[Federal Register Volume 61, Number 29 (Monday, February 12, 1996)]
[Notices]
[Pages 5425-5429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3045]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21737; Int'l Series Release No. 929; 812-9234]
The Foreign Fund, Inc., et al.; Notice of Application
February 6, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: The Foreign Fund, Inc. (the ``Fund''), BZW Barclays Global
Funds Advisors (the ``Adviser''), and Fund Distributor, Inc. (the
``Distributor'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
for an exemption from sections 2(a)(32), 5(a)(1), 22(d), and 22(e) of
the Act and rule 22c-1 thereunder and under sections 6(c) and 17(b) of
the Act for an exemption from section 17(a) of the Act.
SUMMARY OF APPLICATION: Applicants request an order permitting the Fund
to issue securities of limited redeemability that are intended to trade
on the American Stock Exchange (the ``AMEX'') at negotiated prices. The
order also would permit certain transactions between the Fund and
affiliated persons and permit the Fund to make payment for redeemed
securities more than seven days from the date such securities are
tendered in certain circumstances.
FILING DATE: The application was filed on August 19, 1994 and amended
on December 23, 1994, May 19, 1995, and January 17, 1996. Applicants
have agreed to file an additional amendment, the substance of which is
incorporated herein, 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 March 4, 1996,
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. Applicants, 400 Bellevue Parkway, Wilmington, Delaware 19809.
FOR FURTHER INFORMATION CONTACT:
James M. Curtis, Senior Counsel, at (202) 942-0563, or Robert A.
Robertson, 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 at the
SEC's Public Reference Branch.
Applicants' Representations
1. The Fund is an open-end management investment company that
initially will consist of seventeen series (the ``Index Series''). Each
Index Series will invest in a portfolio of equity securities consisting
of some or all of the component securities of a specified foreign
securities index (the ``Portfolio Securities''). Applicants have
selected the indices compiled by Morgan Stanley Capital International
(the ``MSCI Indices'') as the indices for the seventeen Index Series.
The seventeen Index Series will represent, respectively, the MSCI
Indices for Australia, Austria, Belgium, Canada, France, Germany, Hong
Kong, Italy, Japan, Malaysia, Mexico, the Netherlands, Singapore,
Spain, Sweden, Switzerland, and the United Kingdom.
2. The Fund will be managed and advised by the Adviser. PFPC Inc.
is expected to provide certain administrative services to each Index
Series. The principal underwriter and distributor of the Fund's shares
will be the Distributor.
3. The Fund may impose a sales commission on all cash sales orders
received during the initial subscription period of an Index Series.
Applicants expect that pursuant to a plan adopted by the board of
directors of the Fund for each Index Series under rule 12b-1 under the
Act, each Index Series will pay fees to the Distributor, calculated
daily and payable monthly, on an annualized basis, of a specified
percentage of the average daily net assets of the Index Series (subject
to the maximum of .25% per annum thereof). Such monies may be used to
cover the expenses of the Distributor primarily intended to result in
the sale of shares of each Index Series. The Adviser and PFPC Inc. also
will receive fees for their services.
[[Page 5426]]
4. Each Index Series will issue shares referred to as ``World
Equity Benchmark SharesSM'' (the ``WEBS''). WEBS of an Index
Series will be issued and sold by the Fund only in aggregations of a
specified number of WEBS (the ``Creation Units'') that will be
separable at the option of the holder into WEBS. Shareholders of an
Index Series will have one vote per WEB with respect to matters
regarding the Fund or the respective Index Series upon which a
shareholder vote is required. The initial net asset value of the
Creation Units is expected to range from approximately $450,000 to
$10,000,000. Applicants intend to list the WEBS on the AMEX.
5. The Depository Trust Company, New York, New York, a limited
purpose trust company organized under the laws of the State of New York
(the ``Depository'') or its nominee will be the record or registered
owner of all outstanding WEBS. Beneficial ownership of WEBS will be
shown on the records of the Depository or its participating
organizations (``DTC Participants''). Creation Units of WEBS may be
purchased only by or through a DTC Participant that has entered into an
Authorized Participant Agreement with the Fund and the Distributor (an
``Authorized Participant''). The Distributor will be responsible for
distributing prospectuses to purchasers of Creation Units.
6. The Fund will offer, issue, and sell Creation Units through the
Distributor on a continuous basis at the net asset value per share next
determined after it receives an order in proper form. Creation Units
generally will be issuable in exchange for the deposit of portfolio
securities and a specified cash payment; redemptions of Creation Units
generally will be for portfolio securities and a specified cash
payment. The Fund will sell shares of each Index Series only on
Business Days. A ``Business Day'' is defined with respect to each Index
Series as any day that the New York Stock Exchange and the stock
exchange(s) and Fund subcustodian(s) relevant to such Index Series are
open for business.
7. Payment with respect to orders placed through the Distributor
will be made by in-kind deposit or, when available in respect of a
particular Index Series, by cash. An in-kind purchase will be made by
the in-kind deposit with the Fund of a portfolio of securities that is
of essentially the same composition and weighting as the component
shares selected by the Adviser to correspond to the returns of the
relevant index (the ``Deposit Securities''), together with a cash
payment in an amount equal to the Dividend Equivalent Payment (as
defined below), plus or minus a Balancing Amount (as defined below).
The ``Dividend Equivalent Payment'' is an amount equal, on a per
Creation Unit basis, to the dividends on all the Portfolio Securities
with exdividend dates within the accumulation period for such
distribution, net of expenses and liabilities for such period, as if
all of the Portfolio Securities had been held by the Fund for the
entire period. The ``Balancing Amount'' is an amount equal to the
difference between the net asset value (per Creation Unit) of the Index
Series and the sum of the Dividend Equivalent Payment and the market
value (per Creation Unit) of the securities deposited with the Fund.
The Dividend Equivalent Payment and the Balancing Amount are
collectively referred to as the ``Cash Component,'' and the deposit of
the Deposit Securities together with the appropriate Cash Component is
referred to as a ``Portfolio Deposit.'' In addition, investors
purchasing shares in-kind will bear the costs of transferring the
securities to the Fund. All purchases will be subject to a transaction
fee, with a higher fee charged for cash purchases.
8. The Adviser will make available through the Distributor and by
other means on each Business Day, immediately prior to the opening of
business on the AMEX, the names and required number of shares of each
Deposit Security included in the current Portfolio Deposit for each
Index Series. Such Portfolio Deposit will be applicable, subject to any
adjustments, for purchases of Creation Unit aggregations of shares of a
given Index Series until such time as the next-announced Portfolio
Deposit composition is made available. The adjustments will reflect
changes, known to the Adviser on the date of announcement to be in
effect by the time of delivery of the Portfolio Deposit, in the
composition of the subject index being tracked by the Relevant Index
Series, or resulting from stock splits and other corporate actions.
9. Broker-dealers and other persons will be cautioned in the
prospectus and/or the Fund's statement of additional information
(``SAI'') 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. For example, a broker-dealer firm may be deemed
a statutory underwriter if it purchases Creation Units from the Fund,
breaks them down into the constituent WEBS, and sells the WEBS directly
to its customers; or if it chooses to couple the creation of a supply
of new WEBS with an active selling effort involving solicitation of a
secondary market demand for WEBS. The prospectus and/or the SAI will
state that whether a person is an underwriter depends upon all the
facts and circumstances pertaining to that person's and his client's
activities. The prospectus and/or the SAI will explain that dealers who
are not statutory underwriters, but are participating in a distribution
(as contrasted to ordinary secondary trading transactions), and thus
dealing with WEBS that are part of an ``unsold allotment'' within the
meaning of section 4(3) of the Securities Act of 1933, would be unable
to take advantage of the prospectus-delivery exemption provided by
section 4(3) of the Securities Act of 1933.
10. Creation Units will be redeemable for a portfolio of securities
generally consisting of Deposit Securities as announced by the
Distributor on the Business Day that the request for redemption is
received in proper form, together with a cash redemption payment, which
on any given Business Day will be an amount identical to the amount of
the Cash Component. A redeeming beneficial owner, or Authorized
Participant acting on behalf of such beneficial owner, must maintain
appropriate securities broker-dealer, bank, or other custody
arrangements in each jurisdiction in which any of the Portfolio
Securities are customarily traded, to which account such Portfolio
Securities will be delivered. If neither the redeeming beneficial owner
nor the Authorized Participant has appropriate arrangements to take
delivery of the Portfolio Securities in the applicable foreign
jurisdiction, and it is not possible to make other such arrangements,
or if it is not possible to effect deliveries of the Portfolio
Securities in such jurisdiction, the Fund may in its discretion redeem
such shares for cash. In such circumstances, or if the Fund concludes
that operating on an exclusively in-kind basis presents marketing or
operational problems for a specific series, the Fund reserves the right
to offer a cash option for sales and to make redemptions in cash in
respect of any Index Series. A transaction fee to cover brokerage and
other transaction costs will be deducted from the redemption proceeds,
with a higher fee charged for cash redemptions. In addition, investors
redeeming shares in-kind will bear the costs of transferring the
securities from the Fund.
11. Owners of Creation Units may hold the units or sell some or all
of them into the secondary market as WEBS. Applicants intend to list
the WEBS on
[[Page 5427]]
the AMEX so that they may trade in the secondary market in the same
manner as other equity securities. However, the WEBS may not be
redeemed from the Fund unless reconstituted into Creation Units. The
price of WEBS on the AMEX will be based on a current bid/offer market.
Transactions involving the sale of WEBS will be subject to customary
brokerage commissions and charges. The Distributor will act as
coordinator in connection with the distribution of prospectuses to
broker-dealers. In addition, the Fund will provide copies of its annual
and semi-annual shareholder reports to the DTC Participants for
distribution to the beneficial holders of WEBS.
12. In order to avoid confusion in the public's mind between the
Fund and a conventional ``open-end investment company'' or ``mutual
fund,'' the Fund will limit the designation of the Fund in all
marketing materials, including the Fund's prospectus and SAI, to the
term ``investment company,'' without reference to ``open-end fund'' or
``mutual fund.'' The term ``mutual fund'' will not be used at any time.
The term ``open-end investment company'' will be used in the prospectus
only to the extent required by item 4 of Form N-1A.\1\ The cover page
of the prospectus and the summary will include a distinct paragraph
stating that the WEBS will not be individually redeemable. The
description of the Creation Units and the method of their purchase and
redemption will follow such paragraph on the WEBS. The SAI will include
an explanation of the issuance and redemption procedures for Creation
Units. All marketing materials that describe the method of obtaining,
buying, or selling WEBS, will state that the WEBS are non-redeemable.
\1\ Item 4 of Form N1A requires an investment company to state
in its prospectus its classification and subclassification under
sections 4 and 5 of the Act.
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13. Applicants believe that there are two large categories of
investors who are likely to be interested in purchasing Creation Units.
One is the institutional investor who desires a foreign index-based
fund with the liquidity provided by exchange traded shares. The other
likely institutional investor is the arbitrageur, who will purchase or
redeem Creation Units in pursuit of arbitrage profit. Applicants
believe that arbitrage activity will enhance the liquidity of the WEBS
in the secondary market and also help ensure that WEBS will not trade
at a material discount or premium in relation to the Fund's net asset
value.
14. Applicants expect WEBS to be purchased and traded by ``retail''
investors that primarily seek to invest in WEBS in smaller quantities
exclusively through purchases and sales executed on the AMEX and
institutional investors that may purchase and redeem Creation Unit
aggregations of WEBS directly with the Fund in addition to trading such
shares on the AMEX.
15. Because applicants expect that ``retail'' investors will
purchase WEBS on the AMEX and not Creation Units, the prospectus of an
Index Series would include only a minimal description of the creation
and redemption mechanics pertaining to Creation Units. The SAI will
contain a detailed description of the mechanics for purchasing and
redeeming Creation Units. Applicants contemplate that in all cases the
SAI would be delivered along with the prospectus to any investors in
connection with purchases of Creation Units.
Applicants' Legal Analysis
Section 6(c)
1. Applicants request relief under section 6(c) of the Act from
sections 2(a)(32), 5(a)(1), 17(a)(1), 17(a)(2), 22(d), and 22(e) and
rule 22c-1 and under sections 6(c) and 17(b) from sections 17(a)(1) and
17(a)(2). Section 6(c) permits the SEC to exempt any person or
transaction from any provision of the Act, if 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
of the Act. Section 17(b) authorizes the SEC to exempt a transaction
from section 17(a) if the terms of the proposed 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, the
proposed transaction is consistent with the policy of each registered
investment company concerned, and the proposed transaction is
consistent with the general policy of the Act. Section 17(b) could be
interpreted to exempt only a single transaction. However, the SEC,
under section 6(c), may exempt a series of transactions that otherwise
would be prohibited by section 17(a).
Sections 2(a)(32) and 5(a)(1)
1. Section 5(a)(1) of the Act defines an ``open-end company'' as a
``management company which is offering for sale or has outstanding any
redeemable security of which it is the issuer.'' The term ``redeemable
security'' is defined in section 2(a)(32) as a security which entitles
the holder to receive, upon presentation of the security to the issuer,
approximately his or her proportionate share of the issuer's current
net assets.
2. Because the Creation Units are separable into WEBS that are not
individually redeemable, a question arises as to whether the definition
of a ``redeemable security'' or an ``open-end company'' under the Act
would be met if such shares are viewed as non-redeemable securities. In
light of this question, the Fund requests an order to permit it to
maintain its registration as an open-end investment company and to
issue shares that are redeemable only in Creation Units.
3. Applicants note that owners of WEBS wishing to redeem may
purchase additional WEBS and tender the resulting Creation Unit for
redemption. Moreover, AMEX listing will afford shareholders the benefit
of liquidity. Applicants believe that because Creation Units may always
be purchased and redeemed at net asset value, arbitrage opportunities
will ensure that the price of WEBS on the secondary market will not
vary substantially from the net asset value of Creation Units. Also,
the investor has the ability to purchase or redeem Creation Unit
aggregations of shares rather than trade in the secondary market.
Section 22(d) and Rule 22c-1
1. Section 22(d), 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 the current public
offering price described in the prospectus. Rule 22c-1 generally
requires that a dealer selling, redeeming, or repurchasing a redeemable
security do so only at a price based on its net asset value. Secondary
market transactions in WEBS will take place at negotiated prices and
not at a current offering price described in the prospectus or on the
basis of net asset value. Thus, purchases and sales of WEBS by dealers
in the secondary market may not comply with section 22(d) and rule 22c-
1.
2. While there is little legislative history regarding section
22(d), its provisions, as well as those of rule 22c-1, appear to have
been enacted (a) to prevent dilution caused by certain risk-free
trading schemes by principal underwriters and contract dealers, (b) to
prevent unjust discrimination or preferential treatment among buyers
resulting from sales at different prices, and (c) to assure an orderly
distribution of investment company shares by eliminating price
competition from
[[Page 5428]]
dealers offering shares at less than the published sales price and
repurchasing shares at more than the published redemption price.
Applicants believe that the concerns sought to be addressed by section
22(d) and rule 22c-1 with respect to pricing are equally satisfied by
the proposed method of pricing WEBS. First, secondary market trading in
WEBS, because it does not involve the Fund as a party, cannot result in
dilution of a beneficial owner's investment. Second, 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 and interest rates, not as a result of unjust or
discriminatory manipulation. Therefore, secondary market trading in
WEBS 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 WEBS and their net asset value
remains narrow.
Section 22(e)
1. Section 22(e) provides that an investment company may not
postpone the date of payment or satisfaction upon the redemption of any
redeemable security for more than seven calendar days following tender
of such security for redemption. To the extent that Creation Units may
be deemed to be redeemable securities, applicants request an exemption
to permit the Spain Index Series to redeem Creation Units within eight
days, the Belgium and Netherlands Index Series within nine days, the
Austria, Germany, Hong Kong, Italy, Mexico, Singapore, Sweden, and
Switzerland Index Series within ten days, the Malaysia Index Series
within eleven days, and the Japan Index Series within thirteen days at
certain times during the calendar year. The custodian has advised the
Fund that local holiday schedules combined with local delivery cycles
will require more than seven calendar days for delivery of redemption
proceeds several times during the calendar year for these Index Series.
Applicants expect, however, that these Index Series will be able to
deliver redemption proceeds within seven days at all other times.
Applicants do not request an exemption from section 22(e) with respect
to the other four Index Series.\2\
\2\ Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations applicants
may otherwise have under rule 15c6-1 under the Securities Exchange
Act of 1934. Rule 15c6-1 requires that most securities transactions
be settled within three business days of the trade date.
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2. The principal reason for the requested exemption is that
settlement of redemptions in respect of the Fund's Index Series is
contingent not only on the settlement cycle of the United States market
but also on the delivery cycles possible in the local markets for the
underlying foreign securities of each Index Series. Applicants believe
that the Fund will be able to comply with the delivery requirement of
section 22(e) except where the holiday schedule applicable to the
specific foreign market will not permit delivery of redemption proceeds
within seven calendar days.
3. Applicants intend to utilize in-kind redemptions to the maximum
extent possible to assure the fullest investment of Fund assets in
portfolio securities. Applicants believe that the requested exemption
will make issuance and redemption of Fund shares less costly to
administer, enhance the appeal of the product to professional
participants, and thereby promote the liquidity of WEBS in the
secondary market which would benefit all shareholders.
4. The Fund believes that Congress adopted section 22(e) to prevent
unforeseen delays in the actual payment of redemption proceeds. The
prospectus, SAI, and all relevant sales literature for the affected
Index Series will disclose that redemption requests for those series
will be honored within the specified number of days following the date
on which a request for redemption is made. Applicants contend that the
redemption mechanism described above will not lead to unreasonable,
undisclosed, or unforeseen delays in the redemption process.
5. Applicants believe that allowing redemption payments for
Creation Units of an Index Series to be made within the number of days
indicated above would not be inconsistent with the spirit and intent of
section 22(e), and that a redemption payment occurring within such
number of calendar days following redemption request would adequately
afford investor protection.
Section 17(a)
1. Applicants request an exemption under sections 6(c) and 17(b)
from section 17(a) of the Act to permit affiliated persons of the Fund
to purchase and redeem creation Units. Section 17(a) generally
prohibits an affiliated person of a registered investment company from
purchasing from or selling to such company any security or other
property. Because purchases and redemptions will be in-kind rather than
cash transactions, section 17(a) may prohibit affiliated persons of the
Fund from purchasing or redeeming Creation Units. Moreover, because the
definition of affiliated person includes anyone owning 5% or more of an
issuer's outstanding voting stock, at least one purchaser of a Creation
Unit will be affiliated with the Fund so long as there are twenty or
fewer holders of Creation Units.
2. Applicants contend that no useful purpose would be served by
prohibiting affiliated persons from making in-kind purchases or
redemptions of Creation Unites. Both the deposit procedures for in-kind
purchases of shares and the redemption procedures for in-kind
redemptions will be effected in exactly the same manner for all
creations and redemptions, regardless of size or number. The securities
to be used for the in-kind purchase or redemption will be determined by
the Portfolio Deposit, which is based on the MSCI Indices. The MSCI
Indices are widely publicized and not subject to manipulation by the
Fund or its affiliates. Portfolio securities will be valued in the same
manner as those portfolio securities currently held by the Fund and the
valuation of portfolio securities will be made in an identical manner
regardless of the identity of the person purchasing or redeeming. Thus,
applicants believe that there will be no opportunity for affiliated
persons to effect a transaction detrimental to the other shareholders.
Applicants believe that in-kind purchases and redemptions will not
result in abusive self-dealing or overreaching by affiliated persons of
the Fund. Accordingly, applicants believe that the requested relief
meets the section 6(c) and section 17(b) standards for relief.
Applicants' Arguments
1. Applicants assert that WEBS will allow investors to have a
beneficial interest in a standardized portfolio of foreign equity
securities in a size comparable to a share of common stock. Applicants
believe that the ability to take deposits and make redemptions in-kind
will help the Index series that offer this feature to track closely the
relevant foreign securities index and therefore aid in achieving the
Index Series' objectives.
2. Applicants state that they will take such steps as may be
necessary to avoid confusion in the public's mind between the Fund and
a conventional ``open-end investment company'' or ``mutual fund,.'' In
addition, applicants state that brokers will deliver a prospectus to
each investor in connection with the secondary market purchases by
[[Page 5429]]
investors of WEBS on the AMEX. For the above reasons, applicants
believe that the requested relief meets the section 6(c) standards for
relief.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. The Fund will not be advertised or marketed as an open-end
investment company, i.e., as a mutual fund offering redeemable
securities. The Fund's or any Index Series' prospectus will prominently
disclose that WEBS are not redeemable shares and will disclose that the
owners of WEBS may acquire and tender those shares for redemption to
the Fund in Creation Unit aggregations only. Any advertising material
where features of obtaining, buying or selling Creation Units are
described or where there is reference to redeemability will prominently
disclose that WEBS are not redeemable and that owners of WEBS may
acquire and tender those shares for redemption to the Fund in Creation
Unit aggregations only.
2. The Fund will provide copies of its annual and semi-annual
shareholder reports to DTC Participants for distribution to beneficial
holders of WEBS.
3. Applicants will not seek to have the Fund's registration
statement declared effective until the SEC has approved such proposed
rule change pursuant to rule 19b-4 under the Securities Exchange Act of
1934 as may be necessary to enable a national securities exchange to
list the WEBS.
4. In addition, as long as the Fund operates in reliance on the
requested order, the WEBS will be listed on a national securities
exchange.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-3045 Filed 2-9-96; 8:45 am]
BILLING CODE 8010-01-M
