S E C U R I T I E S A N D EXCHANGE COMMISSION
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UNITED STATES
S E C U R I T I E S A N D EXCHANGE COMMISSION
WASHINGTON,
D.C.
20549
March 8,2007
DIVISION O F
MARKET R E G U L A T I O N
Domenick Pugliese, Esq.
Paul, Hastings, Janofsky & Walker LLP
75 E. 55th Street
New York, NY 10022
Re:
HealthShares Composite Exchange-Traded Fund
File No. TP 07-49
Dear Mr. Pugliese:
In your letter dated March 7,2007,' as supplemented by conversations with the staff of
the Division of Market Regulation (the "Staff '), HealthShares, Inc. (the "Company") on behalf
of itself, the HealthShares Composite Exchange-Traded Fund (the "Fund"), the New York Stock
Exchange, and any other Exchange on which HealthShares may subsequently trade, and persons
or entities engaging in transactions in HealthShares, requests exemptive, interpretive, or noaction advice regarding Rules 10a-1, lob-17, and 14e-5 under the Securities Exchange Act of
1934 (the "Exchange Act"), Rules 101 and 102 of Regulation M, and Rule 200(g) of Regulation
SHO, in connection with secondary market transactions in HealthShares on the New York Stock
Exchange or on any other Exchange on which HealthShares may subsequently trade, and the
creation and redemption of Creation Unit Aggregations of the Fund.
The Company is an open-end management investment company that was organized as a
Maryland corporation on February 8,2006. The Company's registration statement for the Fund
has been declared effective by the omm mission.^ The Fund will invest at least 90% of its assets
in the common stocks of companies in the Underlying Index (or in American Depositary
Receipts or Global Depositary Receipts based on securities of international companies in the
Underlying Index). The Fund will attempt to replicate the Underlying Index by matching the
weighting of securities in its portfolio with such securities' weightings in the Underlying Index.
The investment objective of the Fund is to provide investment results that, before expenses,
correspond generally to the total return of the Underlying ~ n d e x . ~
1
We have enclosed a photocopy of your letter. Each defined term in this letter has the
same meaning as defined in your letter, unless we note otherwise.
2
FileNos. 333-131842 and 811-21855.
The HealthShares Composite Exchange-Traded Fund tracks the performance of the
HealthShares Composite Index.
Domenick Pugliese, Esq.
Paul, Hastings, Janofsky & Walker LLP
March 8,2007
Page 2
Response:
Rule 10a-1
Rule 200 of Regulation SHO defines "short sale," and Rule 10a-1 under the Exchange
Act governs short sales generally. Paragraph (a) of Rule 10a-1 covers transactions in any
security registered on a national securities exchange, if trades in such security are reported in the
consolidated transaction reporting system, and prohibits short sales with respect to these
securities unless such sales occur on a "plus tick" (that is, a price above the price at which the
immediately preceding sale was effected), or "zero-plus tick" (that is, at the last sale price if it
was higher than the last different price). Rule 10a-1 is designed to prevent the market price of a
stock or other "reported security," as defined in Rule 11Aa3-l(a)(4)under the Exchange Act,
fiom being manipulated downward by unrestricted short selling.
On the basis of your representations and the facts presented, in particular the composite
and derivative nature of HealthShares, it would not appear that trading in HealthShares would be
susceptible to the practices that Rule 10a-1 is designed to prevent. In particular, the Company
anticipates that the market value of HealthShares will rise or fall based on changes in the net
asset value of the component securities of the Underlying Index and supply and demand.
Accordingly, the Commission hereby grants an exemption fiom Rule 10a-1 to permit sales of
HealthShares without regard to the "tick" requirements of Rule 10a-1.
We note that the exemption fiom Rule 10a-1 would not apply to secondary market
portfolio sales of component securities made in connection with the redemption of HealthShares.
In addition, this exemption is contingent upon the Fund maintaining at least 20 component
stocks.
Rule 200(g) of Regulation SHO
Rule 200(g) of Regulation SHO provides that a broker-dealer must mark all sell orders of
any equity security as "long," "short," or "short exempt." Rule 200(g)(2) requires that a short
sale order must be marked "short exempt" if the seller is relying on an exception fiom the tick
test of Rule 10a-1 of the Exchange Act or any short sale price test of any exchange or national
securities association.
Accordingly, in conjunction with the exemption granted above to permit sales of
HealthShares without regard to the "tick" requirements of Rule 10a-1, on the basis of your
representations and the facts presented, and without necessarily concurring in your analysis, the
Staff will not recommend to the Commission enforcement action under Rule 200(g) of
Regulation SHO if a broker-dealer marks "short," rather than "short exempt," a short sale that is
effected in HealthShares, subject to the following conditions:
Domenick Pugliese, Esq.
Paul, Hastings, Janofsky & Walker LLP
March 8,2007
Page 3
1.
..
For each exempt short sale, the various market centers that execute such sales
have instituted procedures to "mask" the short sale character of the transaction so
that they are executed as short exempt;
11.
Such market centers monitor on a regular basis to confirm that any such product
or transaction continues to meet the conditions for the exemptive relief and reinstitute the price test for any product or transaction that fails to satisfy such
conditions;
iii.
A broker-dealer executing exempt short sales will mark such sales as "short," and
in no event will such sales be marked "long;" and
iv.
The market centers will maintain an audit trail of all such trade executions, which
is capable of being produced and subject to review upon request by the
Commission and other appropriate regulatory authorities.
Regulation M
Redeemable securities issued by an open-end management investment company are
excepted from the provisions of Rule 101 and 102 of Regulation M. The Commission granted
the Company exemptions from certain provisions of the Investment Company Act of 1940 in
order to permit the Company to register as an open-end investment company and to issue shares
that are redeemable only in Creation Unit Aggregations of HealthShares.
Rule 101 of Regulation M
Generally, Rule 101 of Regulation M is an anti-manipulationregulation that, subject to
certain exemptions, prohibits any "distribution participant" and its "affiliated purchasers" from
bidding for, purchasing, or attempting to induce any person to bid for or purchase any security
which is the subject of a distribution until after the applicable restricted period, except as
specifically permitted in the ~egulation.' The provisions of Rule 101 of Regulation M apply to
underwriters, prospective underwriters, brokers, dealers, or other persons who have agreed to
participate or are participating in a distribution of securities.
On the basis of your representations and the facts presented, particularly that the
Company is a registered open-end management investment company that will continuously
redeem at net asset value Creation Unit Aggregations of HealthShares; and that the secondary
market price of HealthShares should not vary substantially from the net asset value of such
HealthShares, which is based on the value of the component securities in the Underlying Index
and will be computed on a daily basis, the Staff hereby confirms that the Company is excepted
under paragraph (c)(4) of Rule 101 of Regulation M, thus permitting persons who may be
Domenick Pugliese, Esq.
Paul, Hastings, Janofsky & Walker LLP
March 8,2007
Page 4
deemed to be participating in a distribution of HealthShares to bid for or purchase HealthShares
during their participation in such di~tribution.~
The Staff also confirms the interpretation of Rule 101 of Regulation M that a redemption
of Creation Unit Aggregations of HealthShares and the receipt of component securities in
exchange therefor by a participant in a distribution of HealthShares would not constitute an
"attempt to induce any person to bid for or purchase a covered security, during the applicable
restricted period" within the meaning of Regulation M, and therefore would not violate
Regulation M.
Rule 102 of Regulation M
Rule 102 of Regulation M prohibits issuers, selling security holders, or any affiliated
purchaser of such person fiom bidding for, purchasing, or attempting to induce any person to bid
for or purchase a covered security during the applicable restricted period in connection with a
distribution of securities effected by or on behalf of an issuer or selling security holder. Rule 100
of Regulation M defines "distribution" to mean any offering of securities that is distinguished
fiom ordinary trading transactions by the magnitude of the ofkring and the presence of special
selling efforts and selling methods.
On the basis of your representations and the facts presented, particularly that the
Company is a registered open-end management investment company that will redeem at net asset
value Creation Unit Aggregations of HealthShares, the Staff hereby confirms that the Company
is excepted under paragraph (d)(4) of Rule 102 of Regulation M, thus permitting the Fund to
redeem HealthShares during the continuous offering of HealthShares.
Rule 14e-5
Rule 14e-5 under the Exchange Act, among other things, prohibits a person making a
tender offer or exchange offer for any equity security fiom directly or indirectly purchasing or
We note that Regulation M does not prohibit a distribution participant and its affiliated
purchasers fiom bidding for and purchasing component stocks in accordance with the
exceptions contained in paragraphs (b)(6) and (c)(l) of Rule 101. Rule 101(b)(6)(i)
excepts basket transactions in which bids or purchases are made in the ordinary course of
business in connection with a basket of 20 or more securities in which a covered security
does not comprise more that 5% of the value of the basket purchased. Rule lOl(b)(6)(ii)
excepts adjustments to such a basket made in the ordinary course of business as a result
of a change in the composition of a standardized index. Also, Rule 101(c)(l) excepts
transactions in actively-traded securities, that is, securities that have an average daily
trading volume value of at least $1 million and are issued by an issuer whose common
equity securities have a public float value of at least $150 million; provided however, that
such securities are not issued by the distribution participant or an affiliate of the
distribution participant.
Domenick Pugliese, Esq.
Paul, Hastings, Janofsky & Walker LLP
March 8,2007
Page 5
arranging to purchase any subject or related securities except as part of the offer, fiom the time
the offer is publicly announced until its expiration.
Rule 14e-5 explicitly includes dealer-managers within the rule's definition of "covered
person." Accordingly, while acting as dealer-manager of a tender offer for a component stock, a
dealer-manager is prohibited fiom purchasing or arranging to purchase that component stock
until the expiration of the offer.
On the basis of your representations and the facts presented, particularly that purchases or
redemptions of HealthShares would not appear to result in the abuses at which Rule 14e-5 is
directed, and that any bids or purchases by dealer-managers would not be effected for the
purpose of facilitating a tender offer, the Commission hereby grants an exemption from Rule
14e-5 to permit any person acting as dealer-manager of a tender offer for a component stock to:
(1) redeem HealthShares in Creation Unit Aggregations to the Company for component stocks
that may include a security subject to the tender offer; and (2) purchase HealthShares during
such offer.6
Rule lob-17
Rule lob-17, with certain exceptions, requires an issuer of a class of publicly traded
securities to give notice of certain specified actions (for example, a dividend distribution, stock
split, or rights offering) relating to such class of securities in accordance with Rule lob-17(b).
On the basis of your representations and the facts presented, particularly that the
Commission has determined to grant an exemption fiom the Investment Company Act of 1940 to
register the Company as an open-end management investment company notwithstanding the fact
that it issues HealthShares with limited redeemability, the Commission hereby grants an
exemption fiom the requirements of Rule lob-17 to the Company with respect to transactions in
~ealth~hares.~
The Staff also confirms its no-action position under Rule 14e-5 when a broker-dealer
(including a member or member organization of the AmEx or other national securities
exchange), acting as a dealer-manager of a tender offer for a component stock, purchases
such component stock in the secondary market for the purpose of tendering them to
purchase a Creation Unit Aggregation of Shares, if such transactions are effected as
adjustments to such a basket in the ordinary course of business as a result of a change in
the composition of the Underlying Index.
We also note that compliance with Rule lob-17 would be impractical in light of the
nature of the Fund. This is because it is not possible for the Company to accurately
project ten days in advance what dividend, if any, would be paid on a particular record
date.
Domenick Pugliese, Esq.
Paul, Hastings, Janofsky & Walker LLP
March 8,2007
Page 6
The foregoing exemptions fiom Rules 10a-1, lob-17, and 14e-5 under the Exchange Act,
interpretations of Rules 101 and 102 of Regulation M, and no-action positions taken under
Regulation SHO are based solely on your representations and the facts presented to the Staff, and
are strictly limited to the application of those rules to transactions involving HealthShares under
the circumstances described above and in your letter. Such transactions should be discontinued,
pending presentation of the facts for our consideration, in the event that any material change
occurs with respect to any of those facts or representations. Moreover, the foregoing exemptions
itom Rules 10a-1, lob-17, and 14e-5 under the Exchange Act, interpretations of Rules 101 and
102 of Regulation M and no-action positions taken under Regulation SHO are subject to the
condition that such transactions in HealthShares, any component security, or any related
securities are not made for the purpose of creating actual, or apparent, active trading in or raising
or otherwise affecting the price of such securities.
These exemptions, interpretations, and no-action positions are subject to modification or
revocation if at any time the Commission or Staff determines that such action is necessary or
appropriate in furtherance of the purposes of the Exchange Act. In addition, persons relying on
these exemptions, interpretations, and no-action positions are directed to the anti-fiaud and antimanipulation provisions of the Exchange Act, particularly Sections 9(a), 10(b), and Rule lob-5
thereunder. Responsibility for compliance with these and other provisions of the federal or state
securities laws must rest with persons relying on these exemptions, interpretations, and no-action
positions. The Staff expresses no view with respect to other questions that the proposed
transactions may raise, including, but not limited to, the adequacy of disclosure concerning, and
the applicability of other federal and state laws to, the proposed transactions.
For the Commission,
by the Division of Market Regulation,
pursuant to delegated authority,
James A. Brigagliano
Associate ~irector
Attachment
PaulHustings
Paul, Hastings, Janofsky & Walker LLP
75 East 55th Street New York, NY 10022
telephone 212 318 6000 facsimile 212 319 4090 www.paulhastings.com
. .
AlTORNEYS
Atlanta
Beijing
Brussels
Hong Kong
London
Los Angeles
Milan
New York
Orange County
Palo Alto
Paris
San Diego
San Francisco
Shanghai
Stamford
Tokyo
Washington, DC
.
March 7,2007
VIA UPS NEXT DAY AIR
Mr. James A. Brigagliano
Associate Director
Office of Trading Practices and Processing
Division of Market Regulation
Securities and Exchange Commission
100 F Street, N.E.
Washmgton, DC 20549-1001
Re:
Request for Exemptive, Interpretive and No-Action Relief from Rules 10a-1; 10b17; and 14e-5 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); and Rules 101 and 102 of Regulation M and Rule 200(g) of Regulation SHO promulgated under the Exchange Act: HealthSharesTMComposite Exchange-Traded Fund.
Dear Mr. Brigagliano:
HealthSharesTM,Inc. (the "Companyyy)is an open-end management investment
company that was organized as a Maryland corporation on February 8,2006. The Company has registered 20 investment series ("Funds") and plans to offer more series in the
future. This letter is submitted on behalf of the following HealthSharesTMfund portfolio:
HealthSharesTMComposite Exchange-Traded Fund (the "F~nd'~).
The shares of the
Fund are referred to herein as "HealthSharesTM".
The Company has an effective registration statement for the ~ u n d which
'
was previously
filed with the Commission in order to regster the Fund and its HealthSharesTMunder the
1940 Act and the Securities Act of 1933, as amended ("Securities Acty'). The Company
1
The Company is regstered under the Investment Company Act of 1940, as amended
(the "1940 Actyy).O n February 14,2006, the Company filed with the Securities and Exchange Commission (the "Commission") a Registration Statement for the Funds on Form
N-1A under the Secbrities Act of 1933, as amended, and under the 1940 Act relating to
the Funds (File Nos. 333-131842 and 811-21855) (the "Registration Statementyy).The
Registration Statement was declared effective by the Commission on January 12,2007.
PaulHastings
Mr. James A. Brigagliano
March 7,2007
Page 2
intends to list the HealthSharesTMof the Fund on the New York Stock Exchange (the
"NYSE') in accordance with NYSE Rules 703.162and 11003.
On March 1,2006 the Company filed with the Commission an application under Section 6(c) of the 1940 Act and on August 23,2006 the Company filed with the Commission
an Amended and Restated application under Section 6(c) of the 1940 Act, for an exemption from Sections 2(a)(32), 5(a)(l), 22(d) and 24(d) of the 1940 Act and Rule 22c-1 under
the 1940 Act, and under Sections 6(c) and 17@)of the 1940 Act for an exemption from
Sections 17(a)(l) and (a)(2) of the 1940 Act, File No. 812-13264 (the "Application"). An
order (the "Order") granting the relief requested in the application was issued by the
Commission on December 7,2006 (IC-27549). The Order permits the Company to offer
the Funds. On May 2,2006, the Company filed with the Commission a second application under 6(c) of the 1940 Act ,on February 12,2007 the Company filed with the Commission an Amended and Restated application under 6(c) of the 1940 Act, for an exemption from Section 12(d)(1)(A) and (B) of the 1940 Act, and under 6(c) and 17@)of the
1940 Act for an exemption from Sections 17(a)(l) and (2) of the 1940 act, File No. 81213288 (the "Second Application," and together with the Application, the "Applications").
The Second Application will permit (i) regstered open-end management investment companies and unit investment trusts ("Purchasing Funds") that are not part of the same
"group of investment companies" as the Company within the meaning of Section 12(d)(l)(G)(ii) of the 1940 Act, and that are not sponsored or advised by the Advisor
(defined herein) or an entity controlling, controlled by or under common control with the
Advisor to acquire, and the Company, principal underwriter and certain broker-dealers to
sell, HealthSharesTMbeyond the limits of Sections 12(d)(l)(A) and (B) of the 1940 Act,
and (ii) Purchasing Funds to engage in certain purchase and redemption transactions in
Creation Unit Aggregations (defined herein) directly with a Fund that might otherwise be
prohibited by Section 17(a) of the 1940 Act.
The market prices of exchange-traded HealthSharesTMare expected to vary from their net
asset values ("NAVs"). The Fund will issue and redeem HealthSharesTMat their NAVs
only in aggregations of a specified number of HealthSharesTM,as further discussed below.
Given the opportunities for arbitrage, it is not anticipated that any deviation between
market price and NAV will be material.
-
The Fund meets the listing standards of Rule 703.16 of the NYSE Listed Company
Manual, as amended, See SEC Rel. 34-55113.
If HealthSharesTMalso trade on a national securities exchange (an "Exchange") registered with the Commission or the Nasdaq Stock Market, Inc. (the "Nasdaq") pursuant to
unlisted trading privileges, such tradmg will be conducted pursuant to self-regulatory organization rules that have become effective pursuant to Exchange Act Section 19(b).
PaulHustings
Mr. James A. Brigagliano
March 7,2007
Page 3
In connection with the secondary market trading of those HealthSharesTMto be offered
by the Company, the Company, on behalf of itself, the NYSE, and persons or entities engagmg in transactions in HealthSharesTM(collectively, the "Applicants"), as the case may
be, hereby request that the Commission and its staff (the "Staff') grant the appropriate
exemptive, interpretive and no-action relief from Rules 10a-1, lob-17 and 14e-5 under the
Exchange Act, and Rules 101 and 102 of Regulation Myand Rule 200(g) of Regulation
SHO ("Regulation SHO") under the Exchange Act, in connection with secondary market
transactions in HealthSharesTMon the NYSE, or any other Exchange on which the
HealthSharesTMmay subsequently trade, and the creation or redemption of Creation Unit
Aggregations (as defined below in Part 1I.A) of HealthSharesTM.The Commission and
Staff have previously granted such relief to other exchange-traded funds ("ETFs") not
related to the Company through a series of lettem4 The Commission has also granted
4
See Letters from James A. Brigagliano, Division of Market Regulation to: (1) Jack P.
Drogin, dated August 4,2005, File No. TP05-88, for ishares MSCI EAFE Growth Index
Fund and ishares MSCI EAFE Value Index Fund (relief identical to the relief requested
by this letter); (2) Stuart M. Strauss, dated October 25,2005, File No. TP 06-07, for the
PowerShares Lux Nanotech Portfolio; (3) Kathleen H. Moriarty, dated March 9,2005, File
No. TP04-19, for the Vanguard Emergmg Markets Stock Index Fund, Vanguard European Stock Index Fund and Vanguard Pacific Stock Index Fund; (4) Stuart M. Strauss,
dated March 2,2005, File No. TP05-15, with respect to PowerShares WilderHill Clean
Energy Portfolio Fund; (5) Ira Hammerman, dated January 3,2005, File No. TP-05-11
(for letters (2) through (5), relief granted from Regulation SHO (identical to the relief
from Regulation SHO requested by this letter) with regard to exchange-traded funds that
had previously been granted an exemption from a price test); (6) Jack P. D r o p , dated
October 8,2004, File No. TP04-33, for the ishares FTSE/Xinhua Chma 25 Index Funds
(for letters (6) through (16), relief is substantially similar to the relief requested by this letter); (7) Jack P. Drogm, dated September 25,2003, File No. TPO3-118, for the ishares
Lehman U.S. Treasury Inflation Protected Securities Fund and ishares Lehman U.S. Aggregate Bond Fund ( & I Sletter did not seek relief under Rule 14e-5); (8) W. John McGuire,
dated July 25,2002, File No. TP02-81, for the ishares 1-3 Year Treasury Index Fund,
i-Shares 7-10 Year Treasury Index Fund, ishares 20+ Year Treasury Index Fund, ishares
Treasury Index Fund, ishares Governrnent/Credit Index Fund, ishares Lehman Corporate Bond Fund and ishares Goldman Sachs InvesTop Corporate Bond Fund (this letter
did not seek relief under Rule 14e-5); (9) Donald R. Crawshaw; dated October 26,2001,
File No. P O I - 2 3 6 , for the iShares, Inc. MSCI Index Funds (ACFE, ACW, EMF,
EMLA, Europe, Pacific, and Israel); (10) W. John McGuire, dated October 19,2001, File
No. TP02-07, for the ishares S&P Latin America 40 Index Fund and the ishares
S&P/Tokyo Stock Price Index ("TOPIX) Index Fund; (11) W. John McGuire, dated
August 15,2001, File No. TP01-160, for the ishares MSCI EAFE Index Fund;
(12) W. John McGuire, dated July 10,2001, File No. TP01-161, for the ishares Goldrnan
(con't. . .)
LEGAL-US-E # 74234332.1
PaulHustings
Mr. James A. Brigagliano
March 7,2007
Page 4
such relief to two other portfolios of the Company; HealthSharesTMEmerging Cancer
Exchange-Traded Fund and HealthSharesTMCardio Devices Exchange-Traded ~ u n d . ~
On October 24,2006, in a letter issued to PowerShares Exchange-Traded Fund Trust6
(the "PowerShares Letter"), the Commission granted relief7with respect to the aforementioned Exchange Act provisions and rules thereunder. This relief supercedes relief that
had been previously granted to the American Stock Exchange, LLC ("AMEX"). ETFs
listed and traded on an Exchange may rely upon the relief granted in the PowerShares Letter without the submission of a 1934 Act exemptivelno-action request if such ETFs meet
certain con&tions, including the following: (a) at least 70% of the ETF must be comprised of component stocks that have a minimum average daily trading volume ("ADTV")
of at least $1 d o n during each of the previous two months of trading prior to formation of the relevant ETF and, at least 70% of the ETF must be comprised of component
stocks that have a minimum public float value of at least $150 million; provided, however,
if the ETF has 200 or more component stocks, then 50% of the component stocks must
meet the $1 d o n ADTV and $150 million public float thre~holds.~
Although the Fund
Sachs Technology Industry Multimedia Networking, Goldman Sachs Technology Industry
Semiconductor, Goldman Sachs Technology Industry Software, Russell Midcap, Russell
Midcap Growth, and Russell Mdcap Value Index Funds; (13) Liza M. Ray, dated March
13,2001, File No. TPO1-106, for the ishares Goldman Sachs Technology Index Fund;
(14) James T. McHale, dated February 1,2001, File No. TPO1-60, for the ishares Cohen &
Steers Realty Majors and the Nasdaq Biotechnology Index Funds; (15) Mary Joan Hoene,
dated September 5,2000, File No. 73'00-135 and December 1,2000, File No. TPO1-16,
respectively for the ishares S&P 100 and S&P Global 100 Index Funds; and (16) Kathleen
H. Moriarty, dated May 16,2000, File No. TP00-39 for 35 ishares Funds.
See, Letter from James A. Brigagliano, Division of Market Regulation to Domenick Pugliese, dated January 22,2007, File No. TP07-31 for the HealthSharesTMEmerging Cancer
Exchange-Traded Fund and the HealthSharesTMCardio Devices Exchange-Traded Fund.
6
See, Letter from James A. Brigagliano, Assistant Director of Market Regulation, to Stuart
M. Strauss, Esq., dated October 24,2006.
7
Letter from James A. Brigagliano, Assistant Director, Division of Market Regulation, to
Claire P. McGrath, Vice President and Special Counsel, AMEX, dated August 17,2001
(the "AMEX Letter").
8
The Commission has granted class relief with respect to Section 11 (d)(l) and Rules 10b10,l ldl-2,15cl-5 and 15cl-6 of the Exchange Act to certain "Qualifjmg ETFs". See,
letter from Catherine McGuire, Chief Counsel, Division of Market Regulation, to the Securities Industry Association, dated November 21,2005. The Funds meet the requit-e(con't.. .)
LEGAUS-E # 74234332.1
PaulHustings
Mr. James A. Brigagliano
March 7,2007
Page 5
will be listed on the NYSE, the Fund does not meet the requirements of the PowerShares
Letter set forth above, as the Fund will not meet the average daily tradmg volume and
public float criteria.' Therefore, the Fund cannot rely on the relief provided in the PowerShares Letter with respect to Rules 10a-1, lob-17 and 14e-5 of the Exchange Act and
Rules 101 and 102 of Regulation M and Rule 200(g) of Regulation SHO promulgated under the Exchange Act and the Company, on behalf of the Fund, hereby requests relief
from the aforementioned Exchange Act rules.
The Company notes the creation and issuance by an investment company of shares or
units that individually trade on an Exchange, but that in large aggregations can be purchased from and redeemed with the issuing investment company, is no longer novel. The
Commission has for more than a decade considered and approved many such proposals.
Some of these exchange-traded products have been trading publicly for years, and the
Company is not aware of any abuses associated with them. Indeed, several of the products have been so embraced by investors that they routinely are among the b h e s t volume
securities on the Exchanges on which they trade.
I.
Parties
A.
The Fund
The Fund seeks to track the performance, before fees and expenses, of a particular benchmark index.'' The Fund intends to qualify as a "regulated investment company" for purposes of the Internal Revenue Code.
The Fund will invest at least 90% of its assets in the common stocks of companies in the
Underlying Index, or in American Depositary Receipts ("ADRsY')or Global Depositary
Receipts ("GDRs") based on securities of international companies in the Underlying Inments of "Qualifymg ETFs" under &IS letter and are therefore relying on this letter with
respect to these provisions.
~ x c e pfor
t the minimum average daily trading volume and public float criteria of the
PowerShares Letter set forth above, the Fund meets all other conditions of the PowerShares Letter. With respect to the minimum average daily trading volume and public float
tests, the Fund satisfies this test with respect to more than 21% of its portfolio. As noted
in Notes 4 and 5 above, the relief requested herein is substantially similar to the relief
granted to other ETFs including other portfolios of the Company.
lo The HealthSharesTM
Composite Exchange-Traded Fund tracks the performance of the
HealthSharesTMComposite Index (an "Underlying Index").
LEGAL-US-E # 74234332.1
PaulHustings
ATTORNM
Mr. James A. Brigagliano
March 7,2007
Page 6
dex. The Fund may also invest up to 10% of its assets in futures contracts, options on
futures contracts, options, swaps on securities of companies in the Underlying Index, as
well as cash and cash equivalents, such as money market instruments (subject to the applicable limitations of the 1940 Act). The Fund will attempt to replicate the Underlying Index by matching the weighting of securities in its portfolio with such securities' weightings
in the Underlying Index. The Fund may also sample, rather than replicate, the Underlying Index in terms of key characteristics, such as price/earnings ratio, earnings growth,
and dividend yield. If the Fund pursues a sampling strategy, as just described, it will continue to invest at least 90°/o of its assets in the common stocks, ADRs or GDRs of the
companies in the Underlying Index." The Fund will consist of approximately 80 securities, matching the Underlying Index as described below.
1.
Underlvine Index Descn~tionand Methodolorn
The Underlying Index is an index of U.S. and foreign common stocks of healthcare, life
sciences or biotechnology companies that have been included in the HealthSharesTM
Autoimmune-Inflammation Index, the HealthSharesTMCancer Index, the HealthSharesTM
Cardio Devices Index, HealthSharesTMCardiology Index, the HealthSharesTMDermatology and Wound Care Index, the HealthSharesTMDiagnostics Index, the HealthSharesTM
Emerging Cancer Index, the HealthSharesTMEnabling Technologies Index, the HealthSharesTMGI/Gender Health Index, the HealthSharesTMInfectious Disease Index, the
HealthSharesTMMetabolic-EndocrineDisorders Index, the HealthSharesTMNeuroscience
Index, the HealthSharesTMOphthalmology Index, the HealthSharesTMOrthopedc Repair
Index, the HealthSharesTMPatient Care Services Index and the HealthSharesTMRespiratory/Pulmonary Index (collectively, the "Composite Eligible Indexes") by the Index Administrator and therefore are included in the HealthSharesTMComposite Index.
XShares Group LLC (the "Index Creatory'),the parent of the Funds' investment adviser,
XShares Advisors LLC, is the creator of the Underlying Index and each Composite Eligible Index and has created each Composite Eligible Index using an investment approach
known as ''vertical" investing. "Vertical" investing seeks to categorize companies within a
particular healthcare, life sciences or biotechnology index by focusing on each company
with regard to the diagnosis of diseases, the developments of drugs, treatments, therapies
and delivery systems, and the development of enabling/research tools and technologes
for use in the healthcare, life sciences or biotechnology sectors.
The Index Creator, based on its own proprietary intellectual model, has established specific, objective inclusion/exclusion criteria (the "Index Composition Methodology") that
11
HealthSharesTMof one Fund may not be exchanged for HealthSharesTMof another
Fund.
LEGAL-US-E # 74234332.1
PaulHustings
AnoRNEYS
Mr. James A. Brigagliano
March 7,2007
Page 7
an issuer must meet in order to be included in a Composite Eligible Index or in the Underlying Index. The Underlying Index, and each Composite Eligible Index, will be administered by Standard & Poor's (the "Index Adrmnistrator"), which will employ these criteria
to determine the composition of each Index. The Advisor has engaged BNY Investment
Advisors as a Sub-Advisor to be responsible for the day-to day management of the Fund's
portfolio, which involves principally reconfiguring the portfolio of the Fund, typically
quarterly, to reflect any reconfiguration in the Underlying Index by the Index A b s t r a tor.
When determining the composition of the Underlying Index and each Composite Eligible
Index, the Index Administrator relies on many sources of information, including information obtained from the BioCentury and MedTrack databases. The BioCentury and MedTrack databases are independent, generally avadable databases that provide a vast amount
of data for healthcare, life sciences and biotechnology companies, including information
regarding products, clinical trials, pipeline development, patent and other information.
For each Composite Eligible Index, the Index Adrninlstrator will screen companies to
eliminate those that fall outside of the market capitahation ranges applicable to that Index. The Index Administrator will then employ the remainder of the Index Composition
Methodology for each Composite Eligible Index to identify the companies that satisfy
these criteria. Typically, the largest of these companies (determined by market capitahation) are included in a Composite Eligible Index, with a minimum of 22 companies in
each Composite Eligible Index. The initial companies selected for inclusion are weighted
equally at inception, and are thereafter weighted based upon the individual company's
market value relative to the overall portfolio market value of the relevant Composite Eligble Index (i.e., price weighted). Maximum weighting for any security in a Composite
Eligible Index is typically 15%. When a company's weighting exceeds 15% of the overall
Index portfolio, the Index Administrator will reduce such company's weighting to lo%,
with the 5% "excess" applied equally to all remaining component securities in the Composite Eligible Index. Mhmum weighting for a security in a Composite Ehgble Index is
2.5%. When a security's weighting falls below 2.5%, the Index Administrator will increase
the security's weighting to its initial weighting or 5%, whichever is less, with the required
increment taken equally from,allthe remaining component securities." The Underlying
Index consists of stocks of the 80 largest companies by market capitalization taken from
the top five companies in market capitalization from each of the Composite Eligible Indexes, arranged in alphabetical order. Information about the Underlying Index, including
the component securities in Underlymg Index and the value of the securities in the Under-
'' The minimum weighting for a security may fall below 2.5% in the event a rebalancing
would require the ETF relymg on such Index to make h g s under Section 13(g) of the
Exchange Act.
Mr. James A. Brigagliano
March 7,2007
Page 8
lying Index, is posted throughout the trading day every 15 seconds and is available
through Reuters.
I.
HealthSharesTMComposite Index
The HealthSharesTMComposite Index is an index of U.S. and foreign common stocks of
healthcare, life sciences or biotechnology compa4es that have been included in the Composite Eligible Indexes.
As of January 31,2007 the HealthSharesTMComposite Index component securities had a
float-adjusted market capitalization of approximately $329.96 billion. The average floatadjusted market capitalization was approximately $4.12 billion. The ten largest constituents represented approximately 31% of the index weight. The five highest weighted securities represented 19% of the index weight.
HeaZthShares TWomposite Index as ofJanuay 31,2007:
Index Composition
Concentration
Size of Companies Float-Adjusted
$ Billions
Index
Characteristics
Total Index Size Float-Adjusted Billions)
Number of Components
Percent in Ten Largest Components
Market Cap. - Median
Market Cap. - Arithmetic Average
Market Cap. - Smallest Stock Held
Market .Cap. - Largest Stock Held
Market Cap. - $ -Weighted Average
329.96
80
31'10
3.57
4.12
0.33
20.16
6.54
Portfolio P/E
Portfolio P / E Excluding Negative Earnings
Port. P / E - I/B/E/S 1 yr Forecast EPS
Portfolio P/E - Normalized Earnings
Portfolio Price/Book
Dividend Yield
47.9
N/A
53.76
N/A
7.84
0.18
Index Constituents
Name
Health Net, Inc.
Davita Inc
SCHWARZ PHARMA AG
Manor Care Inc.
Endo Pharmaceuticals Hldg
Kyphon Inc
Amylin Pharmaceuticals
LCA Vision Inc.
Dade Behring Hldgs Inc
LEGAL-US-E # 74234332.1
Index Weight
6.11
3.82
3.39
3.04
2.84
2.71
2.61
2.16
2.14
PaulHustings
Mr. James A. Brigagliano
March 7,2007
Page 9
United Therapeutics Corp
Bard (C.R.) Inc.
Respironics Inc
Edwards hfesciences Corp.
Solvay SA
FIELMANN AG
St Jude Medical
Pharmion Corp
Varian Medical Systems
Theravance Inc
GENMAB A/S
Conor Medsystems Inc
The Cooper Companies
Advanced Medlcal Optics, Inc.
Smith & Nephew PLC (ADR)
Dentsply International
ACTELION LTD-REG
Human Genome Sciences
Cephalon Inc
Thoratec Corp
ArthroCare Corp.
Sigma-Aldrich
Biomarin Pharmaceutical Inc
EV3
GEDEON RICHTER RT
Mylan Laboratories
Abraxis BioScience Inc
Progenies Pharmaceuticals Inc
Laboratory Corp. of America Holding
IPSEN
Pall Corp.
Biomet, Inc.
Barr Pharmaceuticals, Inc.
Beckrnan Coulter Inc.
Zymogenetics Inc
AXCAN P H A W INC
Elan Corporation plc (ADR)
Millipore Corp.
Lincare Holdings
Triad Hospitals
S h e PLC (ADR)
PaulHustings
Mr. James A. Brigagliano
March 7,2007
Page 10
Cytyc Corp.
Medicis Pharmaceutical
Bausch & Lomb
H LUNDBECK A/S
Keryx Biopharmaceuticals
Community Health Systems
Altana AG (ADR)
Isis Pharmaceuticals
Brookdale Senior Living Inc.
Salix Pharmaceuticals Ltd
Health Management Assoc.
ANGIOTECH
PHARMACEUTICALS IN
Sepracor Inc.
MedImmune Inc.
Waters Corporation
Valeant Pharmaceuticals Int'l
Watson Pharmaceuticals
ALIZYME PLC
Biovail Corp. (US)
Osi Pharmaceuticals Inc
King Pharmaceuticals
Alkermes Inc
Vertex Pharmaceuticals
PDL BioPharma, Inc.
New River Pharmaceuticals
Applera Corp-Applied Biosystems
Group
Medarex Inc
Adolor Corporation
Nektar Therapeutics
Millennium Pharmaceuticals
B.
The Advisor
XShares Advisors LLC serves as the investment adviser to the Fund (the "Advisor") with
overall responsibility for the general management and administration of the Fund, subject
to the supervision of the Fund's Board of Directors (the ccBoard''). Pursuant to an investment advisory agreement between the Company and the Advisor, the Advisor is authorized to engage one or more sub-advisers to perform any of the services contemplated
to be performed by the Adviser under the investment advisory agreement. The Advisor is
LEGAL-US-E # 74234332.1
PaulHustings
Mr. James A. Brigagliano
March 7,2007
Page 11
located at 420 Lexington Avenue, New York, New York 10170. The Advisor's parent
company, XShares Group LLC, is the creator of the Underlying Indexes.
C.
The Sub-Advisor
BNY Investment Advisors ,a separate identifiable &vision of the Bank of New York,
serves as investment sub-adviser to the Fund (the "Sub-Advisor',). Pursuant to a subadvisory agreement between the Advisor and the Sub-Advisor, the Sub-Advisor will be
responsible for the day-to-day management of the Fund, subject to the supervision of the
Advisor and the Board.
D.
The Distributor
ALPS Distributors, Inc. serves as the distributor of Creation Unit Aggregations for the
Fund on an agency basis (the "Distributor"). The Distributor has entered into an agreement with the Company pursuant to which it will distribute HealthSharesTMof the Fund.
This agreement wdl continue for two years from its effective date and wdl be renewable
annually thereafter. HealthSharesTMwill be continuously offered for sale by the Distributor only in Creation Unit Aggregations, as described in the Company's prospectus. The
Distributor wdl deliver the Company's prospectus, and upon request, the statement of
additional information ("SAY) to persons purchasing Creation Unit Aggregations and will
maintain records of both orders placed with it and confirmations of acceptance furnished
by it. The Distributor is a broker-dealer registered under the Exchange Act and a member
of the NASD, Inc. The Distributor has no role in determining the investment policies of
the Fund or which securities are to be purchased or sold by the Fund.
E.
Management - Indexing A ~ ~ r o a c h
The Company's Board has responsibility for the overall management of the Fund. The
Advisor, subject to the supervision of the Board, will be responsible for the investment
management of the Fund. The Sub-Advisor will be responsible for the day-to-day management of the Fund, subject to the supervision of the Advisor and the Board. As described in the Company's prospectus, the Fund is not actively managed and the actions of
the Advisor and Sub-Advisor will not result in the active management of the Fund. Instead, the Advisor uses a passive, or indexing, approach in managing the Fund to track the
performance, before fees and expenses, of the Underlying Index. Unlike many mutual
funds, the Fund does not seek to outperform any particular market sector and will not
assume temporary defensive positions when markets decline or appear overvalued.
Wherever practicable, the Fund will replicate its Underlying Index, meaning that it will
hold the same securities as those in the Underlying Index and in approximately the same
proportions (the securities owned by the Fund are hereinafter referred to as "Fund Securities"). The Fund may also sample its Underlying Index by holding securities that, in the
PaulHustings
Mr. James A. Brigagliano
March 7,2007
Page 12
aggregate, are intended to approximate the Underlpg Index in terms of key characteristics, such as price/earnings ratio, earnings growth, and dividend yield. Typically, the Fund
will use a sampling strategy if regulatory constraints or other considerations prevent it
from replicating its Underlpg Index.
11.
Proposal
A.
Reason for This Request
It is currently expected that the Fund will issue and redeem HealthSharesTMonly in aggregations of 100,000 HealthSharesTMor multiples thereof ("Creation Unit Aggregations")
and that purchasers of Creation Unit Aggregations will be able to separate the Creation
Unit Aggregations of the Fund into 100,000 individual HealthSharesTM.The number of
HealthSharesTMin a Creation Unit Aggregation wlll not change (except in the event of a
stock split or similar revaluation).
The Company will list HealthSharesTMof the Fund on the NYSE. It is not expected that
the Distributor or any other entity will maintain a secondary market in individual HealthSharesTM. One or more NYSE member firms will act as designated specialists and maintain a market for the HealthSharesTMthat trade on the NYSE. HealthSharesTMof the
Fund will trade on the NYSE in a manner similar to the way other ETFs currently trade
on the NYSE and other Exchanges.
As stated earlier, the Company has registered the Funds with the Commission pursuant to
a registration statement on Form N-1A to permit the Company to offer and sell HealthSharesTMof the ~ u n d sunder
' ~ the 1940 Act and the Securities Act. The various disclosure documents and marketing materials will describe the sipficant features of HealthSharesTM.
HealthSharesTMare registered in book-entry form only; the Fund will not issue individual
share certificates for HealthSharesTM.The Depository Trust Company ("DTC"), or its
nominee, will be the record or registered owner of all outstanding HealthSharesTM.Beneficial ownership of HealthSharesTMwdl be shown on the records of DTC or a brokerdealer that is a participant in DTC (a "DTC Participant").
Beneficial owners of HealthSharesTM("Beneficial Owners") will receive all of the statements, notices, and reports required under the 1940 Act and other applicable laws. They
will receive, for example, annual and semi-annual reports, written statements accompanying dvidend payments, proxy statements, annual notifications d e t a h g the tax status of
l3
See footnote 1, snpra.
LEGAL-US-E # 74234332.1
PaulHastings
Mr. James A. Brigagliano
March 7,2007
Page 13
distributions, IRS Form 1099-DIVs, etc. Because the Company's records reflect ownership of HealthSharesTMby DTC only, the Company will furnish applicable statements,
notices and reports to the DTC Participants who, in turn, will be responsible for hstributing them to the Beneficial Owners. This arrangement is identical to that of the other
ETFs already listed on Exchanges, and is sirmlar to that used by ETFs whose shares are
owned through mutual funds supermarket intermeharies.
B.
Purchasing HealthSharesTM
The Fund d issue HealthSharesTMonly in Creation Unit Aggregations and generally,
only in exchange for an in-kind deposit of securities by the purchaser, together with a deposit of a specified cash payment described more fully below. The in-kind deposit will
consist of a basket of securities (the "Deposit Securities") selected by the Advisor to replicate (or sample) the securities in the Underlying Index (as described above in Part 1.E).
The identities and amounts of the Deposit Securities will be determined by the Advisor
and made publicly available on the National Securities Clearing Corporation ("NSCC")
bulletin board. By requiring that purchase (and redemption) transactions involving
HealthSharesTMbe in-kind, rather than in cash, the Company can minimize portfolio
turnover, brokerage expenses, and other transaction costs.
The Fund d offer and sell HealthSharesTMin Creation Unit Aggregations through the
Distributor on a continuous basis, without a sales load, at the NAV per share next determined after receipt of an order in proper form. The Fund will not issue fractional Creation Unit Aggregations. The NAV of HealthSharesTMwill be determined as of the close
of regular trading on the NYSE on each day that the NYSE is open (a "Business Day").
Individual HealthSharesTMof the Fund will be listed on the NYSE and traded in the secondary market in the same manner as other securities. The price of HealthSharesTMtrading on the NYSE will be based on a current bid/offer market and may vary from NAV.
No secondary sales will be made to brokers or dealers at a concession by the Distributor
or by the Fund. Transactions involving the sale of HealthSharesTMon the NYSE, which
will be between purchasers and sellers and will not involve the Fund, will be subject to
customary brokerage commissions or mark-ups and charges.
The pricing of HealthSharesTM of the Fund by means of bids and offers on the NYSE in
the secondary market is not novel. As noted above, other ETFs are listed and traded on
the NYSE and other Exchanges as well. This is the method by which the shares of
closed-end investment companies are priced and sold after initial issuance. Applicants
have been informed that other ETFs have traded at, or very close to, their: respective
NAVs since their tradmg commenced. Like those products, the price at which HealthSharesTMof the Fund trade on the NYSE will be disciplined by arbitrage opportunities
created by the ability to purchase or redeem Creation Unit Aggregations at NAV, whch
PaulHustings
ATrORNM
Mr. James A. Brigagliano
March 7,2007
Page 14
should ensure that HealthSharesTMsimilarly do not trade at a material premium or dlscount in relation to NAV.
C.
Placement of Orders to Purchase Creation Unit Asegations
All orders to purchase Creation Unit Aggregations of HealthSharesTMof the Fund must
be placed with the Distributor by or through a "Participating Organization." A Participating Organization must be either a "Participating Party" (i.e., a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the
NSCC), a clearing agency regstered with the Commission pursuant to Exchange Act Section 17A, or a DTC Participant, and in each case, must enter into a participant agreement
with the Company or its Distributor. The Fund will recoup the costs of issuing a Creation
Unit Aggregation by imposing a "Transaction Fee" on investors purchasing or redeeming
Creation Unit Aggregations. The purpose of the Transaction Fee is to impose the costs
associated with the purchase and redemption of Creation Unit Aggregations on those purchasing and redeeming.14
All orders to purchase Creation Unit Aggregations must be received by the Distributor
prior to the close of regular trading on the NYSE ("Closing Time") on the date the order
is placed (the "Transmittal Dateyy),and all other procedures set forth in the agreement
with the Participating Organization must be followed, in order for the purchaser to receive the NAV determined on the Transmittal Date. The Distributor d maintain a record of Creation Unit Aggregation purchases.
The Distributor will transmit all purchase orders to the Fund. Any order that is not in
form will be rejected. After the Fund has accepted a purchase order and received
delivery of the Deposit Securities and any accompanying cash payment, DTC will instruct
it to initiate "delivery" of the appropriate number of Creation Unit Aggregations of
HealthSharesTMto the book-entry account specified by the purchaser. The Distributor
will furnish a prospectus and a confrrmation to those placing purchase orders.
--
14
-
The Prospectus and SAI for the Fund will provide complete dlsclosure about the
Transaction Fee. An additional charge of up to five (5) times the b e d Transaction Fee
(expressed as a percentage of the value of the Deposit Securities) may be imposed for (i)
creations effected outside the Clearing Process; and (ii) cash creations (to offset the Company's brokerage and other transaction costs associated with using cash to purchase the
requisite Deposit Securities). Investors are responsible for the costs of transferring the
securities constituting the Deposit Securities to the account of the Company.
PaulHustings
ATTORNM
Mr. James A. Brigagliano
March 7,2007
Page 15
D.
Pavment for Creation Unit Awegations
Persons purchasing Creation Unit Aggregations from the Fund generally must make an inkind deposit of Deposit securities together with an amount of cash specified by the Advisor (the "Balancing Amounty') and the Transaction Fee (together with the Balancing
Amount, the "Cash Component"). The Deposit Securities and the Cash Component collectively are referred to as the "Fund Deposit." As noted above, the Deposit Securities
replicate (or sample) the Fund Securities of the Fund. The Balancing Amount is a cash
payment designed to ensure that the NAV of a Fund Deposit (not includmg the Transaction Fee) is identical to the NAV of the Creation Unit it is used to purchase. If the Balancing Amount is a positive number (i.e., the NAV per Creation Unit exceeds the market
value of the Deposit Securities), then that amount will be paid by the purchaser to the
Fund in cash. If the Balancing Amount is a negative number (i.e., the NAV per Creation
Unit is less than the market value of the Deposit Securities), then that amount will be paid
by the Fund to the purchaser in cash.
The Advisor will make avadable through NSCC on each business day, prior to the opening of trading on the NYSE, a list of the names and the required number of units of each
Deposit Security to be included in the Fund ~ e ~ 0 s i t .The
l ' Advisor also wdl make available on a daily basis the information about the previous day's Balancing Amount. In addition, the following information wiU be disseminated: (i) continuously throughout the trading day through the facilities of the consolidated tape, the market price of a HealthShareTM,and (ii) every 15 seconds throughout the trading day, as calculated by
Bloomberg, the estimated NAV of a HealthShareTM(which estimate is expected to be accurate to within a few basis points). Comparing these two figures allows an investor to
determine whether, and to what extent, HealthSharesTMof the Fund are selling at a premium or a discount to NAV.
In addition, the Company reserves the right to permit or require the substitution of an
amount of cash-i.e., a "cash in lieu" amount-to be added to the Cash Component to
replace any Deposit Security that may not be available in sufficient quantity for delivery,
may not be eligible for transfer through the Clearing ~ r o c e s s ' or
~ , may not be eligible for
tradmg by a Participating Organization or the investor for which a Participating Organization is acting. In these circumstances, the Fund may use this "cash in lieu" amount to ac15
The identity and number of units of the Deposit Securities required for a Fund Deposit
may change to reflect rebalancing adjustments and corporate actions by the Fund, or in
response to adjustments to the weighting or composition of the component stocks of the
Underlying Index.
16
It is rare that a security likely to be a Deposit Security is ineligible for transfer.
PaulHustings
ATTORNEVS
Mr. James A. Brigagliano
March 7,2007
Page 16
quire the Deposit Securities that could not be delivered by the purchaser to the Fund.
Brokerage commissions incurred by the Fund in connection with acquisition of such Deposit Securities are expected to be immaterial and d be an expense of the Fund. However, the Advisor, subject to the approval of the Board of Directors, may adjust the
Transaction Fee (described below) to protect existing shareholders from this expense.
E.
Redemption of HealthSharesTM
Just as HealthSharesTMcan beparchased from the Fund only in Creation Unit size aggregations, such shares or units similarly may be redeemed only if tendered in Creation Unit size
aggregations (except in the event the Fund is liquidated). As required by law, redemption
requests in good order will receive the NAV next determined after the request is made.
Except in unusual circumstances, HealthSharesTMwill generally be redeemed in-kind, together with a small cash payment, as described more fully below.
HealthSharesTMin Creation Unit Aggregations of the Fund wdl be redeemable on any day
on whch the NYSE is open in exchange for a basket of securities ("Redemption Securities") and a cash payment. The Redemption Securities received by a redeeming investor
will be those Fund Securities available on the NSCC bulleting board on the Business Day
that the request for redemption is received in h a 1 form. Depending on whether the
NAV of a Creation Unit Aggregation is higher or lower than the market value of the Redemption Securities, the redeemer of a Creation Unit Aggregation will either receive from
or pay to the Fund a cash amount equal to the Balancing Amount.
The Fund may make redemptions partly in cash in lieu of transferring one or more Redemption Securities to a redeeming investor if the Fund determines, in its discretion, that
such alternative is warranted. For example, this could happen if the redeeming investor is
unable, by law or policy, to own a particular Redemption Security.
As with purchases, redemptions of HealthSharesTMin Creation Unit Aggregations will
include a Transaction Fee.
F.
Dividend Reinvestment Service
The Company will not make the DTC book-entry Dividend Reinvestment Service (the
"Service") avadable for use by Beneficial Owners for reinvestment of their cash proceeds,
but certain brokerage h s may make the Service available to their clients. The Company's disclosure documents will inform investors of this fact and direct interested investors to contact such investor's broker to ascertain the avadability and a description of the
Service through such broker. The Company's disclosure documents will also caution interested Beneficial Owners that they should note that each broker may require investors to
adhere to specific procedures and timetables in order to participate in the Service and such
investors should ascertain from their broker such necessary details. HealthSharesTMacLEGAL-US-E # 74234332.1
PaulHustings
ATTMINW
Mr. James A. Brigagliano
March 7,2007
Page 17
quired pursuant to the Service will be held by the Beneficial Owners in the same manner,
and subject to the same terms and conditions, as for o r i p a l ownership of HealthSharesTM.No Balancing Amount will be required in connection with acquiring these
HealthSharesTMbecause such acquisition is a secondary market transaction and not a creation of HealthSharesTMat current NAV. Brokerage commissions, if any, incurred in purchasing HealthSharesTMwith the cash from the distributions wdl be an expense borne by
the Beneficial Owners participating in reinvestment through the Service.
G.
Disclosure Documents
The purchase of HealthSharesTMin Creation Unit Aggregations or in secondary market
transactions will be accompanied or preceded by a statutory prospectus or product description."
The Distributor will coordinate the production and distribution of prospectuses and
product descriptions to broker-dealers. It will be the responsibility of the broker-dealers
to ensure that a prospectus or product description (if the Application is granted) is provided to each secondary market purchaser of HealthSharesTM.
H.
Com~arisonof the Com~anvto the Other Funds That Have Sought Similar
Commission Action
The relief requested in this letter is identical or substantially similar to the relief previously
granted by the Commission to the other portfolios of the Company and to ETFs not related to the ~ o m ~ a n ~ . "
111.
Requests for Relief
A.
Rule 10a-1
Rule 10a-1(a)(l)(i) provides that a short sale of an exchange-traded security may not be
effected below the last regular-way sale price, or at such price, unless such price is above
the next preceding price at which a sale was reported. The Company believes that relief
17
The Company has obtained an exemption from Section 24(d) of the 1940 Act in the
Order (as described above in Part I). The exemption is condrtioned on an undertaking
that investors purchasing HealthSharesTMfrom or through dealers in the secondary market will receive a short "Product Description" or other similar drsclosure document in lieu
of the lengthier statutory prospectus. The Product Description will provide a plain english description of the Fund and the HealthSharesTMit issues.
l8
See footnotes 4 and 5 szrpra.
PaulHustings
ATlORNM
Mr. James A. Brigagliano
March 7,2007
Page 18
from the application of Rule 10a-1 to secondary market transactions in HealthSharesTMof
the Fund is appropriate insofar as HealthSharesTMare derivative securities based on a
stock index. Application of Rule 10a-1 to transactions of the Fund's HealthSharesTM
would not further the rule's purposes, and exempting such transactions would not be inconsistent with such rule.
A primary purpose of Rule 10a-1 is to prevent the market price of a stock from being manipulated downward by unrestricted short selling. The market prices of HealthSharesTM
of the Fund d fluctuate in accordance with changes in NAV and supply and demand on
the NYSE. Price dfferences may be due, in large part, to the fact that supply and demand
forces at work in the secondary tradmg market for HealthSharesTMwill be closely related
to, but not identical to, the same forces influencing the prices of the component securities
of the Underlying Index trading individually or in the aggregate at any point in time. Any
temporary disparities in market value between HealthSharesTMand the relevant component securities would tend to be corrected immedately by arbitrage activity. Moreover,
HealthSharesTMin Creation Unit Aggregations, or multiples thereof, may be redeemed on
any Business Day. Under these circumstances, it would appear to be economically futile
for short sales in HealthSharesTMto be utilized to depress HealthShareTM
prices. Moreover, it would similarly be economically futile for short sales in HealthSharesTMto be utilized to depress particular stocks in the Underlying Indexes.
Because the Fund will qualify as a "regulated investment company" under the Internal
Revenue Code, the Fund cannot invest more than 25% of its assets in a single stock.
Therefore, even if an issuer represents a large portion of the index, a short seller with manipulative intent must spend at least $4 for every $1 of market impact. The economic impracticality of such a strategy is apparent. Moreover, a ratio as favorable to the potential
manipulator as 41 would exist only in the case of extremely large issuers. It is unlikely
that even unrestricted short sales would have significant market impact on the stock of
such issuers.
Furthermore, the maximum weighting for any security in the Underlying Index is typically
15% and when a company's weighting exceeds 15% of the overall Index portfolio, the
Index Administrator will reduce such company's weighting to 10%. Thus, it is highly
unlikely that 25% of a Fund's assets will be in a single stock and the 41 ratio is much
more hkely to be 6.7:l for the Fund.
The trading market for HealthSharesTMof the Fund would be adversely affected if
Rule 10a-1 operated to prevent dealers or the specialist from making short sales of
HealthSharesTMto satisfy customer demand in the absence of an uptick. Requiring an
investor to u t h e another means to acheve such investor's investment goals would be
detrimental to the market for HealthSharesTMand contrary to the public interest in liquid,
efficient securities markets.
PaulHustings
ATTORNEYS
Mr. James A. Brigagliano
March 7,2007
Page 19
The Company notes that it is not requesting relief from Rule 10a-1 for secondary market
portfolio sales that may be made by the Fund in connection with redemptions of Creation
Unit Aggregations of HealthSharesTMor otherwise. The short sale rule will apply (or not
apply) to such transactions as to any other portfolio trade.
For the reasons set forth above, the Company requests that the Commission grant an exemption from Rule 10a-1 to permit sales of HealthSharesTMof the Fund without regard to
the "tick" requirements of Rule 10a-1.
B.
Rule 200(d of Redation SHO
Rule 200(g) of Regulation SHO ("Rule 200(g)") provides that a broker-dealer must mark
all sell orders of any equity security as "long," "short" or "short exempt." Rule 200(g)(2)
requires that a short sale order must be marked "short exempt" if the seller is relying on
an exception from the uptick requirements of Rule 10a-1 of the Exchange Act or any
short sale price test of any exchange or national securities association. As of January 3,
2005, under Regulation SHO, broker-dealers are generally required to mark "short exempt" all short sales effected in any class of products, or during certain specified periods
of time, that have been granted an exemption from a price test, such as that requested by
the Company in connection with the Funds. The Commission Staff has provided noaction relief1' to the Securities Industry Association (the "SLA Letter") that, subject to certain conditions, permits broker-dealers to mark short sales as "shortyyrather than "short
exempt" for, among other things, short sales effected in ETFs that had been granted an
exemption from a price test at the time of the letter.
If the Commission grants the requested relief with respect to Rule 10a-1, the Company
hereby requests that the Staff not recommend that the Commission take enforcement action under Rule 200(g) of Regulation SHO if a broker-dealer marks "short," rather than
"short exempt," a short sale that is effected in the Fund in the same manner as those
ETFs listed in Appendix A of the SIA Letter, and that the relief granted to such ETFs in
the SIA Letter be extended to cover transactions in the HealthSharesTM.The requested
relief is subject to the following conditions:
For each exempt short sale, the various market centers that execute such
(i)
sales have instituted procedures to "mask" the short sale character of the transaction so
that they are executed as short exempt;
19
See, footnote 4, ~ z p aletter
,
from Ira Hammerman, to James A. Brigagliano, Division of
Market Regulation, dated January 3,2005.
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Such market centers monitor on a regular basis to confirm that any such
(ii)
product or transaction continues to meet the conditions for the exemptive relief and reinstitute the price test for any product or transaction that fails to satisfy such con&tions;
A broker-dealer executing exempt short sales will mark such sales as
(iii)
"short," and in no event will such sales be marked "long;" and
The market centers w d maintain an audit wad of all such trade executions,
(iv)
which is capable of being produced and subject to review upon request by the Commission and other appropriate regulatory authorities.
C.
Rule 101 of Re~ulationM
Generally, Rule 101 of Regulation M is an anti-manipulation regulation that, subject to
certain exemptions, prohbits any "distribution participant" and its "affiliated purchasers"
from bidding for, purchasing, or attempting to induce any person to bid for or purchase,
any security that is the subject of a distribution until after the applicable restricted period,
except as specifically permitted in Regulation M. The provisions of Rule 101 apply to underwriters, prospective underwriters, brokers, dealers, and other persons who have agreed
to participate or are participating in a distribution of securities.
We understand that while broker-dealers that: (i) tender Deposit Securities through the
Distributor in return for Creation Unit Aggregation(s) or (ii) redeem Creation Unit Aggregations generally d not be part of a syndicate or selling group, and while no brokerdealer will receive fees, commissions or other remuneration from the Company or the
Distributor for the sale of Creation Unit Aggregations, under certain circumstances such
broker-dealers could be deemed to be "underwriters" or "&stribution participants" as
those terms are defined in Rule loo@).
The Company respectfully requests that the Commission grant an exemption from
Rule 101, as dscussed below, to permit persons participating in a distribution of HealthSharesTMof the Fund to bid for or purchase, redeem or engage in other secondary market
transactions in such HealthSharesTMduring their participation in such distribution.
Paragraph (c)(4) of Rule 101 exempts from its application, among other things, redeemable securities issued by an open-end management investment company (as such terms are
used in the 1940 Act). The Company is registered as an open-end management investment company under the 1940 Act. HealthSharesTM,however, are not redeemable except
in Creation Unit Aggregations. Due to the redeemability of the HealthSharesTMin Creation Unit Aggregations, however, there should be little disparity between the HealthSharesyTM
market price and their NAV per HealthShareTM.Accordingly, the rationale for
exempting redeemable securities of open-end management investment companies from
the application of Rule 101 is equally applicable to HealthSharesTM.Although redemption
PaulHustings
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Mr. James A. Brigagliano
March 7,2007
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is subject to the condition of tendering sufficient HealthSharesTMin Creation Unit Aggregations, the Company otherwise will function as an open-end fund continuously offering
its shares. It is in recogrution of the special nature of such offerings that open-end management investment company and unit investment trust securities are exempted under
paragraph (c)(4). Without such an exemption, they could not operate as intended. In
view of the foregoing, the Company requests that the Commission confirm that as a result
of regstration of the Company as an open-end management investment company and the
redeemable nature of the HealthSharesTMin Creation Unit Aggregations, transactions in
the HealthSharesTMof the Fund would be exempted from Rule 101 on the basis of the
exception contained in (c)(4) of such rule.
The purpose of Rule 101 is to prevent persons from condtioning the market to facilitate a
distribution. Creation Unit Aggregations of HealthSharesTMmay be created, and HealthSharesTMin Creation Unit Aggregations may be redeemed in-kind at NAV, on any Business Day. Holders of HealthSharesTMalso have the benefit of intra-day secondary market
liquidity by virtue of the Exchange listing. Thus, the secondary market price of HealthSharesTMshould not vary substantially from their NAV. Because of the redeemability of
HealthSharesTMin Creation Unit Aggregations, any significant disparity between the market price of HealthSharesTMand NAV should be eliminated by arbitrage activity. Because
the NAV of HealthSharesTMis based on the market value of the Fund's portfolio, transactions involving HealthSharesTM(creations from and redemptions with the Fund, purchases and sales in the secondary market) will not affect NAV. Similarly, such transactions should not have a sipficant effect on the market value of HealthSharesTM.
The Company also respectfully requests relief from the provisions of Rule 101 to the extent necessary to permit persons or entities that may be deemed to be participating in the
distribution of shares of Fund Securities: (i) to purchase Fund Securities for the purpose
of purchasing Creation Unit Aggregations of HealthSharesTM,and (ii) to tender HealthSharesTMfor redemption in Creation Unit Aggregations and to receive Fund Securities as
part of the redemption proceeds.
The Company requests that the Commission clarify that the tender of HealthSharesTMto
the Fund for redemption and the receipt of Fund Securities upon redemption does not
constitute a bid for or purchase of any of such securities, or an "attempt to induce any
person to bid for or purchase a covered security, during the applicable restricted period"
for the purposes of Rule 101. Redemption entails no separate bid for any of the Fund
Securities. Absent unusual circumstances, the Fund will not purchase Fund Securities in
the secondary market to fulfill a redemption request. Therefore, redemptions of HealthSharesTMcannot be expected to affect the market price of the Fund Securities. As in&cated above, the Distributor will not engage in any secondary market transactions in
HealthSharesTM,either for its own account or for investors. In adhtion, the Company
believes that the purchase of Fund Securities, while engaged in a distribution with respect
to such stock, for the purpose of acquiring a Creation Unit Aggregation of HealthLEGALUS-E # 74234332.1
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March 7,2007
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SharesTMshould be exempted from Rule 101. The purpose of Rule 101 is to prevent persons from conditioning the market to facilitate a distribution. Application of Rule 101 in
this context would not further the anti-manipulative purposes underlying the rule.
In view of the lack of any special financial incentive to create Creation Unit Aggregations
of HealthSharesTM,combined with a predictable lack of any meaningful potential for the
issuance and the secondary market t r a h g of HealthSharesTMto affect sipficantly
HealthSharesTMpricing, application of Rule 101 to a broker-dealer or other person who
may be participating in a distribution of HealthSharesTMor Fund Securities is unnecessary
and inappropriate, and could unnecessarily hinder broker-dealers or other persons in their
creation and redemption activities, in their day-to-day ordinary business of buying and
selling securities and HealthSharesTMand thus undermine the potential beneficial market
effect of HealthSharesTMtrading.
D.
Rule 102 of Re-rmlation M
The Company also requests that the Commission confirm that, as a result of registration
of the Company as an open-end management investment company and the redeemable
nature of HealthSharesTMin Creation Unit Aggregations, for the reasons previously stated
under the request with respect to relief under Rule 101(c)(4), transactions in HealthSharesTMof the Fund would be exempted from Rule 102 on the basis of the exception
contained in paragraph (d)(4) of such rule. Application of Rule 102 in this context would
not further the anti-manipulative purposes underlying the rule.
The purpose of Rule 102 is to prevent persons from manipulating the price of a security
during a distribution and to protect the integnty of the offering process by prohibiting
activities that could artificially influence the market for that particular security. The Company respectfully requests that the Commission grant an exemption under paragraph (e) of
Rule 102 to allow the Fund to redeem HealthSharesTMin Creation Unit Aggregations during the continuous offering of HealthSharesTM.The Company respectfully submits that
the redemptions described in this letter do not constitute a manipulative or deceptive
practice within the purpose of Rule 102 and are eligible for an exemption from the provisions of Rule 102 to allow the Fund to redeem HealthSharesTMin Creation Unit Aggregations during the continuous offering of HealthSharesTM.
For the reasons described in connection with the requested Rule 101 relief, redemption
transactions and secondary market transactions in the Fund's HealthSharesTMare not viable means to manipulate the price of a Fund Security during a distribution of such security. The Company will redeem the Creation Unit Aggregations of HealthSharesTMat the
NAV of the HealthSharesTM.Although HealthSharesTMare traded on the secondary market, HealthSharesTMmay only be redeemed in Creation Unit Aggregations. Thus, the
Company believes that the redemption of HealthSharesTMat NAV in consideration prinLEGAL-US-E # 74234332.1
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March 7,2007
Page 23
cipally for Fund Securities does not involve the abuses that Rule 102 was intended to prevent.
E.
Rule 14e-5
Rule 14e-5 prohibits a "covered person" from directly or indirectly purchasing or arranging to purchase any subject securities of a tender offer (or a related security), except as
part of such tender offer. The dealer-manager of a tender offer is a "covered person" and
therefore subject to the Rule. The Company respectfully requests that the Commission
grant an exemption from Rule 14e-5 to permit any person (including a member or member organization of an Exchange) acting as a dealer-manager of a tender offer for a Fund
Security: (1) to redeem HealthSharesTMin one or more Creation Unit Aggregations to the
Company for Fund Securities that may include a security subject to such tender offer, and
(2) to purchase HealthSharesTMduring such tender offer which may include the delivery
of securities subject to such tender offer. The acquisition of individual Fund Securities by
means of redemptions to the Company would be impractical and extremely inefficient in
view of the requirement that a minimum of 100,000 HealthSharesTMbe redeemed. Also,
as discussed in the relief requested under Regulation Myapplication of the Rule's prohibition would impede the valid and useful market and arbitrage activity which would assist
secondary market trading and improve HealthShareTMpricing efficiency. In no case
would redemptions of HealthSharesTMor secondary market transactions by Covered Persons be effected for the purpose of facilitating a tender offer. Accordingly, purchases and
redemptions of HealthSharesTMin the circumstances described would not appear to result
in the abuses at which Rule 14e-5 is directed.
In addition, the Company requests that the Staff take a no-action position under Rule 14e5 if a broker-dealer (including a member or member of the NYSE or other Exchange) acting as a dealer-manager of a tender offer for a Fund Security purchases such securities in
the secondary market for the purpose of tendering such securities to purchase one or
more Creation Unit Aggregations of HealthSharesTM,if made in conformance with the
following: (i) such bids or purchases are effected in the ordmary course of business, in
connection with a basket of 20 or more securities in which any security that is the subject
of a distribution, or any reference security, does not comprise more than 5% of the value
of the basket purchased; or (ii) purchases are effected as adjustments to such basket in the
ordmary course of business as a result of a change in the composition of the Underlying
Index; and (iii) such bids or purchases are not effected for the purpose of facilitating such
tender offer.
F.
Rule lob-17
Rule lob-17 requires an issuer of a class of publicly traded securities to give notice of certain specified actions (e.g., dividends, stock splits, rights offerings) relating to such class of
securities in accordance with Rule lob-17@). Paragraph (c), however, states that the
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Mr. James A. Brigagliano
March 7, 2007
Page 24
rule shall not apply to redeemable securities issued by open-end investment companies
and unit investment trusts registered under the 1940 Act. Except for the fact that HealthSharesTMmust be redeemed in Creation Unit-size aggregations, HealthSharesTMare redeemable securities issued by open-end investment companies.20For the reasons discussed above in connection with the relief requested under Regulation Mywe request that
the exemption under paragraph (c) of Rule lob-17 be applicable to the Fund.
IV.
Conclusion
Based on the foregoing, we respectfully request that the Commission and the Staff grant
the relief requested herein. The forms of relief requested are virtually identical to those
actions that the Commission and the Staff have taken in similar circumstances for other
ETFs and for other portfolios of the Company. Should you have any questions regardmg
the foregoing, please call the undersigned at (212) 318-6295.
Very truly yours,
cc: Racquel Russell (SEC)
Branch Chief Division of Market Regulation
20
As discussed in Note 1 above, the Company is registered under the 1940 Act.
LEGAL-US-E # 74234332.1
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.