Rydex ETF Trust, et al.; Notice of Application, 8810-8814 [E7-3284]

Download as PDF cprice-sewell on PROD1PC62 with NOTICES 8810 Federal Register / Vol. 72, No. 38 / Tuesday, February 27, 2007 / Notices waiver or redesignation) in which the party is interested. Comments must be submitted, in English, to the Chairman of the GSP Subcommittee of the Trade Policy Staff Committee (TPSC) as soon as possible, but no later than 5 p.m., Friday, March 16, 2007, for comments regarding de minimis waivers or redesignations, and no later than 5 p.m., March 23, 2007, for comments on the potential revocation of CNL waivers that meet the new statutory thresholds. To facilitate prompt consideration of submissions, USTR will only accept electronic e-mail submissions in response to this notice. Hand-delivered submissions either by mail or other delivery options will not be accepted. Submissions should be single-copy transmissions in English with the total submission not to exceed 20 singlespaced standard letter-size pages, including attachments, and three megabytes as a digital file attached to an e-mail transmission. The e-mail transmission must use either one of the two following subject lines, based on the subject of the comment being submitted: ‘‘Comments on 2006 GSP Redesignation and De minimis Waiver Review,’’ or ‘‘Comments on 2006 CNL Waiver Threshold Review,’’ followed by the BDC country of origin and HTSUS subheading number as set out in the appropriate list. Documents must be submitted as either MSWord (‘‘.doc’’), Word Perfect (‘‘.wpd’’), Adobe (‘‘.pdf’’) or text (‘‘.txt’’) files. Documents submitted as electronic image files or containing imbedded images (for example, ‘‘.jpg’’, ‘‘.tif’’, ‘‘.bmp’’, or ‘‘.gif’’ files) will not be accepted. 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VerDate Aug<31>2005 15:22 Feb 26, 2007 Jkt 211001 For any document containing business confidential information submitted as an electronic attached file to an e-mail transmission, the file name of the business confidential version should begin with the characters ‘‘BC-’’, and the file name of the public version should begin with the character ‘‘P-’’. The ‘‘BC-’’ or ‘‘-’’should be followed by the name of the party (government, company, union, association, etc.) which is submitting the comments. E-mail submissions should not include separate cover letters or messages in the message area of the email; information that might appear in any cover letter should be included directly in the attached file containing the submission itself, including the sender’s identifying information with telephone number, fax number, and email address. The e-mail address for submissions to the 2006 GSP Redesignation and De minimis Waiver Review is FR0441@USTR.EOP.GOV. The e-mail address for the 2006 CNL Waiver Threshold Review is FR0618@USTR.EOP.GOV. Documents not submitted in accordance with these instructions may not be considered in this review. If unable to provide submissions by e-mail, please contact the GSP Subcommittee to arrange for an alternative method of transmission. Public versions of all documents relating to this review will be available for public review approximately two weeks after the due date by appointment in the USTR Public Reading Room, 1724 F Street NW., Washington, DC. Availability of documents may be ascertained, and appointments may be made from 9:30 a.m. to noon and 1 p.m. to 4 p.m., Monday through Friday, by calling 202–395–6186. Marideth J. Sandler, Executive Director, Generalized System of Preferences (GSP) Program, and Chair, GSP Subcommittee, Office of the U.S. Trade Representative. [FR Doc. E7–3394 Filed 2–26–07; 8:45 am] BILLING CODE 3190–W7–P SECURITIES AND EXCHANGE COMMISSION [Release No. IC–27703; 812–13337] Rydex ETF Trust, et al.; Notice of Application February 20, 2007. Securities and Exchange Commission (‘‘Commission’’). ACTION: Notice of an application for an order under section 6(c) of the Investment Company Act of 1940 (the ‘‘Act’’) for an exemption from sections AGENCY: PO 00000 Frm 00133 Fmt 4703 Sfmt 4703 2(a)(32), 5(a)(1), 22(d) and 24(d) of the Act and rule 22c–1 under the Act, and under sections 6(c) and 17(b) of the Act for an exemption from sections 17(a)(1) and (a)(2) of the Act. Rydex ETF Trust (‘‘Trust’’), PADCO Advisors II, Inc. (‘‘Advisor’’), and Rydex Distributors, Inc. (‘‘Distributor’’). SUMMARY OF APPLICATION: Applicants request an order that would permit: (a) series of an open-end management investment company to issue shares of limited redeemability; (b) secondary market transactions in the shares of the series to occur at negotiated prices on a national securities exchange, as defined in section 2(a)(26) of the Act, such as the New York Stock Exchange LLC (‘‘NYSE’’), The NASDAQ Stock Market, Inc. (‘‘Nasdaq’’) and the American Stock Exchange LLC (‘‘Amex’’) (each, an ‘‘Exchange’’); (c) dealers to sell shares of the series of the Trust to purchasers in the secondary market unaccompanied by a prospectus, when prospectus delivery is not required by the Securities Act of 1933 (the ‘‘Securities Act’’); and (d) certain affiliated persons of a series to deposit securities into, and receive securities from, the series in connection with the purchase and redemption of aggregations of the series’ shares.1 FILING DATES: The application was filed on October 27, 2006. Applicants have agreed to file an amendment during the notice period, the substance of which is reflected in this notice. HEARING OR NOTIFICATION OF HEARING: An order granting the requested relief will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission’s Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on March 19, 2007, and should be accompanied by proof of service on applicants, in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer’s interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Commission’s Secretary. APPLICANTS: 1 The Trust currently operates pursuant to an order that grants such relief to offer series that match the performance of equity securities indices. In the Matter of Rydex ETF Trust, et al., Investment Company Act Release Nos. 25948 (Feb. 27, 2003) (notice) and 25970 (Mar. 25, 2003) (order), amended by Investment Company Act Release Nos. 27183 (Dec. 8, 2005) (notice) and 27202 (Jan. 4, 2006) (order), (‘‘Prior Order’’). E:\FR\FM\27FEN1.SGM 27FEN1 Federal Register / Vol. 72, No. 38 / Tuesday, February 27, 2007 / Notices Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. Applicants: Rydex ETF Trust; PADCO Advisors II, Inc.; and Rydex Distributors, Inc., 9601 Blackwell Road, Suite 500, Rockville, MD 20850. FOR FURTHER INFORMATION CONTACT: Laura L. Solomon, Senior Counsel, at (202) 551–6915, or Julia Kim Gilmer, Branch Chief, at (202) 551–6871 (Division of Investment Management, Office of Investment Company Regulation). SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application may be obtained for a fee at the Commission’s Public Reference Desk, 100 F Street, NE., Washington, DC 20549–0102 (tel. 202–551–5850). cprice-sewell on PROD1PC62 with NOTICES ADDRESSES: Applicants’ Representations 1. The Trust is an open-end management investment company registered under the Act and organized as a Delaware statutory trust. The Trust is authorized to offer an unlimited number of series (the ‘‘Funds’’). The Advisor is registered as an investment adviser under the Investment Advisers Act of 1940 (‘‘Advisers Act’’). Each Fund will be advised by the Advisor or an entity controlled by or under common control with the Advisor. The Advisor may enter into subadvisory agreements with additional investment advisers to act as subadviser to the Trust and any of its Funds. Any subadviser to the Trust or a Fund will be registered under the Advisers Act. The Distributor is registered as a broker-dealer under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) and will act as the distributor and principal underwriter for each Fund’s shares (‘‘Shares’’). 2. The Trust currently offers eight series that seek to match the performance of equity securities indices pursuant to the Prior Order. Applicants seek relief to offer additional series with different types of investment objectives (each such series, a ‘‘New Fund’’). The New Funds will seek daily investment results that correspond, before fees and expenses, to: (a) 125%, 150% or 200% of the return of equity securities indices (‘‘Leveraged Funds’’); or (b) move in the opposite direction of the performance of equity securities indices in multiples of 100%, 125%, 150% or 200% (‘‘Inverse Funds’’). Applicants propose to initially offer ninety-six New Funds.2 3. In addition to equity securities, the New Funds may invest in short-term 2 The underlying indices for these New Funds (each, an ‘‘Underlying Index’’) are identified in the application. VerDate Aug<31>2005 15:22 Feb 26, 2007 Jkt 211001 debt instruments that meet the definition of ‘‘Eligible Security’’ in rule 2a-7 under the Act (‘‘Money Market Instruments’’), and in futures contracts, options, equity caps, collars and floors, swap agreements, forward contracts, and reverse repurchase agreements (collectively, ‘‘Financial Instruments’’) in order to meet their investment objectives. Leveraged Funds will invest 80% or more of their total assets in equity securities contained in the relevant Underlying Index and up to 20% of their total assets in Financial Instruments and Money Market Instruments. The Inverse Funds will only invest in Financial Instruments and Money Market Instruments; they will not invest in equity securities. 4. The Advisor will seek to achieve the investment objectives of the New Funds by using a mathematical model that takes into account a variety of specified criteria, the most important of which are: (a) The net assets in each New Fund’s portfolio at the end of each trading day; (b) the amount of required exposure to the Underlying Index; and (c) the positions in equity securities, Financial Instruments and Money Market Instruments at the beginning of each trading day. On each day that a New Fund is open for business (‘‘Business Day’’), including as required by section 22(e) of the Act, the full portfolio holdings of each New Fund will be disclosed on the Web site of the Trust and/or the Exchange where the Shares are primarily listed (‘‘Primary Listing Exchange’’). The portfolio holdings information disclosed each Business Day will form the basis for that New Fund’s net asset value (‘‘NAV’’) calculation as of 4 p.m. that day and will reflect portfolio trades made on the immediately preceding Business Day. Intra-day values of each Underlying Index will be disseminated every 15 seconds throughout the trading day. 5. For the New Funds, applicants expect a daily tracking error of less than 5% (excluding the impact of expenses and interest, if any) to the specified multiple, inverse or inverse multiple, respectively, of the performance of the relevant Underlying Index. 6. Each New Fund will issue Shares in aggregations of 25,000 to 100,000 Shares (each, a ‘‘Creation Unit’’). Applicants expect the price of a Creation Unit to be a minimum of $1 million. Creation Units may be purchased only by or through the Distributor or a party that has entered into a participant agreement with the Distributor (an ‘‘Authorized Participant’’). An Authorized Participant must be either (a) a brokerdealer or other participant in the PO 00000 Frm 00134 Fmt 4703 Sfmt 4703 8811 continuous net settlement system of the National Securities Clearing Corporation, a clearing agency that is registered with the Commission, or (b) a participant in the Depository Trust Company (‘‘DTC’’) system. 7. Creation Units of Leveraged Funds generally will be purchased and redeemed in exchange for an ‘‘in-kind’’ transfer of securities and cash (‘‘In-Kind Payment’’). Inverse Funds will generally be purchased and redeemed entirely for cash because of the limited transferability of Financial Instruments.3 An investor making an InKind Payment will be required to transfer to the Trust a ‘‘Deposit Basket’’ consisting of: (a) A basket of equity securities consisting of some or all of the securities in the relevant Underlying Index or equivalent equity securities selected by the Advisor to correspond to the performance of the Underlying Index (the ‘‘Deposit List’’); 4 and (b) a cash amount equal to the differential, if any, between the market value of the equity securities in the Deposit Basket and the NAV per Creation Unit (‘‘Balancing Amount’’).5 An investor purchasing a Creation Unit from a New Fund will be charged a fee (‘‘Transaction Fee’’) to prevent the dilution of the interests of the remaining shareholders resulting from the New Fund incurring costs in connection with the purchase of the Creation Units.6 The 3 The Trust may also accept and deliver all-cash payments for the purchase and redemption of Creation Units of any New Fund in certain limited circumstances. 4 The New Funds must comply with the federal securities laws in accepting Deposit Securities and satisfying redemptions with securities on the Redemption List (defined below), including that such securities are sold in transactions that would be exempt from registration under the Securities Act of 1933. 5 On each Business Day, prior to the opening of trading on the NYSE, the Trust’s index receipt agent will make available the list of the names and the required number of shares of each equity security included in the current Deposit Basket and the Balancing Amount for each New Fund. Such Deposit Basket will apply to all purchases of Creation Units until a new Deposit Basket for a New Fund is announced. The Primary Listing Exchange will disseminate every 15 seconds during regular trading hours, through the facilities of the Consolidated Tape Association, an amount representing on a per share basis the sum of the current value of the securities on the Deposit List, and the estimated amount of cash and Money Market Instruments held in the portfolio of a Leveraged Fund. If such New Funds hold Financial Instruments, the amount would also include, on a per share basis, the marked-to-market gains or losses of the Financial Instruments held by the Leveraged Fund. For Inverse Funds, the Primary Listing Exchange will disseminate an amount representing, on a per share basis, the estimated amount of cash and Money Market Instruments, and the marked-to-market gains or losses of the Inverse Fund’s Financial Instruments. 6 A purchaser permitted to substitute cash for certain securities on the Deposit List may be E:\FR\FM\27FEN1.SGM Continued 27FEN1 8812 Federal Register / Vol. 72, No. 38 / Tuesday, February 27, 2007 / Notices cprice-sewell on PROD1PC62 with NOTICES maximum Transaction Fee and any variations or waivers of the Transaction Fee will be disclosed in the current prospectus (‘‘Prospectus’’) and the method of determining the Transaction Fees will be disclosed in the Prospectus and/or statement of additional information (‘‘SAI’’). 8. All orders to purchase Creation Units must be placed on a Business Day with the Distributor. The Distributor also will be responsible for delivering the Prospectus to those persons purchasing Creation Units and for maintaining records of the orders and acknowledgements of acceptance for orders. 9. Persons purchasing Creation Units from a New Fund may hold the Shares or sell some or all of them in the secondary market. Shares of the New Funds will be listed on an Exchange and trade in the secondary market in the same manner as other exchange-traded funds. It is expected that one or more Exchange members will act as a specialist or market maker and maintain a market on the listing Exchange for Shares.7 The price of Shares traded on an Exchange will be based on a current bid/offer market. The initial trading price for each Share of each New Fund will fall in the range of $50 to $250. Transactions involving the sale of Shares in the secondary market will be subject to customary brokerage commissions and charges. 10. Applicants expect that purchasers of Creation Units will include institutional and retail investors, arbitrageurs, traders, financial advisors, portfolio managers and other market participants.8 An Exchange specialist or market maker, in providing for a fair and orderly secondary market for Shares, also may purchase or redeem Creation Units for use in its marketmaking activities. Applicants expect that the market price of Shares will be disciplined by arbitrage opportunities created by the ability to purchase or redeem Creation Units at their NAV, which should ensure that the market assessed a higher Transaction Fee to cover the cost of purchasing such securities, including operational processing and brokerage costs, and part or all of the spread between the expected bid and offer side of the market relating to such securities. 7 The listing requirements established by Nasdaq require that at least two market makers be registered in Shares in order for the Shares to maintain a listing. Registered market makers must make a continuous two-sided market in a listing or face regulatory sanctions. 8 Shares will be registered in book-entry form only. DTC or its nominee will be the record or registered owner of all outstanding Shares. DTC or its participants will maintain records reflecting the beneficial owners of Shares. VerDate Aug<31>2005 15:22 Feb 26, 2007 Jkt 211001 price of Shares at or close to 4 p.m. stays close to the NAV on that Business Day. 11. Shares will not be individually redeemable. Shares will only be redeemable in Creation Units through the Distributor, which will act as the Trust’s agent for redemption. To redeem, an investor must accumulate enough Shares to constitute a Creation Unit. An investor redeeming a Creation Unit of a Leveraged Fund generally will receive an ‘‘in-kind’’ payment comprised of equity securities published by the Trust’s index receipt agent (the ‘‘Redemption List’’) plus a Balancing Amount equal to the difference between the market value of the equity securities on the Redemption List and the NAV of the Shares being redeemed. Redemptions of Creation Units for Inverse Funds will occur entirely in cash. A redeeming investor will pay a Transaction Fee to offset the transactional expenses associated with redeeming Creation Units. 12. Applicants state that neither the Trust nor any New Fund will be advertised, marketed or otherwise held out as a ‘‘mutual fund.’’ The term ‘‘mutual fund’’ will not be used in the Prospectus except to compare and contrast the Trust or a New Fund with conventional mutual funds. In all marketing materials where the features or methods of obtaining, buying, or selling Creation Units are described or where there is reference to redeemability, applicants will include a prominent statement to the effect that individual Shares are not redeemable except in Creation Units. The same approach will be followed in connection with reports and other communications to shareholders, as well as any other investor education materials issued or circulated in connection with Shares. The Trust will provide copies of its annual and semi-annual shareholder reports to DTC participants for distribution to beneficial holders of Shares. Applicants’ Legal Analysis 1. Applicants request an order under section 6(c) of the Act granting an exemption from sections 2(a)(32), 5(a)(1), 22(d) and 24(d) of the Act and rule 22c–1 under the Act, and under sections 6(c) and 17(b) of the Act granting an exemption from sections 17(a)(1) and 17(a)(2) of the Act. 2. Section 6(c) of the Act provides that the Commission may exempt any person, security or transaction, or any class of persons, securities or transactions, from any provision of the Act, if and to the extent that such exemption is necessary or appropriate in the public interest and consistent PO 00000 Frm 00135 Fmt 4703 Sfmt 4703 with the protection of investors and the purposes fairly intended by the policy and provisions of the Act. Sections 5(a)(1) and 2(a)(32) of the Act 3. Section 5(a)(1) of the Act defines an ‘‘open-end company’’ as a management investment company that is offering for sale or has outstanding any redeemable security of which it is the issuer. Section 2(a)(32) of the Act defines a redeemable security as any security, other than short-term paper, under the terms of which the holder, upon its presentation to the issuer, is entitled to receive approximately his proportionate share of the issuer’s current net assets, or the cash equivalent. Because Shares will not be individually redeemable, applicants request an order that would permit the Trust, which is registered as an open-end management investment company, to issue Shares of New Funds that are redeemable in Creation Units only. Applicants state that investors may always redeem Shares in Creation Units from the Trust. Applicants further state that because the market price of Shares will be disciplined by arbitrage opportunities, investors should be able to sell Shares in the secondary market at or close to 4 p.m. on a Business Day at prices that do not vary substantially from the NAV on that Business Day. Section 22(d) of the Act and Rule 22c– 1 Under the Act 4. Section 22(d) of the Act, among other things, prohibits a dealer from selling a redeemable security, which is currently being offered to the public by or through a principal underwriter, except at a current public offering price described in the prospectus. Rule 22c– 1 under the Act generally requires that a dealer selling, redeeming, or repurchasing a redeemable security do so only at a price based on its NAV. Applicants state that secondary market trading in Shares will take place at negotiated prices, not at a current offering price described in the Prospectus as required by section 22(d) of the Act, and not at a price based on NAV as required by rule 22c–1 under the Act. Applicants request an exemption under section 6(c) from these provisions. 5. Applicants assert that the concerns sought to be addressed by section 22(d) of the Act and rule 22c–1 under the Act with respect to pricing are equally satisfied by the proposed method of pricing Shares. Applicants maintain that while there is little legislative history regarding section 22(d), its provisions, as well as those of rule 22c–1, appear to have been intended to (a) prevent dilution caused by certain riskless- E:\FR\FM\27FEN1.SGM 27FEN1 Federal Register / Vol. 72, No. 38 / Tuesday, February 27, 2007 / Notices trading schemes by principal underwriters and contract dealers, (b) prevent unjust discrimination or preferential treatment among buyers, and (c) ensure an orderly distribution of shares by eliminating price competition from dealers offering shares at less than the published sales price and repurchasing shares at more than the published redemption price. 6. Applicants believe that none of these purposes will be thwarted by permitting Shares to trade in the secondary market at negotiated prices. Applicants state that (a) secondary market trading in Shares does not involve the Trust’s assets and cannot result in dilution of an investment in Shares, and (b) to the extent different prices exist during a given trading day, or from day to day, such variances occur as a result of third-party market forces, such as supply and demand, not as a result of unjust or discriminatory manipulation. Therefore, applicants assert that secondary market transactions in Shares will not lead to discrimination or preferential treatment among purchasers. Finally, applicants contend that the proposed distribution system will be orderly because competitive forces in the marketplace will ensure that the difference between the market price of Shares and their NAV remains narrow. cprice-sewell on PROD1PC62 with NOTICES Section 24(d) of the Act 7. Section 24(d) of the Act provides, in relevant part, that the prospectus delivery exemption provided to dealer transactions by section 4(3) of the Securities Act does not apply to any transaction in a redeemable security issued by an open-end investment company. Applicants request an exemption from section 24(d) to permit dealers selling Shares to rely on the prospectus delivery exemption provided by section 4(3) of the Securities Act.9 9 Applicants do not seek relief from the prospectus delivery requirement for non-secondary market transactions, such as transactions in which an investor purchases Shares in Creation Units from the issuer or an underwriter. Applicants state that persons purchasing Creation Units will be cautioned in the Prospectus that some activities on their part may, depending on the circumstances, result in their being deemed statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act. The Prospectus will state that whether a person is an underwriter depends upon all the facts and circumstances pertaining to that person’s activities. For example, a broker-dealer firm and/or its client may be deemed a statutory underwriter if it takes Creation Units after placing an order with the Distributor, breaks them down into the constituent Shares, and sells Shares directly to its customers, or if it chooses to couple the purchase of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. The Prospectus also will state that dealers who are VerDate Aug<31>2005 15:22 Feb 26, 2007 Jkt 211001 8. Applicants state that secondary market investors will regard Shares in a manner similar to other securities, including closed-end fund shares that are listed, bought and sold on an Exchange. Applicants note that shares of closed-end fund investment companies are sold in the secondary market unaccompanied by a prospectus. 9. Applicants contend that Shares, as a listed security, merit a reduction in the compliance costs and regulatory burdens resulting from the imposition of prospectus delivery obligations in the secondary market. Because Shares will be exchange-listed, prospective investors will have access to several types of market information about Shares. Applicants state that information regarding market price and volume will be continually available on a real-time basis throughout the day from the relevant Exchange, automated quotation systems, published or other public sources or on-line information services. Applicants expect that the previous day’s closing price and volume information for Shares also will be published daily in the financial section of newspapers. In addition, the Trust expects to maintain a website that includes quantitative information updated on a daily basis, including, for each New Fund, daily trading volume, the NAV and the reported closing price (or in the alternative, the mid-point of the bid-ask spread at the time of calculation of such NAV (the ‘‘Bid/Ask Price’’)).10 The Web site will also include, for each New Fund, closing price (or Bid/Ask Price) and data in chart format displaying the frequency distribution of discounts and premiums of the closing price (or Bid/Ask Price) against the NAV, within appropriate ranges, for each of the four previous calendar quarters. 10. Investors also will receive a product description (‘‘Product Description’’) describing the Trust, the New Funds and the Shares. Applicants state that, while not intended as a substitute for a Prospectus, the Product Description will contain information about Shares that is tailored to meet the needs of investors purchasing Shares in the secondary market. not ‘‘underwriters’’ but are participating in a distribution (as contrasted to ordinary secondary market trading transactions), and thus dealing with Shares that are part of an ‘‘unsold allotment’’ within the meaning of section 4(3)(C) of the Securities Act, would be unable to take advantage of the prospectus delivery exemption provided by section 4(3) of the Securities Act. 10 The Bid/Ask Price of a New Fund is determined using the highest bid and the lowest offer on the Primary Listing Exchange as of the time of calculation of such new Fund’s NAV. PO 00000 Frm 00136 Fmt 4703 Sfmt 4703 8813 Sections 17(a)(1) and (2) of the Act 11. Section 17(a) of the Act generally prohibits an affiliated person of a registered investment company, or an affiliated person of such a person, from selling any security to or purchasing any security from the company. Section 2(a)(3) of the Act defines ‘‘affiliated person’’ to include any person directly or indirectly owning, controlling, or holding with power to vote 5% or more of the outstanding voting securities of the other person and any person directly or indirectly controlling, controlled by, or under common control with, the other person. Section 2(a)(9) of the Act provides that a control relationship will be presumed where one person owns 25% or more of another person’s voting securities. Applicants state that one or more holders of Creation Units could own more than 5% of a New Fund, or in excess of 25% of that New Fund, and could be deemed affiliated with the Trust or such New Fund under section 2(a)(3)(A) or 2(a)(3)(C) of the Act. Also, an Exchange specialist or market maker for Shares of any New Fund might accumulate, from time to time, more than 5% or in excess of 25% of that New Fund’s Shares. Applicants request an exemption from section 17(a) of the Act under sections 6(c) and 17(b) of the Act, to permit persons that are affiliated persons of the New Funds solely by virtue of a 5% or 25% ownership interest (or affiliated persons of such affiliated persons that are not otherwise affiliated with the New Fund) to purchase and redeem Creation Units through ‘‘in-kind’’ transactions. 12. Section 17(b) of the Act authorizes the Commission to exempt a proposed transaction from section 17(a) of the Act if evidence establishes that the terms of the transaction, including the consideration to be paid or received, are reasonable and fair and do not involve overreaching on the part of any person concerned, and the proposed transaction is consistent with the policies of the registered investment company and the general provisions of the Act. Applicants contend that no useful purpose would be served by prohibiting the affiliated persons of a New Fund described above from purchasing or redeeming Creation Units through ‘‘in-kind’’ transactions. The deposit and redemption procedures for ‘‘in-kind’’ purchases and redemptions of Creations Units will be effected in exactly the same manner for all purchases and redemptions. The securities contained in the ‘‘in-kind’’ transactions will be valued in the same manner and according to the same standards as the securities held by the E:\FR\FM\27FEN1.SGM 27FEN1 8814 Federal Register / Vol. 72, No. 38 / Tuesday, February 27, 2007 / Notices cprice-sewell on PROD1PC62 with NOTICES relevant New Fund. Therefore, applicants state that ‘‘in-kind’’ purchases and redemptions will afford no opportunity for the affiliated persons described above to effect a transaction detrimental to the other holders of its Shares. Applicants also believe that ‘‘inkind’’ purchases and redemptions will not result in abusive self-dealing or overreaching by affiliated persons of the New Funds. Applicants’ Conditions Applicants agree that any order granting the requested relief will be subject to the following conditions: 1. Applicants will not register a series of the Trust not identified in the application, by means of filing a posteffective amendment to the Trust’s registration statement or by any other means, unless applicants have requested and received with respect to such series, either (a) exemptive relief from the Commission, or (b) a no-action letter from the Division of Investment Management of the Commission. 2. The Prospectus and the Product Description will clearly disclose that, for purposes of the Act, Shares are issued by the New Funds and that the acquisition of Shares by investment companies is subject to the restrictions of section 12(d)(1) of the Act, except as permitted by an exemptive order that permits registered investment companies to invest in a New Fund beyond the limits in section 12(d)(1), subject to certain terms and conditions, including that the registered investment company enter into an agreement with the New Fund regarding the terms of the investment. 3. As long as the Trust operates in reliance on the requested order, the Shares will be listed on an Exchange. 4. Neither the Trust nor any New Fund will be advertised or marketed as an open-end fund or a mutual fund. The Prospectus will prominently disclose that Shares are not individually redeemable shares and will disclose that the owners of the Shares may acquire those Shares from the Trust and tender those Shares for redemption to the Trust in Creation Units only. Any advertising material that describes the purchase or sale of Creation Units or refers to redeemability will prominently disclose that Shares are not individually redeemable and that owners of Shares may acquire those Shares from the Trust and tender those Shares for redemption to the Trust in Creation Units only. 5. Before a New Fund may rely on the order, the Commission will have approved, pursuant to rule 19b–4 under the Exchange Act, an Exchange rule or an amendment thereto, requiring VerDate Aug<31>2005 15:22 Feb 26, 2007 Jkt 211001 Exchange members and member organizations effecting transactions in Shares to deliver a Product Description to purchasers of Shares. 6. The Web site for the Trust, which will be publicly accessible at no charge, will contain the following information, on a per Share basis, for each New Fund: (a) The prior Business Day’s NAV and the closing price (or the mid-point of the bid-ask spread at the time of calculation of such NAV (the Bid/Ask Price)), and a calculation of the premium or discount of such closing price (or Bid/Ask Price) against such NAV; and (b) data in chart format displaying the frequency distribution of discounts and premiums of the closing price (or Bid/Ask Price) against the NAV, within appropriate ranges, for each of the four previous calendar quarters (or the life of the New Fund, if shorter). In addition, the Product Description for each New Fund will state that the website for the Trust has information about the premiums and discounts at which the Shares have been traded. 7. The Prospectus and annual report for each New Fund will also include: (a) The information listed in condition 6(b), (i) in the case of the Prospectus, for the most recently completed year (and the most recently completed quarter or quarters, as applicable), and (ii) in the case of the annual report, for the immediately preceding five years (or the life of the New Fund, if shorter); and (b) the following data, calculated on a per Share basis for one, five and ten year periods (or life of the New Fund, if shorter), (i) the cumulative total return and the average annual total return based on NAV and closing price (or Bid/ Ask Price), and (ii) the cumulative total return of the relevant Underlying Index. For the Commission, by the Division of Investment Management, pursuant to delegated authority. Florence E. Harmon, Deputy Secretary. [FR Doc. E7–3284 Filed 2–26–07; 8:45 am] BILLING CODE 8010–01–P PO 00000 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55296; File No. SR–Amex– 2007–14] Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to the Options Fee Schedule February 14, 2007. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 30, 2007, the American Stock Exchange LLC (‘‘Amex’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by the Amex. The Amex has filed the proposal pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(2) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its options fee schedule (the ‘‘Fee Schedule’’) to (i) reduce the daily maximum aggregate fee charged for all dividend strategies, merger spreads and short stock interest spreads to $100, (ii) reduce the monthly maximum aggregate fee charged for such trades to $12,500, (iii) replace the term ‘‘dividend spread’’ with ‘‘dividend strategies,’’ (iv) extend the fee cap pilot program until February 1, 2008, and (v) increase the licensing fee for the Russell Index and Russell ETF Options (together the ‘‘Russell Index Options’’) from $0.10 to $0.15 per contract side The text of the proposed rule change is available at the Exchange, the Commission’s Public Reference Room, and https://www.amex.com. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Amex included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(2). 2 17 Frm 00137 Fmt 4703 Sfmt 4703 E:\FR\FM\27FEN1.SGM 27FEN1

Agencies

[Federal Register Volume 72, Number 38 (Tuesday, February 27, 2007)]
[Notices]
[Pages 8810-8814]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-3284]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-27703; 812-13337]


Rydex ETF Trust, et al.; Notice of Application

February 20, 2007.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') for an exemption from 
sections 2(a)(32), 5(a)(1), 22(d) and 24(d) of the Act and rule 22c-1 
under the Act, and under sections 6(c) and 17(b) of the Act for an 
exemption from sections 17(a)(1) and (a)(2) of the Act.

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Applicants: Rydex ETF Trust (``Trust''), PADCO Advisors II, Inc. 
(``Advisor''), and Rydex Distributors, Inc. (``Distributor'').

Summary of Application: Applicants request an order that would permit: 
(a) series of an open-end management investment company to issue shares 
of limited redeemability; (b) secondary market transactions in the 
shares of the series to occur at negotiated prices on a national 
securities exchange, as defined in section 2(a)(26) of the Act, such as 
the New York Stock Exchange LLC (``NYSE''), The NASDAQ Stock Market, 
Inc. (``Nasdaq'') and the American Stock Exchange LLC (``Amex'') (each, 
an ``Exchange''); (c) dealers to sell shares of the series of the Trust 
to purchasers in the secondary market unaccompanied by a prospectus, 
when prospectus delivery is not required by the Securities Act of 1933 
(the ``Securities Act''); and (d) certain affiliated persons of a 
series to deposit securities into, and receive securities from, the 
series in connection with the purchase and redemption of aggregations 
of the series' shares.\1\
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    \1\ The Trust currently operates pursuant to an order that 
grants such relief to offer series that match the performance of 
equity securities indices. In the Matter of Rydex ETF Trust, et al., 
Investment Company Act Release Nos. 25948 (Feb. 27, 2003) (notice) 
and 25970 (Mar. 25, 2003) (order), amended by Investment Company Act 
Release Nos. 27183 (Dec. 8, 2005) (notice) and 27202 (Jan. 4, 2006) 
(order), (``Prior Order'').

Filing Dates: The application was filed on October 27, 2006. Applicants 
have agreed to file an amendment during the notice period, the 
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substance of which is reflected in this notice.

Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on March 19, 2007, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

[[Page 8811]]


ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090. Applicants: Rydex ETF Trust; PADCO 
Advisors II, Inc.; and Rydex Distributors, Inc., 9601 Blackwell Road, 
Suite 500, Rockville, MD 20850.

FOR FURTHER INFORMATION CONTACT: Laura L. Solomon, Senior Counsel, at 
(202) 551-6915, or Julia Kim Gilmer, Branch Chief, at (202) 551-6871 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Desk, 100 F Street, NE., Washington, DC 
20549-0102 (tel. 202-551-5850).

Applicants' Representations

    1. The Trust is an open-end management investment company 
registered under the Act and organized as a Delaware statutory trust. 
The Trust is authorized to offer an unlimited number of series (the 
``Funds''). The Advisor is registered as an investment adviser under 
the Investment Advisers Act of 1940 (``Advisers Act''). Each Fund will 
be advised by the Advisor or an entity controlled by or under common 
control with the Advisor. The Advisor may enter into subadvisory 
agreements with additional investment advisers to act as subadviser to 
the Trust and any of its Funds. Any subadviser to the Trust or a Fund 
will be registered under the Advisers Act. The Distributor is 
registered as a broker-dealer under the Securities Exchange Act of 1934 
(``Exchange Act'') and will act as the distributor and principal 
underwriter for each Fund's shares (``Shares'').
    2. The Trust currently offers eight series that seek to match the 
performance of equity securities indices pursuant to the Prior Order. 
Applicants seek relief to offer additional series with different types 
of investment objectives (each such series, a ``New Fund''). The New 
Funds will seek daily investment results that correspond, before fees 
and expenses, to: (a) 125%, 150% or 200% of the return of equity 
securities indices (``Leveraged Funds''); or (b) move in the opposite 
direction of the performance of equity securities indices in multiples 
of 100%, 125%, 150% or 200% (``Inverse Funds''). Applicants propose to 
initially offer ninety-six New Funds.\2\
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    \2\ The underlying indices for these New Funds (each, an 
``Underlying Index'') are identified in the application.
---------------------------------------------------------------------------

    3. In addition to equity securities, the New Funds may invest in 
short-term debt instruments that meet the definition of ``Eligible 
Security'' in rule 2a-7 under the Act (``Money Market Instruments''), 
and in futures contracts, options, equity caps, collars and floors, 
swap agreements, forward contracts, and reverse repurchase agreements 
(collectively, ``Financial Instruments'') in order to meet their 
investment objectives. Leveraged Funds will invest 80% or more of their 
total assets in equity securities contained in the relevant Underlying 
Index and up to 20% of their total assets in Financial Instruments and 
Money Market Instruments. The Inverse Funds will only invest in 
Financial Instruments and Money Market Instruments; they will not 
invest in equity securities.
    4. The Advisor will seek to achieve the investment objectives of 
the New Funds by using a mathematical model that takes into account a 
variety of specified criteria, the most important of which are: (a) The 
net assets in each New Fund's portfolio at the end of each trading day; 
(b) the amount of required exposure to the Underlying Index; and (c) 
the positions in equity securities, Financial Instruments and Money 
Market Instruments at the beginning of each trading day. On each day 
that a New Fund is open for business (``Business Day''), including as 
required by section 22(e) of the Act, the full portfolio holdings of 
each New Fund will be disclosed on the Web site of the Trust and/or the 
Exchange where the Shares are primarily listed (``Primary Listing 
Exchange''). The portfolio holdings information disclosed each Business 
Day will form the basis for that New Fund's net asset value (``NAV'') 
calculation as of 4 p.m. that day and will reflect portfolio trades 
made on the immediately preceding Business Day. Intra-day values of 
each Underlying Index will be disseminated every 15 seconds throughout 
the trading day.
    5. For the New Funds, applicants expect a daily tracking error of 
less than 5% (excluding the impact of expenses and interest, if any) to 
the specified multiple, inverse or inverse multiple, respectively, of 
the performance of the relevant Underlying Index.
    6. Each New Fund will issue Shares in aggregations of 25,000 to 
100,000 Shares (each, a ``Creation Unit''). Applicants expect the price 
of a Creation Unit to be a minimum of $1 million. Creation Units may be 
purchased only by or through the Distributor or a party that has 
entered into a participant agreement with the Distributor (an 
``Authorized Participant''). An Authorized Participant must be either 
(a) a broker-dealer or other participant in the continuous net 
settlement system of the National Securities Clearing Corporation, a 
clearing agency that is registered with the Commission, or (b) a 
participant in the Depository Trust Company (``DTC'') system.
    7. Creation Units of Leveraged Funds generally will be purchased 
and redeemed in exchange for an ``in-kind'' transfer of securities and 
cash (``In-Kind Payment''). Inverse Funds will generally be purchased 
and redeemed entirely for cash because of the limited transferability 
of Financial Instruments.\3\ An investor making an In-Kind Payment will 
be required to transfer to the Trust a ``Deposit Basket'' consisting 
of: (a) A basket of equity securities consisting of some or all of the 
securities in the relevant Underlying Index or equivalent equity 
securities selected by the Advisor to correspond to the performance of 
the Underlying Index (the ``Deposit List''); \4\ and (b) a cash amount 
equal to the differential, if any, between the market value of the 
equity securities in the Deposit Basket and the NAV per Creation Unit 
(``Balancing Amount'').\5\ An investor purchasing a Creation Unit from 
a New Fund will be charged a fee (``Transaction Fee'') to prevent the 
dilution of the interests of the remaining shareholders resulting from 
the New Fund incurring costs in connection with the purchase of the 
Creation Units.\6\ The

[[Page 8812]]

maximum Transaction Fee and any variations or waivers of the 
Transaction Fee will be disclosed in the current prospectus 
(``Prospectus'') and the method of determining the Transaction Fees 
will be disclosed in the Prospectus and/or statement of additional 
information (``SAI'').
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    \3\ The Trust may also accept and deliver all-cash payments for 
the purchase and redemption of Creation Units of any New Fund in 
certain limited circumstances.
    \4\ The New Funds must comply with the federal securities laws 
in accepting Deposit Securities and satisfying redemptions with 
securities on the Redemption List (defined below), including that 
such securities are sold in transactions that would be exempt from 
registration under the Securities Act of 1933.
    \5\ On each Business Day, prior to the opening of trading on the 
NYSE, the Trust's index receipt agent will make available the list 
of the names and the required number of shares of each equity 
security included in the current Deposit Basket and the Balancing 
Amount for each New Fund. Such Deposit Basket will apply to all 
purchases of Creation Units until a new Deposit Basket for a New 
Fund is announced. The Primary Listing Exchange will disseminate 
every 15 seconds during regular trading hours, through the 
facilities of the Consolidated Tape Association, an amount 
representing on a per share basis the sum of the current value of 
the securities on the Deposit List, and the estimated amount of cash 
and Money Market Instruments held in the portfolio of a Leveraged 
Fund. If such New Funds hold Financial Instruments, the amount would 
also include, on a per share basis, the marked-to-market gains or 
losses of the Financial Instruments held by the Leveraged Fund. For 
Inverse Funds, the Primary Listing Exchange will disseminate an 
amount representing, on a per share basis, the estimated amount of 
cash and Money Market Instruments, and the marked-to-market gains or 
losses of the Inverse Fund's Financial Instruments.
    \6\ A purchaser permitted to substitute cash for certain 
securities on the Deposit List may be assessed a higher Transaction 
Fee to cover the cost of purchasing such securities, including 
operational processing and brokerage costs, and part or all of the 
spread between the expected bid and offer side of the market 
relating to such securities.
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    8. All orders to purchase Creation Units must be placed on a 
Business Day with the Distributor. The Distributor also will be 
responsible for delivering the Prospectus to those persons purchasing 
Creation Units and for maintaining records of the orders and 
acknowledgements of acceptance for orders.
    9. Persons purchasing Creation Units from a New Fund may hold the 
Shares or sell some or all of them in the secondary market. Shares of 
the New Funds will be listed on an Exchange and trade in the secondary 
market in the same manner as other exchange-traded funds. It is 
expected that one or more Exchange members will act as a specialist or 
market maker and maintain a market on the listing Exchange for 
Shares.\7\ The price of Shares traded on an Exchange will be based on a 
current bid/offer market. The initial trading price for each Share of 
each New Fund will fall in the range of $50 to $250. Transactions 
involving the sale of Shares in the secondary market will be subject to 
customary brokerage commissions and charges.
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    \7\ The listing requirements established by Nasdaq require that 
at least two market makers be registered in Shares in order for the 
Shares to maintain a listing. Registered market makers must make a 
continuous two-sided market in a listing or face regulatory 
sanctions.
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    10. Applicants expect that purchasers of Creation Units will 
include institutional and retail investors, arbitrageurs, traders, 
financial advisors, portfolio managers and other market 
participants.\8\ An Exchange specialist or market maker, in providing 
for a fair and orderly secondary market for Shares, also may purchase 
or redeem Creation Units for use in its market-making activities. 
Applicants expect that the market price of Shares will be disciplined 
by arbitrage opportunities created by the ability to purchase or redeem 
Creation Units at their NAV, which should ensure that the market price 
of Shares at or close to 4 p.m. stays close to the NAV on that Business 
Day.
---------------------------------------------------------------------------

    \8\ Shares will be registered in book-entry form only. DTC or 
its nominee will be the record or registered owner of all 
outstanding Shares. DTC or its participants will maintain records 
reflecting the beneficial owners of Shares.
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    11. Shares will not be individually redeemable. Shares will only be 
redeemable in Creation Units through the Distributor, which will act as 
the Trust's agent for redemption. To redeem, an investor must 
accumulate enough Shares to constitute a Creation Unit. An investor 
redeeming a Creation Unit of a Leveraged Fund generally will receive an 
``in-kind'' payment comprised of equity securities published by the 
Trust's index receipt agent (the ``Redemption List'') plus a Balancing 
Amount equal to the difference between the market value of the equity 
securities on the Redemption List and the NAV of the Shares being 
redeemed. Redemptions of Creation Units for Inverse Funds will occur 
entirely in cash. A redeeming investor will pay a Transaction Fee to 
offset the transactional expenses associated with redeeming Creation 
Units.
    12. Applicants state that neither the Trust nor any New Fund will 
be advertised, marketed or otherwise held out as a ``mutual fund.'' The 
term ``mutual fund'' will not be used in the Prospectus except to 
compare and contrast the Trust or a New Fund with conventional mutual 
funds. In all marketing materials where the features or methods of 
obtaining, buying, or selling Creation Units are described or where 
there is reference to redeemability, applicants will include a 
prominent statement to the effect that individual Shares are not 
redeemable except in Creation Units. The same approach will be followed 
in connection with reports and other communications to shareholders, as 
well as any other investor education materials issued or circulated in 
connection with Shares. The Trust will provide copies of its annual and 
semi-annual shareholder reports to DTC participants for distribution to 
beneficial holders of Shares.

Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act 
granting an exemption from sections 2(a)(32), 5(a)(1), 22(d) and 24(d) 
of the Act and rule 22c-1 under the Act, and under sections 6(c) and 
17(b) of the Act granting an exemption from sections 17(a)(1) and 
17(a)(2) of the Act.
    2. Section 6(c) of the Act provides that the Commission may exempt 
any person, security or transaction, or any class of persons, 
securities or transactions, from any provision of the Act, if and to 
the extent that such exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act.

Sections 5(a)(1) and 2(a)(32) of the Act

    3. Section 5(a)(1) of the Act defines an ``open-end company'' as a 
management investment company that is offering for sale or has 
outstanding any redeemable security of which it is the issuer. Section 
2(a)(32) of the Act defines a redeemable security as any security, 
other than short-term paper, under the terms of which the holder, upon 
its presentation to the issuer, is entitled to receive approximately 
his proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Shares will not be individually redeemable, 
applicants request an order that would permit the Trust, which is 
registered as an open-end management investment company, to issue 
Shares of New Funds that are redeemable in Creation Units only. 
Applicants state that investors may always redeem Shares in Creation 
Units from the Trust. Applicants further state that because the market 
price of Shares will be disciplined by arbitrage opportunities, 
investors should be able to sell Shares in the secondary market at or 
close to 4 p.m. on a Business Day at prices that do not vary 
substantially from the NAV on that Business Day.

Section 22(d) of the Act and Rule 22c-1 Under the Act

    4. Section 22(d) of the Act, among other things, prohibits a dealer 
from selling a redeemable security, which is currently being offered to 
the public by or through a principal underwriter, except at a current 
public offering price described in the prospectus. Rule 22c-1 under the 
Act generally requires that a dealer selling, redeeming, or 
repurchasing a redeemable security do so only at a price based on its 
NAV. Applicants state that secondary market trading in Shares will take 
place at negotiated prices, not at a current offering price described 
in the Prospectus as required by section 22(d) of the Act, and not at a 
price based on NAV as required by rule 22c-1 under the Act. Applicants 
request an exemption under section 6(c) from these provisions.
    5. Applicants assert that the concerns sought to be addressed by 
section 22(d) of the Act and rule 22c-1 under the Act with respect to 
pricing are equally satisfied by the proposed method of pricing Shares. 
Applicants maintain that while there is little legislative history 
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been intended to (a) prevent dilution caused by 
certain riskless-

[[Page 8813]]

trading schemes by principal underwriters and contract dealers, (b) 
prevent unjust discrimination or preferential treatment among buyers, 
and (c) ensure an orderly distribution of shares by eliminating price 
competition from dealers offering shares at less than the published 
sales price and repurchasing shares at more than the published 
redemption price.
    6. Applicants believe that none of these purposes will be thwarted 
by permitting Shares to trade in the secondary market at negotiated 
prices. Applicants state that (a) secondary market trading in Shares 
does not involve the Trust's assets and cannot result in dilution of an 
investment in Shares, and (b) to the extent different prices exist 
during a given trading day, or from day to day, such variances occur as 
a result of third-party market forces, such as supply and demand, not 
as a result of unjust or discriminatory manipulation. Therefore, 
applicants assert that secondary market transactions in Shares will not 
lead to discrimination or preferential treatment among purchasers. 
Finally, applicants contend that the proposed distribution system will 
be orderly because competitive forces in the marketplace will ensure 
that the difference between the market price of Shares and their NAV 
remains narrow.

Section 24(d) of the Act

    7. Section 24(d) of the Act provides, in relevant part, that the 
prospectus delivery exemption provided to dealer transactions by 
section 4(3) of the Securities Act does not apply to any transaction in 
a redeemable security issued by an open-end investment company. 
Applicants request an exemption from section 24(d) to permit dealers 
selling Shares to rely on the prospectus delivery exemption provided by 
section 4(3) of the Securities Act.\9\
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    \9\ Applicants do not seek relief from the prospectus delivery 
requirement for non-secondary market transactions, such as 
transactions in which an investor purchases Shares in Creation Units 
from the issuer or an underwriter. Applicants state that persons 
purchasing Creation Units will be cautioned in the Prospectus that 
some activities on their part may, depending on the circumstances, 
result in their being deemed statutory underwriters and subject them 
to the prospectus delivery and liability provisions of the 
Securities Act. The Prospectus will state that whether a person is 
an underwriter depends upon all the facts and circumstances 
pertaining to that person's activities. For example, a broker-dealer 
firm and/or its client may be deemed a statutory underwriter if it 
takes Creation Units after placing an order with the Distributor, 
breaks them down into the constituent Shares, and sells Shares 
directly to its customers, or if it chooses to couple the purchase 
of a supply of new Shares with an active selling effort involving 
solicitation of secondary market demand for Shares. The Prospectus 
also will state that dealers who are not ``underwriters'' but are 
participating in a distribution (as contrasted to ordinary secondary 
market trading transactions), and thus dealing with Shares that are 
part of an ``unsold allotment'' within the meaning of section 
4(3)(C) of the Securities Act, would be unable to take advantage of 
the prospectus delivery exemption provided by section 4(3) of the 
Securities Act.
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    8. Applicants state that secondary market investors will regard 
Shares in a manner similar to other securities, including closed-end 
fund shares that are listed, bought and sold on an Exchange. Applicants 
note that shares of closed-end fund investment companies are sold in 
the secondary market unaccompanied by a prospectus.
    9. Applicants contend that Shares, as a listed security, merit a 
reduction in the compliance costs and regulatory burdens resulting from 
the imposition of prospectus delivery obligations in the secondary 
market. Because Shares will be exchange-listed, prospective investors 
will have access to several types of market information about Shares. 
Applicants state that information regarding market price and volume 
will be continually available on a real-time basis throughout the day 
from the relevant Exchange, automated quotation systems, published or 
other public sources or on-line information services. Applicants expect 
that the previous day's closing price and volume information for Shares 
also will be published daily in the financial section of newspapers. In 
addition, the Trust expects to maintain a website that includes 
quantitative information updated on a daily basis, including, for each 
New Fund, daily trading volume, the NAV and the reported closing price 
(or in the alternative, the mid-point of the bid-ask spread at the time 
of calculation of such NAV (the ``Bid/Ask Price'')).\10\ The Web site 
will also include, for each New Fund, closing price (or Bid/Ask Price) 
and data in chart format displaying the frequency distribution of 
discounts and premiums of the closing price (or Bid/Ask Price) against 
the NAV, within appropriate ranges, for each of the four previous 
calendar quarters.
---------------------------------------------------------------------------

    \10\ The Bid/Ask Price of a New Fund is determined using the 
highest bid and the lowest offer on the Primary Listing Exchange as 
of the time of calculation of such new Fund's NAV.
---------------------------------------------------------------------------

    10. Investors also will receive a product description (``Product 
Description'') describing the Trust, the New Funds and the Shares. 
Applicants state that, while not intended as a substitute for a 
Prospectus, the Product Description will contain information about 
Shares that is tailored to meet the needs of investors purchasing 
Shares in the secondary market.

Sections 17(a)(1) and (2) of the Act

    11. Section 17(a) of the Act generally prohibits an affiliated 
person of a registered investment company, or an affiliated person of 
such a person, from selling any security to or purchasing any security 
from the company. Section 2(a)(3) of the Act defines ``affiliated 
person'' to include any person directly or indirectly owning, 
controlling, or holding with power to vote 5% or more of the 
outstanding voting securities of the other person and any person 
directly or indirectly controlling, controlled by, or under common 
control with, the other person. Section 2(a)(9) of the Act provides 
that a control relationship will be presumed where one person owns 25% 
or more of another person's voting securities. Applicants state that 
one or more holders of Creation Units could own more than 5% of a New 
Fund, or in excess of 25% of that New Fund, and could be deemed 
affiliated with the Trust or such New Fund under section 2(a)(3)(A) or 
2(a)(3)(C) of the Act. Also, an Exchange specialist or market maker for 
Shares of any New Fund might accumulate, from time to time, more than 
5% or in excess of 25% of that New Fund's Shares. Applicants request an 
exemption from section 17(a) of the Act under sections 6(c) and 17(b) 
of the Act, to permit persons that are affiliated persons of the New 
Funds solely by virtue of a 5% or 25% ownership interest (or affiliated 
persons of such affiliated persons that are not otherwise affiliated 
with the New Fund) to purchase and redeem Creation Units through ``in-
kind'' transactions.
    12. Section 17(b) of the Act authorizes the Commission to exempt a 
proposed transaction from section 17(a) of the Act if evidence 
establishes that the terms of the transaction, including the 
consideration to be paid or received, are reasonable and fair and do 
not involve overreaching on the part of any person concerned, and the 
proposed transaction is consistent with the policies of the registered 
investment company and the general provisions of the Act. Applicants 
contend that no useful purpose would be served by prohibiting the 
affiliated persons of a New Fund described above from purchasing or 
redeeming Creation Units through ``in-kind'' transactions. The deposit 
and redemption procedures for ``in-kind'' purchases and redemptions of 
Creations Units will be effected in exactly the same manner for all 
purchases and redemptions. The securities contained in the ``in-kind'' 
transactions will be valued in the same manner and according to the 
same standards as the securities held by the

[[Page 8814]]

relevant New Fund. Therefore, applicants state that ``in-kind'' 
purchases and redemptions will afford no opportunity for the affiliated 
persons described above to effect a transaction detrimental to the 
other holders of its Shares. Applicants also believe that ``in-kind'' 
purchases and redemptions will not result in abusive self-dealing or 
overreaching by affiliated persons of the New Funds.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Applicants will not register a series of the Trust not 
identified in the application, by means of filing a post-effective 
amendment to the Trust's registration statement or by any other means, 
unless applicants have requested and received with respect to such 
series, either (a) exemptive relief from the Commission, or (b) a no-
action letter from the Division of Investment Management of the 
Commission.
    2. The Prospectus and the Product Description will clearly disclose 
that, for purposes of the Act, Shares are issued by the New Funds and 
that the acquisition of Shares by investment companies is subject to 
the restrictions of section 12(d)(1) of the Act, except as permitted by 
an exemptive order that permits registered investment companies to 
invest in a New Fund beyond the limits in section 12(d)(1), subject to 
certain terms and conditions, including that the registered investment 
company enter into an agreement with the New Fund regarding the terms 
of the investment.
    3. As long as the Trust operates in reliance on the requested 
order, the Shares will be listed on an Exchange.
    4. Neither the Trust nor any New Fund will be advertised or 
marketed as an open-end fund or a mutual fund. The Prospectus will 
prominently disclose that Shares are not individually redeemable shares 
and will disclose that the owners of the Shares may acquire those 
Shares from the Trust and tender those Shares for redemption to the 
Trust in Creation Units only. Any advertising material that describes 
the purchase or sale of Creation Units or refers to redeemability will 
prominently disclose that Shares are not individually redeemable and 
that owners of Shares may acquire those Shares from the Trust and 
tender those Shares for redemption to the Trust in Creation Units only.
    5. Before a New Fund may rely on the order, the Commission will 
have approved, pursuant to rule 19b-4 under the Exchange Act, an 
Exchange rule or an amendment thereto, requiring Exchange members and 
member organizations effecting transactions in Shares to deliver a 
Product Description to purchasers of Shares.
    6. The Web site for the Trust, which will be publicly accessible at 
no charge, will contain the following information, on a per Share 
basis, for each New Fund: (a) The prior Business Day's NAV and the 
closing price (or the mid-point of the bid-ask spread at the time of 
calculation of such NAV (the Bid/Ask Price)), and a calculation of the 
premium or discount of such closing price (or Bid/Ask Price) against 
such NAV; and (b) data in chart format displaying the frequency 
distribution of discounts and premiums of the closing price (or Bid/Ask 
Price) against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters (or the life of the New Fund, if shorter). 
In addition, the Product Description for each New Fund will state that 
the website for the Trust has information about the premiums and 
discounts at which the Shares have been traded.
    7. The Prospectus and annual report for each New Fund will also 
include: (a) The information listed in condition 6(b), (i) in the case 
of the Prospectus, for the most recently completed year (and the most 
recently completed quarter or quarters, as applicable), and (ii) in the 
case of the annual report, for the immediately preceding five years (or 
the life of the New Fund, if shorter); and (b) the following data, 
calculated on a per Share basis for one, five and ten year periods (or 
life of the New Fund, if shorter), (i) the cumulative total return and 
the average annual total return based on NAV and closing price (or Bid/
Ask Price), and (ii) the cumulative total return of the relevant 
Underlying Index.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-3284 Filed 2-26-07; 8:45 am]
BILLING CODE 8010-01-P
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