SEC Division of Corporation Finance no-action letter: iShares Enhanced U.S. Small Cap ETF

WILLKIE FARR & GALLAGHER LLP
1875 K Street, NW
Washington, DC 20006-1238
Tel: 202 303 1000
Fax: 202 303 2000

Ms. Michele M. Anderson
Chief
Office of Mergers and Acquisitions
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549

Re: Request for Exemptive, Interpretive and No-Action Relief from Rule 14e-5 under the Securities Exchange Act of 1934 for the iShares Enhanced U.S. Small Cap ETF, iShares Enhanced U.S. Large Cap ETF

Dear Ms. Anderson:

iShares U.S. ETF Trust (the "Trust") requests relief under the Securities Exchange Act of 1934 (the "Exchange Act") on behalf of themselves and the market participants discussed below with respect to two series of the Trust operated as exchange-traded funds ("ETFs" and each, an "ETF"). The Trust is an open-end management investment company, registered as an investment company with the U.S. Securities and Exchange Commission (the "Commission"), that was organized on June 21, 2011 as a Delaware statutory trust. The Trust currently consists of 5 investment series or portfolios.

This letter requests relief for two newly-created series of the Trust, the iShares Enhanced U.S. Small Cap ETF (the "U.S. Small Cap ETF") and iShares Enhanced U.S. Large Cap ETF (the "U.S. Large Cap ETF"), (each of the preceding is referred to as a "Fund" and, collectively, the "Funds"). The Trust are seeking approval from the NYSE Arca, Inc. (the "Exchange") to have the Funds' shares (the "Shares") listed on the Exchange, subject to notice of issuance, pursuant to Exchange Rule 8.600.¹

¹ Rule 8.600 sets out the standards for trading, by listing or pursuant to unlisted trading privileges, Managed Fund Shares on the Exchange. Under sub-paragraph (c)(1) of Rule 8.600, "Managed Fund Share" means a security that, among other things, "represents an interest in a registered investment company ("Investment Company") organized as an open-end management investment or similar entity, that invests in a portfolio of securities selected by the Investment Company's adviser consistent with the Investment Company's investment objectives and policies." The Investment Company must issue

NEW YORK WASHINGTON PARIS LONDON MILAN ROME FRANKFURT BRUSSELS in alliance with Dickson Minto W.S., London and Edinburgh

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Each Fund will, under normal circumstances, invest at least 80 percent of its net assets in equity securities according to a proprietary investment process to assemble an investment portfolio from a defined group of stocks (the "Component Securities") that seeks to emphasize companies within the group that exhibit certain investment characteristics. The Trust will issue and redeem Shares generally only in aggregations of at least 50,000 Shares (referred to as "Creation Units").

The Trust, on behalf of themselves, the Funds, the Exchange and any other national securities exchange on or through which the Shares may subsequently trade (with each such market being a "Market"), and persons or entities engaging in transactions in Shares, as the case may be, requests that the Commission grant exemptive, interpretive or no-action relief from Rule 14e-5 under the Exchange Act in connection with secondary market transactions in Shares and the creation or redemption of Creation Units of Shares, as discussed below.

On October 24, 2006, the Commission granted relief to the PowerShares Exchange-Traded Fund Trust with respect to the rules under the Exchange Act identified above (the "PowerShares Letter").² ETFs listed and traded on an exchange may rely upon the relief granted in the PowerShares Letter without the submission of an Exchange Act exemptive/no-action request if such ETFs meet specified conditions, including that each of the ETFs be managed to track a particular index.³ Although the Funds are expected to meet the applicable requirements to be listed on the Exchange, they will not be managed to track a particular index;⁴ therefore, the Funds may not rely on the relief provided in the PowerShares Letter with respect to Rule 14e-5 under the Exchange Act.

The SEC staff (the "Staff") has, however, previously issued relief substantially similar to that requested herein to actively-managed ETFs⁵ that are listed and traded on a

Managed Fund Shares in a specific aggregate number of individual shares in return for a deposit of securities and/or cash, a amount. Managed Fund Shares must be redeemable directly or indirectly from the Investment Company in return for securities and/or cash, a minimum number of Managed Fund Shares must be outstanding at the commencement of trading on the Exchange, and the Managed Fund Shares' net asset value per share must be calculated daily and available to all market participants at the same time. The Exchange will file a proposal with the SEC under Section 19(b) of the Exchange Act before listing and/or trading Managed Fund Shares. ² See Letter from James A. Brigagliano, Assistant Director of Market Regulation, to Stuart M. Strauss, Esq. (Oct. 24, 2006). Relief was granted for the Commission by the Division of Market Regulation (now the Division of Trading and Markets) pursuant to delegated authority. ³ See PowerShares Letter at 3. ⁴ Except for the index-tracking criterion, the Funds satisfy all other conditions of the PowerShares Letter. ⁵ See Letter from Michelle M. Anderson to John McGuire, Esq. (Nov. 13, 2012); Letter from Josephine J. Tao to Grail Advisors ETF Trust (May 6, 2009) (the "Grail Letter"); Letter from Josephine Tao to WisdomTree Trust (May 9, 2008) (the "WisdomTree Letter"); Letter from James A. Brigagliano to PowerShares Actively Managed Exchange-Traded Fund Trust (Apr. 4, 2008). In the WisdomTree Letter, the Staff stated that it has repeatedly expressed its views on Exchange Act Section 11(d)(1) and Exchange

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national securities exchange and satisfy specified conditions.⁶ On June 21, 2012, the Staff granted relief with respect to Rule 14e-5 under the Exchange Act to an actively-managed ETF that would be listed on the Exchange (the "First Trust Letter").⁷ Similar to the fund in the First Trust Letter, a Fund's portfolio will be fully transparent and permit arbitrage activity and will in all material respects operate in a similar manner as index-based ETFs other than being actively managed. The relief requested by the Trust is substantially similar to the relief granted in the First Trust Letter; therefore, the Trust does not believe that the relief requested raises any significant new regulatory issues.

I. The Parties

A. The Funds

The Funds are separate investment portfolios of the Trust. The investment objective of each Fund is to provide long-term capital appreciation from investments made based on certain proprietary models of the Trust; the Funds do not seek to replicate the performance of specified indexes. Each Fund's investment objective is not a fundamental policy and can be changed by the board of trustees of the Trust (the "Board") without shareholder approval.

Each of the Funds seeks to achieve its investment objective by investing, under normal circumstances, at least 80 percent of its net assets in equity securities of certain types of issuers. The U.S. Small Cap ETF seeks to maintain strategic exposure to U.S. small-capitalization stocks with targeted investment characteristics. The Fund utilizes proprietary investment processes intended to provide increased exposure to securities of companies based on certain quantitative investment characteristics, including, but not limited to earnings variability, leverage, price-to-book ratio and market capitalization.

Act Rules 10b-10, 11d1-2, 15c1-5 and 15c1-6 with respect to ETFs that are not tied to an index and that could not satisfy all of the conditions of the class relief relating to such provisions (see footnote 6 below). The Staff stated that it therefore would not respond to requests for relief from those provisions relating to ETFs that are not managed to track a particular index unless they present novel or unusual issues. Because the Trust does not believe that the creation, redemption, listing or trading of Shares should present any novel or unusual issues, the Trust does not request relief from Section 11(d)(1) or Rules 10b-10, 11d1-2, 15c1-5 or 15c1-6. ⁶ The Commission has granted class relief with respect to Section 11(d)(1) of the Exchange Act and Rules 10b-10, 11d1-2, 15c1-5 and 15c1-6 thereunder to certain "Qualifying ETFs." See Letter from Catherine McGuire, Chief Counsel, Division of Market Regulation, to the Securities Industry Association (Nov. 21, 2005). The Fund meets the requirements of "Qualifying ETFs" under the aforementioned letter and is relying on the letter with respect to these provisions. Moreover, the Trust notes that the Commission has issued an order granting a limited exemption from Rule 10b-17 under the Exchange Act to any issuer of an actively managed ETF. See Exchange Act Release No. 67,215 (Jun. 19, 2012). ⁷ See Letter from Michele M. Anderson, Chief, Office of Mergers and Acquisitions, to Suzanne M. Russell, Esq. (Jun. 21, 2012).

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Companies in the universe of U.S. small-capitalization securities include consumer discretionary, consumer staples, financial and utilities companies.

The U.S. Large Cap ETF seeks to maintain strategic exposure to U.S. large-capitalization stocks with targeted investment characteristics. The Fund utilizes proprietary investment processes intended to provide increased exposure to securities of companies based on certain quantitative investment characteristics, including, but not limited to earnings variability, leverage, price-to-book ratio and market capitalization. Companies in the universe of U.S. large-capitalization securities include consumer discretionary, healthcare, utilities and financial companies.

B. The Adviser

BlackRock Fund Advisors ("BFA" or the "Adviser") has overall responsibility for the general management and administration of the Funds, including investment of the Funds' assets. BFA is registered as an investment adviser under the Investment Advisers Act of 1940 (the "Advisers Act"). BFA provides an investment program for each of the Funds and manages the investment of the Funds' assets. In seeking to achieve each Fund's investment objective, BFA uses a team of portfolio managers, investment strategists and other investment specialists. BFA's management and administration of the Funds is subject to the oversight of the Boards. BFA uses proprietary models to try to achieve each Fund's investment objective.

Under the Investment Advisory Agreements between BFA and the Trust (entered into on behalf of the Funds), BFA is responsible for substantially all expenses of the Funds other than interest expense, taxes, brokerage expenses, future distribution fees or expenses and extraordinary expenses.

C. The Distributor

BlackRock Investments, LLC (the "Distributor"), a broker-dealer registered with the Commission under the Exchange Act, will act on an agency basis and will be the Funds' "principal underwriter," as defined in Section 2(a)(29) of the Investment Company Act of 1940 (the "1940 Act"). The Trust issues and sells Shares only in Creation Units on a continuous basis through the Distributor at their net asset value ("NAV") next determined after receipt of an order in proper form. The Distributor will not maintain a secondary market in the Shares. The Distributor may enter into selected dealer agreements with other broker-dealers or other qualified financial institutions for the sale of Creation Units of Shares ("Soliciting Dealers"). Such Soliciting Dealers may also be participants in the Depository Trust Company ("DTC").

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D. The Depository Trust Company

DTC will serve as the securities depository for the Shares (the Shares may be held only in book-entry form; stock certificates will not be issued). DTC, or its nominee, will be the record or registered owner of all outstanding Shares. Beneficial ownership of Shares will be shown on the records of DTC or its participants (i.e., securities brokers-dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC, referred to herein as "DTC Participants"). Beneficial owners of Shares generally are not entitled to have Shares registered in their names, and will not receive or be entitled to receive physical delivery of certificates.

To exercise any rights of a holder of Shares, each beneficial owner must rely on the procedures of (i) DTC; (ii) DTC Participants; and (iii) broker-dealers, banks and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly, through which such beneficial owner holds its interests.

II. Creation and Redemption of Shares

A. Method of Purchase and Creation of Shares

The consideration for purchase of Creation Units of the Funds generally consists of the in-kind deposit of a designated portfolio of securities (including any portion of those securities for which cash may be substituted) (i.e., the "Deposit Securities"), and the "Cash Component," as described below. Together, the Deposit Securities and the Cash Component constitute the "Fund Deposit," which represents the minimum initial and subsequent investment amount for a Creation Unit of each Fund.

The Cash Component is an amount equal to the difference between the NAV of the Creation Unit and the "Deposit Amount," which is an amount equal to the market value of the Deposit Securities. The function of the Cash Component is to compensate for any differences between the NAV per Creation Unit and the Deposit Amount.

BFA, through the National Securities Clearing Corporation ("NSCC"), makes available on each business day, before the opening of business on the Exchange, the identity and required number of shares of each Deposit Security.

To be eligible to place orders with the Distributor and to create a Creation Unit of each Fund, an entity must be: (i) a "Participating Party," i.e., a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the NSCC, (ii) a clearing agency that is registered with the Commission, or (iii) a DTC Participant, and must have executed an agreement with the Distributor with respect to creations and redemptions of Creation Units ("Participant Agreement"). A Participating

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Party that has executed a Participant Agreement is referred to as an "Authorized Participant."

All creation orders must be placed for one or more Creation Units by or through an Authorized Participant and must be received by the Distributor in proper form no later than the time specified in each Fund's prospectus on any business day in order for the purchase to be effected based on the NAV of the Shares as next determined on such date. The date on which an order to create Creation Units (or an order to redeem Creation Units, as discussed below) is timely received in proper form is referred to as the "Transmittal Date."

The custodian of each Fund's assets (the "Custodian"), will maintain or cause a sub-custodian of a Fund to maintain an account into which the Authorized Participant shall deliver, on behalf of itself or the party on whose behalf it is acting, the securities included in the Fund Deposit (or the cash value of such securities, in the case of permitted or required cash purchases or "cash-in-lieu" amounts), with any appropriate adjustments as permitted by the Trust.

To the extent contemplated by the applicable Participant Agreement, Creation Units may be issued to an Authorized Participant notwithstanding the fact that the corresponding Deposit Securities have not been received in part or in whole, in reliance on the undertaking of the Authorized Participant to deliver the missing Deposit Securities as soon as possible, which undertaking must be secured by such Authorized Participant's delivery and maintenance of collateral.

A Creation Unit typically will not be issued until the transfer to the Trust of good title to the Deposit Securities or cash, as applicable, and the payment of the Cash Component, have been completed. The Trust reserves the absolute right to reject any creation order for Shares transmitted to them by the Distributor in respect of a Fund if: (i) the order is not in proper form; (ii) the investor(s), upon obtaining the Shares ordered, would own 80% or more of the currently outstanding Shares; (iii) the Deposit Securities delivered do not conform to the identity and number of shares of Deposit Securities disseminated through the facilities of NSCC for that date by BFA, as described above; (iv) acceptance of Deposit Securities would have certain adverse tax consequences to the Fund; (v) acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful; (vi) acceptance of the Fund Deposit would, in the discretion of the Trust or BFA, have an adverse effect on the Trust or the rights of the beneficial owners; or (vii) circumstances outside the control of the Trust, the Custodian, the Distributor or BFA would make it impossible or impracticable to process creation orders.

A standard creation transaction fee is imposed to offset the transfer and other transaction costs associated with the issuance of Creation Units. The standard creation transaction fee will be the same regardless of the number of Creation Units purchased by the purchaser on the same day. An Authorized Participant may be responsible for paying

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additional costs and expenses in certain circumstances, including certain brokerage, tax, foreign exchange, execution, market impact (including expenses associated with certain brokerage execution guarantees) and other costs and expenses related to the execution of trades resulting from the cash portion of the transaction. When the Trust permits an in-kind purchaser to substitute cash-in-lieu of depositing a portion of the Deposit Securities, the purchaser may be responsible for certain additional costs and expenses related to the transaction up to a maximum amount that is disclosed in each Fund's prospectus.

B. Redemption of Shares in Creation Units

Shares may be redeemed only in Creation Units at their NAV next determined after receipt of a redemption request in proper form by a Fund. Orders to redeem Creation Units must be delivered by or through an Authorized Participant. A Fund will not normally redeem Shares in aggregations less than Creation Units. Beneficial owners must accumulate enough Shares in the secondary market to constitute a Creation Unit in order to be eligible to have such Shares redeemed by the Trust.

BFA and the Distributor make available through NSCC, immediately prior to the opening of business on the Exchange (normally 9:30 a.m., Eastern time) on each business day, the identity and number of Shares that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form on that day ("Fund Securities"). Fund Securities received on redemption may not be identical to Deposit Securities that are applicable to purchases of Creation Units.

Unless cash redemptions are available or specified for a Fund, the redemption proceeds for a Creation Unit generally consist of Fund Securities plus cash in an amount equal to the difference between the NAV of the Creation Unit, as next determined after receipt of a request in proper form, and the value of the Fund Securities (such difference, the "Cash Redemption Amount"), less the redemption transaction fee or any additional fee described in the Fund's registration statement. If the Fund Securities have a value greater than the NAV of the Creation Unit, a compensating cash payment equal to such difference is required to be made by or through an Authorized Participant by the redeeming shareholder.

If contemplated by an Authorized Participant's agreement with the Distributor, if an Authorized Participant has submitted a redemption request in proper form, but cannot transfer all or part of the Creation Unit to be redeemed to a Fund's transfer agent, the Distributor may accept the redemption request in reliance on the undertaking by the Authorized Participant to deliver the missing shares as soon as possible. Such undertaking shall be secured by the Authorized Participant's delivery and maintenance of collateral.

A standard fixed transaction fee is imposed on redemptions to offset transfer and other transaction costs that may be incurred by a Fund. The standard transaction

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fee will be the same regardless of the number of Creation Units redeemed by an investor on the same day. An Authorized Participant may be required to pay an additional charge (up to a maximum amount that is disclosed in the Fund's prospectus) to cover other costs related to a redemption transaction and may be responsible for additional costs and expenses in certain circumstances, including certain brokerage, tax, foreign exchange, execution, market impact (including expenses associated with certain brokerage execution guarantees) and other costs and expenses related to the execution of trades resulting from the cash portion of the redemption. With respect to the Trust, the redeeming investor may be responsible for certain additional costs and expenses associated with the cash-in-lieu portion of its redemption proceeds, up to a maximum amount that is disclosed in each Fund's prospectus.

III. Requests for Relief

The Trust requests relief from Rule 14e-5 under the Exchange Act.⁸ Rule 14e-5 prohibits a person who makes a cash tender offer or exchange offer for any equity security from directly or indirectly purchasing such security (or a security immediately convertible into or exchangeable for such security (a "related security")) otherwise than pursuant to such tender offer or exchange offer. Rule 14e-5 also applies to the dealer-manager of a tender offer or exchange offer for an equity security in which a Fund invests (a "Dealer-Manager").

The Trust respectfully requests that the Commission or Staff grant an exemption from Rule 14e-5 to permit any Dealer-Manager (including a member or member organization of the Exchange or other Market), during the existence of such offer, to (1) redeem Shares in Creation Unit size aggregations for the Fund Securities that may include a security subject to the tender or exchange offer; and (2) engage in secondary market transactions in Shares during such offer.

The Trust believes that granting this request for relief is substantially similar to the relief provided in the First Trust Letter. The acquisition of individual Fund Securities by means of redemptions of Shares would be impractical and extremely inefficient in view of the requirement that a minimum number of Shares be redeemed. In addition, application of Rule 14e-5's prohibition would impede the valid and useful market and arbitrage activity that would assist secondary market trading and improve Share pricing efficiency. In no case would redemptions of Shares or secondary market transactions by Dealer-Managers be effected for the purpose of facilitating a tender offer. Accordingly, purchases and redemptions of Shares in the circumstances described would not appear to result in the abuses at which Rule 14e-5 is directed.

In addition, the Trust requests no-action relief in connection with purchases of Creation Units of a Fund's Shares by a broker-dealer (including a member or member

⁸ 17 CFR 240.14e-5 (2011).

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organization of the Exchange or other Market) acting as dealer-manager of a tender offer for securities in which the Fund invests. The Trust acknowledges that Rule 14e-5(b)(5) provides an exception to the prohibition for purchases or arrangements to purchase a basket of securities containing a subject security or a related security if: (i) the purchase or arrangement is made in the ordinary course of business as a result of a change in the composition of an index and not to facilitate the tender offer; (ii) the basket contains 20 or more securities; and (iii) covered securities and related securities do not comprise more than 5% of the value of the basket (the "Basket Exception").

As indicated by the Commission in the release adopting Rule 14e-5,⁹ transactions in baskets in accordance with the Basket Exception provide little opportunity for a Covered Person to facilitate an offer¹⁰ or for a security holder to exact a premium from the offeror. The purchase and redemption of ETF creation units typically involve baskets of securities, and broker-dealers acting as dealer-managers of tender offers for securities in which a Fund invests may be able to rely on the Basket Exception in purchasing Creation Units of a Fund's Shares. From time to time, however, a change in the composition of the portfolio securities of a Fund may result in a change in a basket that has been established for purposes of purchasing its Creation Units. As a consequence, a basket could contain less than 20 securities and/or covered securities and related securities could comprise more than 5% of the value of a basket. For example, a liquidation of the issuer of one of the securities or a merger involving the acquisition of the issuer of one of the securities could cause the number of securities in a basket to fall below 20 and/or could cause covered securities and related securities to comprise more than 5% of the value of a basket. Additionally, as a result of fluctuations in the market value of the securities held in a basket, covered securities and related securities could, at times, comprise more than 5% of the value of a basket. This would result in the unavailability of the Basket Exception for a broker-dealer acting as a dealer-manager for a tender offer for securities in which a Fund invests.

In order to address situations (including but not limited to the foregoing examples) where a basket contains less than 20 securities and/or covered securities and related securities comprise more than 5% of the value of a basket, the Trust respectfully requests that the Staff take a no-action position under Rule 14e-5 if a broker-dealer (including a member or member organization of the Exchange or other Market) acting as a dealer-manager of a tender offer for any securities in which a Fund invests purchases such securities in the secondary market for the purpose of tendering such securities to purchase one or more Creation Units of a Fund's Shares, if such purchases are effected as adjustments to the basket in the ordinary course of business as a result of a change in the

⁹ See Exchange Act Release No. 42,055 (Oct. 22, 1999) (the "Rule 14e-5 Adopting Release").
¹⁰ As discussed in the Rule 14e-5 Adopting Release, "facilitation of an offer" includes purchases intended to bid up the market price of the covered or related security, and includes buying a basket to strip out the covered security in an effort to get the offeror the number of shares it is seeking.

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composition of a Fund's portfolio and are not effected for the purpose of facilitating such tender offer. Relief would be necessary in order to permit such broker-dealers to effect purchases of Creation Units of a Fund's Shares under such circumstances given that the Basket Exception would not be available. This extension of the Basket Exception is consistent with the relief granted in the First Trust Letter that accommodated a potential factual circumstance associated with the operation of ETFs and remains consistent with the rationale underlying the adoption of the Basket Exception. Similarly, we note, in particular, that purchases would not be effected for the purpose of facilitating a tender offer and therefore would not appear to result in the abuses at which Rule 14e-5 is directed. Further, we note that the Commission has also previously granted similar relief to actively managed ETFs¹¹ and index-based ETFs.¹²

The Trust understands that, except as permitted by the relief from Rule 14e-5 requested herein, any person acting as a dealer-manager is required to comply with the requirements of Rule 14e-5.

IV. Conclusion

Based on the foregoing, we respectfully request that the Commission or Staff grant the relief requested herein. The forms of relief requested are substantially similar to those actions that the Commission and the Staff have taken in similar circumstances. Should you have any questions, please call me at (202) 303-1124.

Sincerely,

/s/ Benjamin J. Haskin
Benjamin J. Haskin

cc: Ed Baer, Managing Director, BlackRock
Deepa Damre, Director, BlackRock
Josh Banerje, Vice President, BlackRock
Margery Neale, Willkie, Farr & Gallagher
Peggy Kim, U.S. Securities and Exchange Commission

¹¹ See Grail Letter; Letter from James A. Brigagliano to PowerShares Actively Managed Exchange-Traded Fund Trust (Apr. 4, 2008).
¹² See PowerShares Letter. The adjustments to the basket of an indexed-based ETF would occur as a result of a change in the composition of the relevant index.