SEC Division of Investment Management staff letter: iShares Trust, et al.

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EFFECTIVE DECEMBER 23, 2020, THIS LETTER IS WITHDRAWN.
Please consult the following web page for more information: https://www.sec.gov/divisions/ investment/im-modified-withdrawn-staff-statements. Investment Company Act of 1940 – Sections 2(a)(32), 5(a)(1), 17(a), 22(d) and 22(e) Rule 22c-1 iShares Trust, et al RESPONSE OF THE OFFICE OF INVESTMENT COMPANY REGULATION Our Ref. No. 2008-1-ICR DIVISION OF INVESTMENT MANAGEMENT iShares Trust, et al. In your letter of October 14, 2008, you request our assurance that we would not recommend that the Securities and Exchange Commission (the “Commission”) take any enforcement action against iShares Trust and iShares, Inc. (each, a “Company”) under sections 2(a)(32), 5(a)(1), 17(a), 22(d), and 22(e) of the Investment Company Act of 1940 (the “Act”), or rule 22c-1 under the Act if any existing or future series (each, a “Fund”) of the Companies that operates as an exchange-traded fund (“ETF”) in reliance upon one of certain existing exemptive orders (“Existing Orders”)1 invests in other Funds (“Underlying Funds”) to seek its investment objective, as described in your letter. As more fully explained in your letter, you state that the Existing Orders permit the Funds to operate as ETFs that seek to provide investment results that correspond generally to the price and yield performance of publicly traded securities included in a particular benchmark index (“Index”). To meet their investment objectives and consistent with the Existing Orders, you state that the Funds at all times hold at least 80% of their assets in the component securities of the relevant Index or in investments that have economic characteristics that are substantially identical to the economic characteristics of such component securities. You state that certain Funds seek to track a “broad” market index comprised of many securities, while other Funds seek to track an Index that may be considered a more “narrow” segment of a broader market index comprised of fewer securities. In many cases, a broad market index may be comprised of Barclays Global Fund Advisors, et al., Investment Company Act Release No. 25622 (June 25, 2002), as subsequently amended by iShares Trust, et al., Investment Company Act Release No. 26006 (Apr. 15, 2003), Barclays Global Fund Advisors, et al., Investment Company Act Release No. 26175 (Sept. 8, 2003), and Barclays Global Fund Advisors, et al., Investment Company Act Release No. 27417 (June 23,
2006) (as amended, the “Prior Fixed Income Order”). Barclays Global Fund Advisors, et al., Investment
Company Act Release No. 24452 (May 12, 2000); iShares Trust, et al., Investment Company Act Release No. 25111 (Aug. 15, 2001); and iShares, Inc., et al., Investment Company Act Release No. 25215 (Oct. 18, 2001); each order as amended by iShares, Inc., et al., Investment Company Act Release No. 25623 (June 25, 2002), iShares Trust, et al., Investment Company Act Release No. 26006 (April 15, 2003) and Barclays Global Fund Advisors, Investment Company Act Release No. 26626 (Oct. 5, 2004) (collectively and as amended, “Prior Foreign Equity Orders”). Barclays Global Fund Advisors, et al., Investment Company Act Release No. 24451 (May 12, 2000), as amended by iShares, Inc., et al., Investment Company Act Release No. 25623 (June 25, 2002) and iShares Trust, et al., Investment Company Act Release No. 26006 (April 15, 2003) (as amended, “Prior Domestic Equity Order”). The Prior Fixed Income Order, Prior Foreign Equity Orders, and Prior Domestic Equity Order were amended by Barclays Global Fund Advisors, et al., Investment Company Act Release No. 27661 (Jan. 17, 2007) (collectively, the “Existing Orders”). In addition, the Companies obtained certain relief from section 12(d)(1) of the Act in iShares Trust, et al., Investment Company Act Release No. 26006 (Apr. 15, 2003) (the “Section 12(d)(1) Order”).

2 the same components as the aggregate of two or more narrow segment indices. You state that, because each Fund holds a portfolio consisting of the securities that the Fund’s investment adviser (“Adviser”) believes will best replicate the performance of its Index, the holdings of a Fund that seeks to track a narrow Index are generally substantially identical to a portion of the holdings of a Fund that seeks to track a broad Index of which the narrow Index is a segment. Thus, you state that a Fund (an “Upper Fund”) may effectively track its benchmark Index, while operating more efficiently, by holding the shares of an Underlying Fund in proportion to the weighting of the Underlying Fund’s holdings in the Upper Fund’s Index instead of investing directly in the component securities of the Upper Fund’s Index. You state that the Adviser believes that an investment in one or more Underlying Funds rather than in each of the potentially hundreds of portfolio companies making up the Upper Fund’s benchmark Index would greatly reduce the complexity of clearing and settling transactions in Creation Units and would facilitate creation and redemption transactions by Authorized Participants.2 In addition, you represent that the Adviser believes that the facilitation of creation and redemption transactions by Authorized Participants will lead to more efficient secondary market trading of Fund shares, which will benefit Fund shareholders. In order to capture these efficiencies, you propose that, instead of an Upper Fund directly investing in securities whose performance the Adviser believes will best replicate the performance of that Fund’s benchmark Index, an Upper Fund would seek to meet its investment objectives by investing all or part of its assets in Underlying Funds, each of which seeks to track the performance of an Index that is a subset of the Upper Fund’s Index or highly correlated to a portion of an Upper Fund’s Index. You state that, but for investing in the Underlying Funds instead of the component parts of its benchmark Index, an Upper Fund would operate in a manner substantially identical to its current practices and in compliance with the terms and conditions of the Existing Order. You state that an “Authorized Participant” is an institution that has entered into a participant agreement with a Company’s distributor to create or redeem shares of a Fund in large aggregations (“Creation Units”) through in-kind transactions at net asset value. 2

You argue that the proposed structure does not raise any concerns not addressed by the Existing Orders.3 In addition, you state that before a Fund would operate as an Upper Fund, its board of directors (“Board”) would determine that investing in Underlying Funds to seek the Fund’s investment objective is in the best interest of the Fund and its shareholders. You also state that prior to a Fund beginning to operate as an Upper Fund, the Fund would add disclosure to its prospectus that the Fund would seek its investment objective by investing in Underlying Funds.4 Based on all of the facts and representations made in your letter, and in particular that: (1) an Upper Fund will operate in compliance with the terms and conditions of its applicable Existing Order as discussed in this letter; and (2) before any Upper Fund relies on this letter, (i) the Board of an Upper Fund will determine that investing in Underlying Funds to seek the Upper Fund’s investment objective is in the best interest of the Upper Fund and its shareholders, (ii) each Upper Fund will notify each registered investment company that previously has entered into a participation agreement with the Fund that the registered investment company will no longer be able to acquire shares of the Upper Fund in reliance on the 12(d)(1) Order and (iii) each Upper Fund will add disclosure to its prospectus and its website that it will seek its investment objective by investing in Underlying Funds, we would not recommend enforcement action to the Commission under sections 2(a)(32), 5(a)(1), 17(a), 22(d), and 22(e) of the Act, or rule 22c-1 under the Act if an Upper Fund seeks to meet its investment objective by investing in Underlying Funds, and holding shares of each Underlying Fund in proportion to the weighting of the Underlying Fund’s holdings in the Upper Fund’s Index instead of investing directly in the component securities of its Index, as more fully described in your letter. This response expresses the Division’s position on enforcement action only, and does not purport to express any legal conclusions concerning the issues presented. Any facts or representations different from those presented in your letter might result in a different conclusion. Courtney S. Thornton Senior Counsel Office of Investment Company Regulation October 22, 2008 3 You note that condition 12 of the 12(d)(1) Order precludes any registered investment company from relying on that order to acquire shares of an Upper Fund. To underscore this provision, you state that prior to a Fund beginning to operate as an Upper Fund, the Fund will send a notice to each registered investment company that previously has entered into a participation agreement with the Fund in accordance with the Section 12(d)(1) Order informing the registered investment company that it will no longer be able to acquire shares of the Upper Fund in reliance on the Section 12(d)(1) Order. 4 In addition, you note that the Funds would include disclosure of
the fund of funds arrangement in its next annual or semi-annual report following the Fund’s determination to operate as an Upper Fund. The Upper Funds would also disclose their new structure on the Funds’ website. 3