Adviser will be able to employ the portfolio
optimization technique so that the expected tracking error of a Fund
relative to the performance of its Index will be less than 5 percent.
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\3\ The Adviser will consider each component security in an
Index for inclusion in a Fund based on the security's contribution
to certain capitalization, industry, and fundamental investment
characteristics. The Adviser will seek to construct the portfolio of
a Fund so that, in the aggregate, its capitalization, industry, and
fundamental investment characteristics perform like those in the
corresponding Index.
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4. Shares of a Fund (``Shares'') generally will be issued in
aggregations of 50,000 Shares (``Creation Units'') depending on the
Fund, as specified in the Fund's prospectus. The price of a Creation
Unit will be approximately $1,000,000 to $1,100,000 (based on the
values of the Indices as of October 6, 1998). To be eligible to
purchase a Creation Unit, an investor must either be a participant in
the Continuous Net Settlement (``CNS'') System of the National
Securities Clearing Corporation (``NSCC''), or a Depository Trust
Company (``DTC'') participant. An investor wishing to purchase a
Creation Unit from a Fund will have to transfer to the Fund a ``Fund
Deposit'' consisting of: (i) a portfolio of securities that has been
selected by the custodian to correspond to the returns on the Index
(``Deposit Securities''),\4\ and (ii) 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 of the
Portfolio Securities (``Cash Component''). Certain of the Funds may
include as part of the Cash Component, a ``Dividend Equivalent
Payment'' which is an amount equal per Creation Unit to the dividends
accrued on the Portfolio Securities of a Fund since the last dividend
payment by the Fund, net of expenses and liabilities.\5\ An investor
purchasing a Creation Unit from a Fund will be charged a purchase fee
(``Transaction Fee'') to prevent the dilution of the interests of the
remaining shareholders resulting from the Fund incurring costs in
connection with the purchase of the Creation Units.\6\ Each Fund will
disclose in its prospectus and/or statement of additional information
(``SAI'') the Transaction Fees charged by the Fund or the method of
calculating the Transaction Fees.
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\4\ The identity and number of shares of the Deposit Securities
required for each Fund will change as rebalancing adjustments and
corporate events are reflected from time to time by the Adviser. The
composition of the Deposit Securities may also change in response to
adjustments to the weighting or composition of the securities
constituting an Index.
\5\ On each business day, the custodian in consultation with the
Adviser will make available, immediately prior to the opening of
trading on the AMEX, a list of the names and the required number of
shares of each Deposit Security, as well as the Cash Component, each
as of the prior business day, per outstanding shares of each Fund.
The Fund Deposit will be applicable to effect purchases of Creation
Units until the Fund Deposit composition is next announced. In
addition, each Fund reserves the right to permit or require the
substitution of an amount of cash to be added to the Cash Component
to replace any Deposit Security that may be unavailable or
unavailable in sufficient quantity for delivery to the Fund upon the
purchase of a Creation Unit, or which may be ineligible for transfer
through the CNS of the NSCC or ineligible for trading by an NSCC
participant or the investor on whose behalf the participant is
acting. In addition, the AMEX will disseminate every 15 seconds
throughout the trading day via the Consolidated Tape an amount
representing on a per Share basis the sum of the Dividend Equivalent
Payment effective through and including the prior business day, plus
the current value of the Deposit Securities.
\6\ The Transaction Fee for each Fund will be separately
determined. The Transaction Fee will be limited to amounts
determined by the Adviser to be appropriate and will take into
account the transaction costs associated with the Deposit Securities
of each Fund. Brokerage commissions incurred by a Fund in connection
with the acquisition of any Index Securities ineligible for transfer
through the systems of DTC and therefore ineligible for transfer
through the Shares Clearing Process will be charged to the Fund and
will affect the value of all Shares of the Fund, unless the Adviser
adjusts the Transaction Fee.
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5. Orders to purchase Creation Units will be placed with the
Distributor who will be responsible for transmitting the orders to each
Fund. The Distributor will issue confirmations of acceptance, issue
delivery instructions to the Fund to implement the delivery of Creation
Units, and maintain records of the orders and the confirmations. The
Distributor also will be responsible for delivering prospectuses to
purchasers of Creation Units.
6. Persons purchasing Creation Unit-size aggregations of Shares
from a Fund may hold the Shares or sell some or all of them in the
secondary market. Shares will be listed on the AMEX and traded in the
secondary market as other equity securities. An AMEX specialist will be
assigned to make a market in Shares. The price of Shares on the AMEX
will be based on a current bid/offer market and will be in the range of
$15 to $27 per Share (based on the values of the Indices as of October
6, 1998). Transactions involving the sale of Shares will be subject to
customary brokerage commissions and charges. Applicants expect that the
price at which the Shares trade will be disciplined by arbitrage
opportunities created by the ability to continually purchase or redeem
Creation Units at their NAV, which should ensure that the Shares will
not trade at a material discount or premium in relation to their NAV.
7. Applicants expect that purchasers of Creation Units will include
institutional investors and arbitrageurs (which could include
institutional investors). The AMEX specialist, in providing for a fair
and orderly secondary market for Share, 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.\7\
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\7\ Share 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-size aggregations through each Fund.\8\ To
redeem, an investor will have to accumulate enough Shares to constitute
a Creation Unit. An investor redeeming a Creation Unit generally will
receive a portfolio of securities identical to the Deposit Securities
in effect on the date the redemption request is made. An inventory may
receive the cash equivalent of a Portfolio Security upon its request
if, for example, the investor
[[Page 57334]]
were constrained from effecting transactions in the Portfolio Security
by regulation or policy. A redeeming investor will also receive a
Dividend Equivalent Payment, and may also receive an amount of cash to
equalize any differences between the market value of the Portfolio
Securities and the NAV per Creation Unit. A redeeming investor will pay
a Transaction Fee calculated in the same manner as a Transaction Fee
payable in connection with the purchase of a Creation Unit.\9\
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\8\ Creation Units may be redeemed through either NSCC or DTC.
Investors who redeem through DTC will pay a higher Transaction Fee.
\9\ See note 6, supra.
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9. Because each Fund will redeem Creation Units in kind, a Fund
will not have to maintain cash reserves for redemptions. This will
allow the assets of each Fund to be committed as fully as possible to
tracking its Index. Accordingly, applicants state that each Fund will
be able to track its Index more closely than certain other investment
products that must allocate a greater portion of their assets for cash
redemptions.
10. Applicants state that neither Trust nor any Fund will be
marketed or otherwise held out as a ``mutual fund.'' Rather, applicants
state that each Fund will be marketed as an ``exchange-traded fund.''
All marketing materials will refer to a Fund as an ``investment
company'' and ``fund'' without reference to an ``open-end'' or ``mutual
fund,'' except to contrast a Fund with a conventional open-end
management investment company. In all marketing materials where the
method of obtaining, buying or selling Shares is described, applicants
will include a statement to the effect that Shares are not redeemable
through a Fund except in Creation Units. The same type of disclosure
will be provided in each Fund's prospectus, SAI, advertising materials,
and all reports to shareholders.\10\
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\10\ Applicants state that persons purchasing Creation Units
will be cautioned in a 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
of 1933 (``Securities Act''). For example, a broker-dealer firm or
its client may be deemed a statutory underwriter if it takes
Creation Units after placing an order with the Distributor, breaks
them down into the constituent Shares, and sells Shares directly to
its customers; or if it chooses to couple the creation of a supply
of new Shares with an active selling effort involving solicitation
of secondary market demand for Shares. A 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
Fund's 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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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 (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, 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 Shares will not be individually redeemable,
applicants request an order that would permit each Trust to register
and operate as an open-end management investment company. Applicants
state that investors may purchase Shares in Creation Units from each
Fund and redeem Creation Units. Applicants further state that because
the market price of Creation Units will be disciplined by arbitrage
opportunities, investors 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 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 (1) prevent dilution caused by
certain riskless-trading schemes by principal underwriters and contract
dealers, (ii) prevent unjust discrimination or preferential treatment
among buyers resulting from sales at different prices, and (iii) assure
an orderly distribution of investment company shares by eliminating
price competition from dealers offering shares at less than the
published sale 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 (i) that secondary market trading in Shares
does not involve the Fund as parties and cannot result in dilution of
an investment in Shares, and (ii) to the extent different prices exist
during a given trading day, or from day to day, such variances occur as
a result of third-party market forces, such as supply and demand, not
as a result of unjust or discriminatory manipulation. Therefore,
applicants assert that secondary market transactions in 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 generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such person, from selling any security to or purchasing any security
from the company. Because purchases and redemptions of Creation Units
will be ``in-kind'' rather than cash transactions, section 17(a) may
prohibit affiliated persons of the Fund from purchasing or redeeming
Creation Units. Because the definition of ``affiliated
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person'' of another person in section 2(a)(3) of the Act includes any
person owning five percent or more of an issuer's outstanding voting
securities, every purchaser of a Creation Unit will be affiliated with
a Fund so long as fewer than twenty Creation Units of the Fund are
extant. Applicants request an exemption from section 17(a) under
sections 6(c) and 17(b), to permit affiliated persons of the Funds to
purchase and redeem Creation Units.
8. Section 17(b) authorizes the Commission to exempt a proposed
transaction from section 17(a) if evidence establishes that the terms
of the transaction, including the consideration to be paid or received,
are reasonable and fair and do not involve overreaching, and the
proposed transaction is consistent with the policies of the registered
investment company and the general provisions of the Act. Applicants
contend that no useful purpose would be served by prohibiting
affiliated persons of a Fund described above from purchasing or
redeeming Creation Units. The composition of a Fund Deposit made by a
purchaser or given to a redeeming investor will be the same regardless
of the investor's identity, and will be valued under the same objective
standards applied to valuing the Portfolio Securities. Therefore,
applicants state that ``in kind'' purchases and redemptions will afford
no opportunity for an affiliated person of a Fund to effect a
transaction detrimental to the other holders of its Shares. Applicants
also believe that ``in kind'' purchases and redemptions will not result
in abusive self-dealing or overreaching by affiliated persons of the
Fund.
Applicants' Conditions
Applicants agree that the order granting the requested relief will
be subject to the following conditions:
1. Applicants will not register a new Fund of a Trust, whether
identical or similar to the Funds, 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 new
Fund, either exemptive relief from the Commission or a no-action letter
from the Division of Investment Management of the Commission.
2. Each Fund's prospectus will clearly disclose that, for purposes
of the Act, Shares are issued by the Fund and that the acquisition of
Shares by investment companies is subject to the restrictions of
section 12(d)(1) of the Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28641 Filed 10-26-98; 8:45 am]
BILLING CODE 8010-01-M
