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«W. John McGuire Partner +1.202.373.6799 john.mcguire ICA Section 12(d)(2) ICA Section 12(d)(3) March 24, 2016 Douglas J. Scheidt ...»

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W. John McGuire

Partner

+1.202.373.6799

john.mcguire@morganlewis.com

ICA Section 12(d)(2)

ICA Section 12(d)(3)

March 24, 2016

Douglas J. Scheidt

Associate Director and Chief Counsel

Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C. 20549

Re: Index-Based Funds and Sections 12(d)(2) and 12(d)(3) of the Investment Company Act

of 1940

Dear Mr. Scheidt:

We request assurances that the Division of Investment Management of the U.S. Securities and Exchange Commission (the "Commission") will not recommend any enforcement action to the Commission under Sections 12(d)(2) and 12(d)(3) of the Investment Company Act of 1940, as amended (the "1940 Act"), if our "index fund" client, consistent with its investment objective and restrictions, invests such that it may (i) own more than 10% of the total outstanding voting stock of an insurance company and/or (ii) purchase more than 5% of an outstanding class of equity securities of an issuer that, in its most recent fiscal year, derived more than 15% of its gross revenues from securities related activities (an "Equity Issuer"). We believe that such investments, as described herein, are consistent with the protections that Sections 12(d)(2) and 12(d)(3) are intended to provide.

I. SPDR Series Trust and the SPDR S&P Dividend ETF SPDR Series Trust, a registered open-end investment company under the 1940 Act, currently offers a number of investment portfolios that seek to track the performance of specified market sectors represented by various indexes sponsored by index providers that are not affiliated with the funds or the funds' investment adviser, SSGA Funds Management, Inc. ("SSGA FM"). One such Fund, the SPDR S&P Dividend ETF, a portfolio of the SPDR Series Trust, is referred to in this letter as the "Fund."

The Fund's shares are listed for trading on the NYSE Arca, Inc. The shares trade on the NYSE Arca, Inc. at prices based on a current bid/offer market, which may differ from the shares' net asset value. The Fund will issue and redeem shares, called Creation Units, at net asset value in Morgan, Lewis & Bockius LLP 1111 Pennsylvania Avenue, NW Washington, DC 20004 +1.202.739.3000 United States +1.202.739.3001 Douglas J. Scheidt March 24, 2016 Page 2 exchange for the securities that comprise the Index. 1 A Creation Unit is comprised of individually non-redeemable, exchange-traded shares. For the twelve month period ended January 31, 2016, Fund shareshave traded in the range of $68.41 to $79.82, and the net asset value per share has ranged from $68.38 to $79.79. Because the ability to redeem Creation Units provides an arbitrage opportunity whenever the market price differs from the net asset value per share, the market price tends to closely track the net asset value per share.

The investment objective of the Fund is to seek to provide investment results that, before fees and expenses, correspond generally to the total return performance of an index that tracks the performance of publicly traded issuers that have historically followed a policy of making dividend payments. The index the Fund tracks is the S&P High Yield Dividend Aristocrats Index (the "Index"). The Index is designed to measure the performance of the highest dividend yielding S&P Composite 1500 Index constituents that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 consecutive years. Companies in the Index include, among others, insurance companies 2 and financial service firms that derive a substantial portion of their revenues from securities related activities. 3 The Index is sponsored by Standard & Poor's Financial Services LLC (the "Index Provider") which is not affiliated with the Fund or the Adviser.

The Index Provider determines the composition of the Index, relative weightings of the securities in the Index and publishes information regarding the market value of the Index. As of January 31, 2015, the issuers of the stocks in the Index had a minimum individual market capitalization of $2.1 billion, with an average of $37 billion; their minimum daily dollar trading volume was $8 million, with an average of $179 million.

Stocks within the Index are weighted by indicated yield (annualized gross dividend payment per share divided by price per share) and weight-adjusted each quarter. To prevent the Index from being concentrated in only a few names, the methodology incorporates limits so that no individual stock represents more than 4% of the Index weight. To be included in the Index, a stock must also have a minimum float market capitalization of $2 billion and have a 3-month average daily value traded above $5 million. The Index components are reviewed annually in January for continued inclusion in the Index and re-weighted quarterly in April, July and October. A component stock may be removed from the Index if, among other factors, (i) during the January rebalancing, dividends did not increase from the previous year, or (iii) at any time during the year, a company is removed from the S&P Composite 1500 Index.

The Fund is not managed according to traditional methods of "active" investment management involving the buying and selling of securities based upon economic, financial and market analyses and investment judgment. Instead, the Fund, utilizing an indexing investment approach, attempts to approximate the investment performance of the Index by investing in a portfolio of stocks with generally the same risk and return characteristics of the Index. Until recently, the Fund was managed using a replication strategy, whereby SSGA FM sought to hold all of the constituents of The SPDR Series Trust structure of an open-end investment company issuing non-redeemable exchange-traded shares is permitted by an SEC exemptive order. SSgA Funds Management, Inc., et al., Investment Company Act Rel. Nos. 27809 (Apr. 30, 2007) (Notice of Application) and 27839 (May 25, 2007) (Order).





Insurance companies currently represented in the Index include, among others: People's United Financial Inc.

"Securities related activities" is defined as "a person's activities as a broker, a dealer, an underwriter, an investment adviser registered under the Investment Advisers Act of 1940, as amended, or as an investment adviser to a registered investment company." Rule 12d3-l(d)(l).

Douglas J. Scheidt March 24, 2016 Page 3 the Index in approximately the same proportion as the Index. As the Fund has grown in size and encountered the regulatory restrictions of Sections 12(d)(2) and 12(d)(3) that limit the percentage amount an investment company may own of the outstanding securities of an issuer that is engaged in a securities-related activities or is an insurance company, SSGA FM began to employ a sampling strategy for the Fund. Through the use of the sampling strategy, SSGA FM uses quantitative analysis to select securities, including securities in the Index, outside of the Index and derivatives that have a similar investment profile (in terms of key risk factors, performance attributes and other economic characteristics) as the relevant Index or components of the index.

These include industry weightings, market capitalization, and other financial characteristics of securities. The quantity of holdings in the Fund is based on a number of factors, including asset size of the Fund.

Although SSGA FM currently uses a sampling strategy for the Fund, SSGA FM typically purchases and maintains positions in the stock of insurance companies and issuers engaged in securities­ related activities only in the approximate proportion that the stock represents in the Index. Some of the issuers represented in the Index either are insurance companies or derive a substantial portion of their revenues from securities-related activities. The most efficient and accurate way to manage the Fund consistent with its investment objective (i.e., track the Index) would be to acquire securities of these issuers in the same proportion as these issuers represent in the Index.

However, as discussed in more detail below, these investments may implicate Sections 12(d)(2) and/or 12(d)(3). Consequently, the Fund may be required to adjust the proportion of its investment in an insurance company or securities-related issuer in order to continue to comply with Sections 12(d)(2) and (3), which has the potential to increase the Fund's tracking error. SSGA FM does not make any investment decisions so as to (i) reward any issuers engaged in securities related activities for selling shares of the Fund or (ii) control any insurance company.

–  –  –

Section 12(d)(2) generally prohibits an investment company from purchasing or otherwise acquiring any security issued by an insurance company if, as a result of the purchase or acquisition, the investment company (and any company or companies controlled by it) will own more than 10% of the insurance company's total outstanding voting stock. Although "the legislative history relating to Section 12(d)(2) is somewhat sparse... the explanation [for its incorporation] indicates an intent to prevent continuing control of an active insurance company by an investment company."4 As a result of the limitations contained in Section 12(d)(2) and the increasing size of the Fund, the Fund may not be able to invest in insurance companies to the extent that is necessary for it to track the Index, because doing so would result in the Fund owning more than 10% of an insurance company's total outstanding voting stock.

In the Matter ofInter-Canadian Corporation, Investment Company Act Rel. No. 2751 (July 28, 1958).

See also 3 TAMAR FRANKEL & ANN TAYLOR SCHWING, THE REGULATION OF MONEY MANAGERS, MUTUAL FUNDS AND

ADVISERS 22-60 (2nd ed. 2009) ("In 1940, the SEC, and both the securities industry and the insurance industry, agreed that it was undesirable for investment companies to own and control insurance companies. Management may be tempted to convert investments of insurance reserves to investments for profits, and thereby endanger the financial stability of insurance companies.

Depending on who is dominant, insurance or investment companies may "dump" worthless securities on each other.").

Douglas J. Scheidt March 24, 2016 Page 4 The Commission has "interpreted Section 12(d)(2) as prohibiting control of an insurance company by an investment company but permitted acquisition of stock of an insurance company upon assurance that there would be no control."5 The Fund has a non-fundamental investment restriction that prevents it from investing in the securities of companies for the purpose of exercising management or control. Since the Fund is an "index fund," the composition of its portfolio securities is, even with a sampling strategy, essentially non-volitional. As indicated above, the Fund's investment objective is to seek to provide investment results that, before fees and expenses, correspond generally to the total return performance of the Index. Although SSGA FM currently uses a sampling strategy, it has limited discretion to choose portfolio securities or the amount of such securities to be purchased as it is obligated to seek to track the performance of the Index. With respect to the Fund's holdings, SSGA FM generally only deviates from the securities in the Index in order to comply with requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") and/or the 1940 Act. Absent these restrictions, however, SSGA FM anticipates that the Fund would hold all of the securities that constitute the Index. As noted above, the most efficient and accurate way to manage the Fund consistent with this objective would be acquire the securities of these issuers in the same proportion as these issuers represent in the Index. But for the limits of Section 12(d)(2), SSGA FM would purchase the outstanding voting stock of an insurance company and maintain its position in the stock in the same approximate proportion that such stock represents in the Index. Thus, it is virtually impossible for the Fund to purchase securities of an insurance company with the intent to control the insurance company. Notwithstanding the Fund's non-fundamental investment restriction, the Fund will not exercise a controlling influence over the management or policies of the insurance company and will either: (a) vote its shares in the insurance company as directed by an independent third party, or (b) vote its shares in the insurance company in the same proportion as the vote of all other holders of the insurance company's shares.

B. Section 12(d)(3)

Section 12(d)(3), with limited exceptions, prohibits an investment company from acquiring any securities issued by a securities-related business, such as a broker, dealer, underwriter or investment adviser. "While the reasons for Congress prohibiting investment company investments in securities-related businesses are not addressed in much detail in the Act's legislative history, it appears that Congress had two purposes. First, Congress wished to limit, at least to some extent, the exposure of registered investment companies to the entrepreneurial risks peculiar to securities­ related businesses."6 "A second purpose appears to have been to prevent potential conflicts of interest and reciprocal practices."7 5 In the Matter ofInvestors Syndicate ofAmerica, Inc., Investment Company Act Rel. Nos. 1401 (Jan.

18, 1950) and 2722 (June 4, 1958).

6 Exemption of Acquisitions of Securities by Persons Engaged in Securities Related Businesses.

Investment Company Act Rel. No. 19204 (Jan. 4, 1993) (Proposing Amendments to Rule 12d3-1) [hereinafter RELEASE 19204].

7 Id. The Commission also has suggested that Congress had "apparent liquidity concerns" it sought to address by enacting Section 12(d)(3). Exemption for Acquisition by Registered Investment Companies of Securities Issued by Persons Engaged Directly or Indirectly in Securities - Related Businesses. Investment Company Act Rel. No. 13725 (Jan. 17, 1984) (Adopting Amendments to Rule 12d3-1) [hereinafter RELEASE 13725]. To the extent liquidity is a Commission concern, the component stocks of the Index, which are components of the S&P Composite 1500 Index, are some of the most liquid securities in the world -- with an average daily dollar trading volume of $179 million.



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