Rafferty Asset Management, LLC, et al.; Notice of Application, 54179-54184 [E8-21763]
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Federal Register / Vol. 73, No. 182 / Thursday, September 18, 2008 / Notices
Wednesday, September 24 at 11:00 a.m.
(Closed)—If Needed
1. Continuation of Tuesday’s closed
session agenda.
CONTACT PERSON FOR MORE INFORMATION:
Julie S. Moore, Secretary of the Board,
U.S. Postal Service, 475 L’Enfant Plaza,
SW., Washington, DC 20260–1000.
Telephone (202) 268–4800.
Julie S. Moore,
Secretary.
[FR Doc. E8–21904 Filed 9–16–08; 11:15 am]
BILLING CODE 7710–12–P
SECURITIES AND EXCHANGE
COMMISSION
Proposed Collection; Comment
Request
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of Filings and
Information Services, Washington, DC
20549.
dwashington3 on PRODPC61 with NOTICES
Extension:
Form N–2; SEC File No. 270–21; OMB
Control No. 3235–0026.
Notice is hereby given that pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.) the Securities
and Exchange Commission (the
‘‘Commission’’) is soliciting comments
on the collection of information
summarized below. The Commission
plans to submit this existing collection
of information to the Office of
Management and Budget for extension
and approval.
The title for the collection of
information is ‘‘Form N–2 (17 CFR
239.14 and 274.11a–1) under the
Securities Act of 1933 and under the
Investment Company Act of 1940,
Registration Statement of Closed-End
Management Investment Companies.’’
Form N–2 is the form used by closedend management investment companies
(‘‘closed-end funds’’) to register as
investment companies under the
Investment Company Act of 1940 (15
U.S.C. 80a–1 et seq.) (‘‘Investment
Company Act’’) and to register their
securities under the Securities Act of
1933 (15 U.S.C. 77a et seq.) (‘‘Securities
Act’’). The primary purpose of the
registration process is to provide
disclosure of financial and other
information to investors and potential
investors for the purpose of evaluating
an investment in a security. Form N–2
also permits closed-end funds to
provide investors with a prospectus
containing information required in a
registration statement prior to the sale or
at the time of confirmation of delivery
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of securities. The form also may be used
by the Commission in its regulatory
review, inspection, and policy-making
roles.
The Commission estimates that there
are 140 initial registration statements
and 60 post-effective amendments to
initial registration statements filed on
Form N–2 annually and that the average
number of portfolios referenced in each
initial filing and post-effective
amendment is 1. The Commission
further estimates that the hour burden
for preparing and filing a post-effective
amendment on Form N–2 is 116.5 hours
per portfolio. The total annual hour
burden for preparing and filing posteffective amendments is 6,990 hours (60
post-effective amendments × 1
portfolios × 116.5 hours per portfolio).
The estimated annual hour burden for
preparing and filing initial registration
statements is 79,478 hours (140 initial
registration statements × 1 portfolios ×
567.7 hours per portfolio). The total
annual hour burden for Form N–2,
therefore, is estimated to be 86,468
hours (6,990 hours + 79,478 hours).
The information collection
requirements imposed by Form N–2 are
mandatory. Responses to the collection
of information will not be kept
confidential. An agency may not
conduct or sponsor, and a person is not
required to respond to a collection of
information unless it displays a
currently valid control number.
Written comments are invited on: (a)
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the
agency, including whether the
information will have practical utility;
(b) the accuracy of the agency’s estimate
of the burden of the collection of
information; (c) ways to enhance the
quality, utility, and clarity of the
information collected; and (d) ways to
minimize the burden of the collection of
information on respondents, including
through the use of automated collection
techniques or other forms of information
technology. Consideration will be given
to comments and suggestions submitted
in writing within 60 days of this
publication.
Please direct your written comments
to Lewis W. Walker, Acting Director/
CIO, Securities and Exchange
Commission, C/O Shirley Martinson,
6432 General Green Way, Alexandria,
VA 22312; or send an e-mail to:
PRA_Mailbox@sec.gov.
Dated: September 10, 2008.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–21764 Filed 9–17–08; 8:45 am]
BILLING CODE 8010–01–P
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54179
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
28379; 812–13483]
Rafferty Asset Management, LLC, et
al.; Notice of Application
September 12, 2008.
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), 22(e), 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 17(a)(2) of the Act.
AGENCY:
Summary of Application: Applicants
request an order that would permit (a)
an open-end management investment
company and its series to issue shares
(‘‘ETS’’) that can be redeemed only in
large aggregations (‘‘Creation Units’’); (b)
secondary market transactions in ETS to
occur at negotiated prices; (c) dealers to
sell ETS to purchasers in the secondary
market unaccompanied by a prospectus
when prospectus delivery is not
required by the Securities Act of 1933
(‘‘Securities Act’’); (d) certain series to
pay redemption proceeds, under certain
circumstances, more than seven days
after the tender of ETS for redemption
and; (e) certain affiliated persons of the
series to deposit securities into, and
receive securities from, the series in
connection with the purchase and
redemption of Creation Units.
Applicants: Rafferty Asset
Management, LLC (‘‘Adviser’’) and
Direxion Shares ETF Trust (‘‘Trust’’).
Filing Dates: The application was
filed on January 23, 2008 and amended
on May 8, 2008, August 21, 2008 and
September 12, 2008.
Hearing or Notification of Hearing: An
order granting the application 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 October 3, 2008, 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.
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Federal Register / Vol. 73, No. 182 / Thursday, September 18, 2008 / Notices
Secretary, Securities and
Exchange Commission, 100 F Street,
NE., Washington, DC 20549–1090;
Applicants, 33 Whitehall Street, 10th
Floor, New York, New York 10004.
FOR FURTHER INFORMATION CONTACT:
Emerson S. Davis, Sr., Senior Counsel at
(202) 551–6868, or Julia Kim Gilmer,
Branch Chief, at (202) 551–6821
(Division of Investment Management,
Office of Investment Company
Regulation).
ADDRESSES:
The
following is a summary of the
application. The complete application
may be obtained for a fee at the Public
Reference Branch, U.S. Securities and
Exchange Commission, 100 F Street,
NE., Washington DC 20549–1520,
telephone (202) 551–5850.
SUPPLEMENTARY INFORMATION:
Applicants’ Representations
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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
Adviser is registered as an investment
adviser under the Investment Advisers
Act of 1940 (‘‘Advisers Act’’). The Trust
will initially offer thirty-two series
(‘‘Initial Funds’’) with different types of
investment objectives as further
described below.1 Applicants may offer
additional Funds in the future (‘‘Future
Funds’’ and included in the term
Funds).2 Each Fund will be advised by
the Adviser. The Adviser may enter into
subadvisory agreements with additional
investment advisers to act as
subadvisers to the Trust and any of the
Funds. Any subadviser to the Trust or
a Fund will be registered under the
Advisers Act. A broker-dealer registered
under the Securities Exchange Act of
1934 (‘‘Exchange Act’’) will act as the
distributor and principal underwriter of
each Fund’s Creation Units of ETS
(‘‘Distributor’’).
2. The Funds will seek daily
investment results, before fees and
expenses, that: (a) Correspond to the
return of particular foreign equity
indices (‘‘Underlying Foreign Indices’’),
domestic equity indices (‘‘Underlying
Domestic Indices’’) or fixed income
securities indices (‘‘Underlying Fixed
Income Indices’’ together with the
Underlying Foreign Indices and the
Underlying Domestic Indices, the
1 The underlying indices for the Initial Funds are
identified in the application.
2 All existing entities that intend to rely on the
requested order have been named as applicants.
Any Future Fund that relies on the requested order
will comply with the terms and conditions of the
application.
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‘‘Underlying Indices’’) 3 (such Funds are
referred to as the ‘‘Conventional
Funds’’); (b) provide up to 400% of the
return of their Underlying Indices
(‘‘Leveraged Funds’’); or (c) provide up
to 400% of the inverse performance of
their Underlying Indices (‘‘Inverse
Funds’’).4
3. Conventional Funds and Leveraged
Funds based on Underlying Domestic
Indices will invest at least 95% and
80%, respectively, of their total assets in
the equity securities contained in the
relevant Underlying Domestic Index.
Conventional Funds and Leveraged
Funds based on Underlying Fixed
Income Indices will invest at least 80%
of their total assets in the securities that
comprise the relevant Underlying Fixed
Income Index. Conventional Funds and
Leveraged Funds based on Underlying
Foreign Indices will invest at least 80%
of their total assets in the equity
securities contained in the relevant
Underlying Foreign Index and
depositary receipts representing such
securities.5
4. Additionally, the 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. The Inverse
Funds will only invest in Financial
Instruments and Money Market
Instruments; they will not invest in the
component securities of their
Underlying Indices.
5. A Conventional Fund will utilize
either a replication or representative
sampling strategy. A Conventional Fund
using a ‘‘replication’’ strategy will invest
in substantially all of the Component
Securities in its Underlying Index in
approximately the same proportions as
in the Underlying Index. A
Conventional Fund using a
representative sampling strategy will
invest in some, but not all, of the
relevant Component Securities. The
Adviser will seek to achieve the
investment objectives of the Leveraged
Funds and the Inverse Funds by using
3 An entity that creates, compiles, sponsors or
maintains an Underlying Index is not and will not
be an affiliated person, as defined in section 2(a)(3)
of the Act, or an affiliated person of an affiliated
person of the Trust, a Fund, the Distributor, the
Adviser, or any subadviser or promoter of any
Fund.
4 Sixteen of the Initial Funds are Leveraged Funds
and the remainder are Inverse Funds.
5 ‘‘Depositary Receipts’’ include American
Depositary Receipts, Global Depositary Receipts
and European Depositary Receipts.
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a mathematical model that takes into
account a variety of specified criteria,
the most important of which are: (a) The
net assets in each 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
and fixed income securities, Financial
Instruments and Money Market
Instruments at the beginning of each
trading day. On each day that a Fund is
required to be open under section 22(e)
of the Act (‘‘Business Day’’) the full
portfolio holdings of each Fund will be
disclosed on the website of the Trust
and/or the Exchange on which ETS are
primarily listed (‘‘Primary Listing
Exchange’’). The portfolio holdings
information disclosed each Business
Day will form the basis for that Fund’s
net asset value (‘‘NAV’’) calculation as
of 4:00 pm Eastern Time that day and
will reflect portfolio trades made on the
immediately preceding Business Day.
Intra-day values of each Underlying
Domestic Index and Underlying Foreign
Index will be disseminated every 15
seconds throughout the trading day. The
value of Underlying Fixed Income
Indices will be calculated and published
once per day.
6. Applicants expect that each
Conventional Fund will have an annual
tracking error of less than 5% over the
course of the year (excluding the impact
of expenses and interest, if any) to the
performance of its Underlying Index.
For Leveraged Funds and Inverse
Funds, applicants expect a tracking
error of less than 5% over the course of
a year (excluding the impact of expenses
and interest, if any) to the specified
multiple or inverse multiple,
respectively, of the performance of the
relevant Underlying Index.
7. Each Fund will issue Creation
Units of approximately 25,000 to
100,000 ETS. Applicants expect the
initial offering price of a Creation Unit
to be a minimum of $1 million. All
orders to purchase Creation Units must
be placed on a Business Day with the
Distributor by or through 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
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. The
Distributor also will be responsible for
delivering the Prospectus to those
persons purchasing Creation Units and
for maintaining records of the orders
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and acknowledgements of acceptance
for orders.
8. Creation Units of Conventional and
Leveraged Funds generally will be
purchased and redeemed in exchange
for an ‘‘in-kind’’ transfer of securities
(‘‘In-Kind Payment’’) and cash. Inverse
Funds will generally be purchased and
redeemed entirely for cash because of
the limited transferability of Financial
Instruments.6 An investor making an InKind Payment will be required to
transfer to the Trust a ‘‘Deposit Basket’’
consisting of: (a) A basket of securities
consisting of some or all of the
securities in the relevant Underlying
Index or other securities selected by the
Adviser to correspond to the
performance of the Underlying Index
(the ‘‘Deposit Securities’’); and (b) a
‘‘Balancing Amount.’’ The Balancing
Amount will be equal to the differential,
if any, between the total aggregate
market value of the Deposit Securities,
or in the case of redemptions, the
Redemption Securities (defined below),
and the NAV per Creation Unit.7 An
investor purchasing or redeeming a
Creation Unit from a Fund will be
charged a fee (‘‘Transaction Fee’’) to
prevent the dilution of the interests of
the remaining shareholders resulting
from the Fund incurring costs in
connection with the purchase and
redemption of the Creation Units.8 The
maximum Transaction Fee and any
variations or waivers of the Transaction
Fee will be disclosed in the prospectus
for ETS (‘‘Prospectus’’) and the method
6 The Trust may also accept and deliver all-cash
payments for the purchase and redemption of
Creation Units of any Fund in certain limited
circumstances.
7 On each Business Day, prior to the opening of
trading on the New York Stock Exchange, the
Trust’s index receipt agent will make available the
list of the names and the required number of shares
of each security included in the current Deposit
Basket and the Balancing Amount for each Fund.
Such Deposit Basket will apply to all purchases of
Creation Units until a new Deposit Basket for a
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 ETS basis the sum of the
current value of the Deposit Securities, and the
estimated amount of cash and Money Market
Instruments held in the portfolio of a Conventional
or Leveraged Fund. For Leveraged Funds, the
amount would also include, on a per share basis,
the marked-to-market gains or losses of the
Financial Instruments held by the 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 Fund’s Financial Instruments.
8 A purchaser permitted to substitute cash for
certain Deposit Securities 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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of determining the Transaction Fees will
be disclosed in the Prospectus and/or
statement of additional information
(‘‘SAI’’).
9. Persons purchasing Creation Units
from a Fund may hold the ETS or sell
some or all of them in the secondary
market. ETS of the 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
member firms will act as a specialist
(‘‘Exchange Specialist’’) or market
maker (‘‘Market Maker’’) and maintain a
market on the Primary Listing Exchange
for ETS. The price of ETS traded on an
Exchange will be based on a current
bid/offer market. The initial trading
price for ETS of each Fund will fall in
the range of $50 to $250. Transactions
involving the sale of ETS 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.9 An Exchange Specialist or
Market Maker, in providing for a fair
and orderly secondary market for ETS,
also may purchase or redeem Creation
Units for use in its market-making
activities. Applicants expect that the
market price of ETS 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 ETS at
or close to 4 p.m. stays close to the NAV
on that Business Day.
11. ETS will not be individually
redeemable. ETS 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 ETS to constitute a Creation
Unit. An investor redeeming a Creation
Unit of a Conventional or Leveraged
Fund generally will receive an In-Kind
Payment of securities published by the
Trust’s index receipt agent (the
‘‘Redemption Securities’’), the
Balancing Amount in effect on the date
a request for redemption is made, minus
any Transaction Fee.
12. Applicants state that in accepting
Deposit Securities and satisfying
redemptions with Redemption
9 ETS will be registered in book-entry form only.
DTC or its nominee will be the record or registered
owner of all outstanding ETS. DTC or its
participants will maintain records reflecting the
beneficial owners of ETS.
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Securities,10 the relevant Funds will
comply with the federal securities laws,
including that the Deposit Securities
and Fund Securities are sold in
transactions that would be exempt from
registration under the Securities Act.11
As a general matter, the Deposit
Securities and Redemption Securities
will correspond pro rata to the securities
held by each Conventional Fund and
Leveraged Fund, but Redemption
Securities received on redemption may
not always be identical to Deposit
Securities deposited in connection with
the purchase of Creation units for the
same day.
13. Applicants state that neither the
Trust nor any 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 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 ETS 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 ETS. The Trust will
provide copies of its annual and semiannual shareholder reports to DTC
participants for distribution to
beneficial holders of ETS.
Applicants’ Legal Analysis
1. Applicants request an order under
section 6(c) of the Act for an exemption
from sections 2(a)(32), 5(a)(1), 22(d),
22(e), and 24(d) of the Act and rule 22c–
10 Applicants state that a cash-in-lieu amount will
replace any ‘‘to-be-announced’’ (‘‘TBA’’) transaction
that is listed as a Deposit Security or Redemption
Security of any Fund. A TBA transaction is a
method of trading mortgage-backed securities where
the buyer and seller agree upon general trade
parameters such as agency, settlement date, par
amount and price. The actual pools delivered
generally are determined two days prior to the
settlement date. The amount of substituted cash in
the case of TBA transactions will be equivalent to
the value of the TBA transaction listed as a Deposit
Security or Redemption Security.
11 In accepting Deposit Securities and satisfying
redemptions with Redemption Securities that are
restricted securities eligible for resale pursuant to
rule 144A under the Securities Act, the relevant
Funds will comply with the conditions of rule
144A, including in satisfying redemptions with
such rule 144A eligible restricted Redemption
Securities. The Prospectus will also state that an
Authorized Participant that is not a ‘‘Qualified
Institutional Buyer’’ as defined in rule 144A under
the Securities Act will not be able to receive, as part
of a redemption, restricted securities eligible for
resale under rule 144A.
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Federal Register / Vol. 73, No. 182 / Thursday, September 18, 2008 / Notices
1 under the Act, and under sections 6(c)
and 17(b) of the Act for 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.
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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 owner, 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 ETS will
not be individually redeemable,
applicants request an order that would
permit the Trust to issue ETS that are
redeemable in Creation Units only.
Applicants state that investors may
purchase ETS of a Fund in Creation
Units and redeem Creation Units from
the Trust. Applicants further state that
because the market price of ETS will be
disciplined by arbitrage opportunities,
investors should be able to sell ETS in
the secondary market at or close to 4:00
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 ETS will take place at
negotiated prices, not at a current
offering price described in a Fund’s
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.
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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 ETS. 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 risklesstrading schemes by principal
underwriters and contract dealers, (b)
prevent unjust discrimination or
preferential treatment among buyers,
and (c) ensure an orderly distribution of
investment company 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 ETS to trade in the secondary
market at negotiated prices. Applicants
state that (a) secondary market trading
in ETS does not directly involve Trust
assets 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 ETS 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 ETS 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 seek relief from
section 24(d) to permit dealers selling
ETS in the secondary markets to rely on
the prospectus delivery exemption
provided by section 4(3) of the
Securities Act.12
12 Applicants state that they are not seeking relief
from the prospectus delivery requirement for nonsecondary market transactions, such as transactions
in which an investor purchases ETS from the Funds
or an underwriter. Applicants further state that each
Fund’s Prospectus will caution broker-dealers and
others that some activities on their part, depending
on the circumstances, may result in their being
deemed statutory underwriters and subject them to
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8. Applicants state that secondary
market investors will regard ETS 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 ETS, 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 ETS will be
exchange-listed, prospective investors
will have access to several types of
market information about ETS.
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 ETS 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 Fund, daily trading volume, the
NAV and the reported closing price. The
website will also include, for each
Fund, a calculation of the premium or
discount of the reported closing price
against NAV, and data in chart format
displaying the frequency distribution of
discounts and premiums of the reported
closing price against the NAV, within
appropriate ranges, for each of the four
previous calendar quarters.
10. Applicants will make available for
distribution to secondary market
purchasers of ETS a product description
(‘‘Product Description’’) that describes,
in plain English, the Trust, relevant
Fund and its ETS. Applicants state that,
the prospectus delivery and liability provisions of
the Securities Act. 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 ETS, and sells those ETS
directly to customers, or if it chooses to couple the
creation of a supply of new ETS with an active
selling effort involving solicitation of secondary
market demand for ETS. Each Fund’s Prospectus
will state that whether a person is an underwriter
depends upon all of the facts and circumstances
pertaining to that person’s activities. 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
ETS 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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Federal Register / Vol. 73, No. 182 / Thursday, September 18, 2008 / Notices
while not intended as a substitute for a
Prospectus, the Product Description will
contain information about ETS that is
tailored to meet the needs of investors
purchasing ETS in the secondary
market. The Product Description will
also disclose the potential for deviation
over time between the return of the
Leveraged Funds or Inverse Funds and
the multiple return of the corresponding
Underlying Index and provide an
example of this deviation in returns
over time in the same manner as in the
Prospectus.
dwashington3 on PRODPC61 with NOTICES
Section 22(e)
11. Section 22(e) of the Act generally
prohibits a registered investment
company from suspending the right of
redemption or postponing the date of
payment of redemption proceeds for
more than seven days after the tender of
a security for redemption. Applicants
state that settlement of redemptions for
Funds based on Underlying Foreign
Indices (‘‘Foreign Funds’’) is contingent
not only on the settlement cycle of the
United States market, but also on
delivery cycles in local markets for
underlying foreign securities held by the
Foreign Funds. Applicants state that
local market delivery cycles for
transferring Redemption Securities to
redeeming investors, coupled with local
market holiday schedules, will, under
certain circumstances, require a delivery
process longer than seven calendar days
for Foreign Funds. Applicants request
relief under section 6(c) of the Act from
section 22(e) to allow Foreign Funds to
pay redemption proceeds up to 14
calendar days after the tender of a
Creation Unit for redemption. Except as
disclosed in the relevant Foreign Fund’s
Prospectus, Product Description and/or
SAI, applicants expect that each Foreign
Fund will be able to deliver redemption
proceeds within seven days.13 With
respect to future Foreign Funds,
applicants seek the same relief from
section 22(e) only to the extent that
circumstances similar to those described
in the application exist.
12. Applicants state that section 22(e)
was designed to prevent unreasonable,
undisclosed and unforeseen delays in
the payment of redemption proceeds.
Applicants assert that the requested
relief will not lead to the problems that
section 22(e) was designed to prevent.
Applicants state that the SAI will
disclose those local holidays (over the
13 Rule 15c6–1 under the Exchange Act requires
that most securities transactions be settled within
three business days of the trade. Applicants
acknowledge that no relief obtained from the
requirements of section 22(e) will affect any
obligations applicants may have under rule
15c6–1.
VerDate Aug<31>2005
15:26 Sep 17, 2008
Jkt 214001
period of at least one year following the
date of the SAI), if any, that are
expected to prevent the delivery of
redemption proceeds in seven calendar
days, and the maximum number of days
needed to deliver the proceeds for each
Foreign Fund. Applicants are not
seeking relief from section 22(e) with
respect to Foreign Funds that do not
effect creations and redemptions of
Creation Units in-kind.
Sections 17(a)(1) and 17(a)(2) of the Act
13. Section 17(a) of the Act generally
prohibits an affiliated person of a
registered investment company, or an
affiliated person of such a person
(‘‘Second-Tier Affiliate’’), from selling
any security to or purchasing any
security from the company. Section
2(a)(3) of the Act defines ‘‘affiliated
person’’ to include (a) 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, (b)
any person 5% or more of whose
outstanding voting securities are
directly or indirectly owned, controlled
or held with the power to vote by the
other person, and (c) 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
more than 25% of another person’s
voting securities.
14. Applicants request an exemption
from section 17(a) of the Act pursuant
to sections 17(b) and 6(c) of the Act to
permit persons to effectuate in-kind
purchases and redemptions with a Fund
when they are affiliated persons of the
Fund or Second-Tier Affiliates solely by
virtue of one or more of the following:
(a) Holding 5% or more, or more than
25%, of the outstanding ETS of one or
more Funds; (b) having an affiliation
with a person with an ownership
interest described in (a); or (c) holding
5% or more, or more than 25%, of the
shares of one or more other registered
investment companies (or series thereof)
advised by the Adviser or an entity,
controlling, controlled by or under
common control with the Adviser.
15. 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
PO 00000
Frm 00050
Fmt 4703
Sfmt 4703
54183
the Act. Applicants assert that no useful
purpose would be served by prohibiting
these types of affiliated persons from
purchasing or redeeming Creation Units
through ‘‘in-kind’’ transactions. The
deposit procedures for both in-kind
purchases and in-kind redemptions of
Creation Units will be the same for all
purchases and redemptions. Deposit
Securities and Redemption Securities
will be valued in the same manner as
the securities held by the Funds.
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 other holders of ETS.
Applicants also believe that in-kind
purchases and redemptions will not
result in self-dealing or overreaching of
the Fund.
Applicants’ Conditions
Applicants agree that any order of
granting the requested relief will be
subject to the following conditions:
1. The Prospectus and Product
Description will clearly disclose that,
for purposes of the Act, ETS are issued
by the Funds and the acquisition of ETS
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
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 Fund regarding the
terms of the investment.
2. As long as the Trust operates in
reliance on the requested order, the ETS
will be listed on an Exchange.
3. Neither the Trust nor any Fund will
be advertised or marketed as an openend investment company or a mutual
fund. The Prospectus will prominently
disclose that ETS are not individually
redeemable shares and will disclose that
the owners of ETS may acquire those
ETS from a Fund and tender those ETS
for redemption to a Fund in Creation
Units only. Any advertising material
that describes the purchase or sale of
Creation Units or refers to redeemability
will prominently disclose that ETS are
not individually redeemable, and that
owners of ETS may acquire those ETS
from a Fund and tender those ETS for
redemption to a Fund in Creation Units
only.
4. Before a 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
E:\FR\FM\18SEN1.SGM
18SEN1
54184
Federal Register / Vol. 73, No. 182 / Thursday, September 18, 2008 / Notices
ETS to deliver a Product Description to
purchasers of ETS.
5. The Trust’s Web site, which will be
publicly accessible at no charge, will
contain the following information, on a
per ETS basis, for each Fund: (a) The
prior Business Day’s NAV and the
reported closing price, and a calculation
of the premium or discount of such
price against such NAV; and (b) data in
chart format displaying the frequency
distribution of discounts and premiums
of the daily closing price against the
NAV, within appropriate ranges, for
each of the four previous calendar
quarters (or the life of the Fund, if
shorter). In addition, the Product
Description for each Fund will state that
the Trust’s Web site has information
about the premiums and discounts at
which the ETS have traded.
6. The Prospectus and annual report
for each Fund also will include: (a) The
information listed in condition 5(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 Fund, if shorter); and (b) the
following data, calculated on a per ETS
basis for one, five and ten year periods
(or life of the Fund, if shorter), (i) the
cumulative total return and the average
annual total return based on NAV and
closing price, and (ii) the cumulative
total return of the relevant Underlying
Index.
7. The requested relief to permit ETF
operations will expire on the effective
date of any Commission rule under the
Act that provides relief permitting the
operation of index-based exchangetraded funds and exchange-traded funds
that seek to return a multiple, the
inverse or an inverse multiple of an
index.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–21763 Filed 9–17–08; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
dwashington3 on PRODPC61 with NOTICES
[File No. 500–1]
In the Matter of Cadema Corp. and
Caredata.com, Inc.; Order of
Suspension of Trading
It appears to the Securities and
Exchange Commission that there is a
15:26 Sep 17, 2008
By the Commission.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–21938 Filed 9–16–08; 4:15 pm]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–58516; File No. SR–Amex–
2008–69]
Self-Regulatory Organizations;
American Stock Exchange LLC; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change Related to
the Listing and Trading of Options on
Section 107 Securities
September 11, 2008.
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
September 3, 2008, 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 and II below, which Items have
been prepared by the Exchange. Amex
filed the proposal pursuant to Section
19(b)(3)(A) of the Act 3 and Rule 19b–
4(f)(6) thereunder,4 which renders the
proposal effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
1 15
September 16, 2008.
VerDate Aug<31>2005
lack of current and accurate information
concerning the securities of Cadema
Corp. because it has not filed any
periodic reports since the period ended
September 30, 2002.
It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of
Caredata.com, Inc. because it has not
filed any periodic reports since the
period ended September 30, 2000.
The Commission is of the opinion that
the public interest and the protection of
investors require a suspension of trading
in the securities of the above-listed
companies.
Therefore, it is ordered, pursuant to
Section 12(k) of the Securities Exchange
Act of 1934, that trading in the
securities of Cadema Corp. and
Caredata.com, Inc. is suspended for the
period from 9:30 a.m. EDT on
September 16, 2008, through 11:59 p.m.
EDT on September 29, 2008.
Jkt 214001
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)(6).
2 17
PO 00000
Frm 00051
Fmt 4703
Sfmt 4703
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 add new
Commentary .11 to Rule 915 and new
Commentary .12 to Rule 916 to enable
the listing and trading of options on
securities meeting the requirements of
Sections 107D, 107E, 107F, 107G, 107H
or 107I of the Amex Company Guide
(the ‘‘Company Guide’’).
The text of the proposed rule change
is available on the Amex’s Web site at
https://www.amex.com, the Office of the
Secretary, the Amex and at the
Commission’s Public Reference Room.
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
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections (A), (B), and (C) below,
of the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to adopt new
Commentary .11 to Rule 915 and new
Commentary .12 to Rule 916 to enable
the listing and trading of options on
index-linked securities (‘‘Index-Linked
Securities’’), commodity-linked
securities (‘‘Commodity-Linked
Securities’’), currency-linked securities
(‘‘Currency-Linked Securities’’), fixed
income-linked securities (‘‘Fixed
Income-Linked Securities’’), futureslinked securities (‘‘Futures-Linked
Securities’’) and combination-linked
securities (‘‘Combination-Linked
Securities’’) (collectively known as
‘‘Section 107 Securities’’ as defined in
Sections 107D, 107E, 107F, 107G, 107H
and 107I, respectively, of the Company
Guide) that are principally traded on a
national securities exchange and an
‘‘NMS Stock’’ (as defined in Rule 600 of
Regulation NMS under the Securities
Exchange Act of 1934 (the ‘‘1934 Act’’)).
Section 107 Securities are designed
for investors who desire to participate in
a specific market segment by providing
E:\FR\FM\18SEN1.SGM
18SEN1
]]>Agencies
[Federal Register Volume 73, Number 182 (Thursday, September 18, 2008)]
[Notices]
[Pages 54179-54184]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-21763]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 28379; 812-13483]
Rafferty Asset Management, LLC, et al.; Notice of Application
September 12, 2008.
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), 22(e), 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 17(a)(2) of the Act.
-----------------------------------------------------------------------
Summary of Application: Applicants request an order that would
permit (a) an open-end management investment company and its series to
issue shares (``ETS'') that can be redeemed only in large aggregations
(``Creation Units''); (b) secondary market transactions in ETS to occur
at negotiated prices; (c) dealers to sell ETS to purchasers in the
secondary market unaccompanied by a prospectus when prospectus delivery
is not required by the Securities Act of 1933 (``Securities Act''); (d)
certain series to pay redemption proceeds, under certain circumstances,
more than seven days after the tender of ETS for redemption and; (e)
certain affiliated persons of the series to deposit securities into,
and receive securities from, the series in connection with the purchase
and redemption of Creation Units.
Applicants: Rafferty Asset Management, LLC (``Adviser'') and
Direxion Shares ETF Trust (``Trust'').
Filing Dates: The application was filed on January 23, 2008 and
amended on May 8, 2008, August 21, 2008 and September 12, 2008.
Hearing or Notification of Hearing: An order granting the
application 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 October 3, 2008, 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 54180]]
ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street,
NE., Washington, DC 20549-1090; Applicants, 33 Whitehall Street, 10th
Floor, New York, New York 10004.
FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Sr., Senior Counsel
at (202) 551-6868, or Julia Kim Gilmer, Branch Chief, at (202) 551-6821
(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
Public Reference Branch, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington DC 20549-1520, telephone (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 Adviser is registered as an investment adviser under
the Investment Advisers Act of 1940 (``Advisers Act''). The Trust will
initially offer thirty-two series (``Initial Funds'') with different
types of investment objectives as further described below.\1\
Applicants may offer additional Funds in the future (``Future Funds''
and included in the term Funds).\2\ Each Fund will be advised by the
Adviser. The Adviser may enter into subadvisory agreements with
additional investment advisers to act as subadvisers to the Trust and
any of the Funds. Any subadviser to the Trust or a Fund will be
registered under the Advisers Act. A broker-dealer registered under the
Securities Exchange Act of 1934 (``Exchange Act'') will act as the
distributor and principal underwriter of each Fund's Creation Units of
ETS (``Distributor'').
---------------------------------------------------------------------------
\1\ The underlying indices for the Initial Funds are identified
in the application.
\2\ All existing entities that intend to rely on the requested
order have been named as applicants. Any Future Fund that relies on
the requested order will comply with the terms and conditions of the
application.
---------------------------------------------------------------------------
2. The Funds will seek daily investment results, before fees and
expenses, that: (a) Correspond to the return of particular foreign
equity indices (``Underlying Foreign Indices''), domestic equity
indices (``Underlying Domestic Indices'') or fixed income securities
indices (``Underlying Fixed Income Indices'' together with the
Underlying Foreign Indices and the Underlying Domestic Indices, the
``Underlying Indices'') \3\ (such Funds are referred to as the
``Conventional Funds''); (b) provide up to 400% of the return of their
Underlying Indices (``Leveraged Funds''); or (c) provide up to 400% of
the inverse performance of their Underlying Indices (``Inverse
Funds'').\4\
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\3\ An entity that creates, compiles, sponsors or maintains an
Underlying Index is not and will not be an affiliated person, as
defined in section 2(a)(3) of the Act, or an affiliated person of an
affiliated person of the Trust, a Fund, the Distributor, the
Adviser, or any subadviser or promoter of any Fund.
\4\ Sixteen of the Initial Funds are Leveraged Funds and the
remainder are Inverse Funds.
---------------------------------------------------------------------------
3. Conventional Funds and Leveraged Funds based on Underlying
Domestic Indices will invest at least 95% and 80%, respectively, of
their total assets in the equity securities contained in the relevant
Underlying Domestic Index. Conventional Funds and Leveraged Funds based
on Underlying Fixed Income Indices will invest at least 80% of their
total assets in the securities that comprise the relevant Underlying
Fixed Income Index. Conventional Funds and Leveraged Funds based on
Underlying Foreign Indices will invest at least 80% of their total
assets in the equity securities contained in the relevant Underlying
Foreign Index and depositary receipts representing such securities.\5\
---------------------------------------------------------------------------
\5\ ``Depositary Receipts'' include American Depositary
Receipts, Global Depositary Receipts and European Depositary
Receipts.
---------------------------------------------------------------------------
4. Additionally, the 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. The Inverse Funds will only invest in Financial Instruments
and Money Market Instruments; they will not invest in the component
securities of their Underlying Indices.
5. A Conventional Fund will utilize either a replication or
representative sampling strategy. A Conventional Fund using a
``replication'' strategy will invest in substantially all of the
Component Securities in its Underlying Index in approximately the same
proportions as in the Underlying Index. A Conventional Fund using a
representative sampling strategy will invest in some, but not all, of
the relevant Component Securities. The Adviser will seek to achieve the
investment objectives of the Leveraged Funds and the Inverse 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 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 and fixed income securities, Financial Instruments and Money
Market Instruments at the beginning of each trading day. On each day
that a Fund is required to be open under section 22(e) of the Act
(``Business Day'') the full portfolio holdings of each Fund will be
disclosed on the website of the Trust and/or the Exchange on which ETS
are primarily listed (``Primary Listing Exchange''). The portfolio
holdings information disclosed each Business Day will form the basis
for that Fund's net asset value (``NAV'') calculation as of 4:00 pm
Eastern Time that day and will reflect portfolio trades made on the
immediately preceding Business Day. Intra-day values of each Underlying
Domestic Index and Underlying Foreign Index will be disseminated every
15 seconds throughout the trading day. The value of Underlying Fixed
Income Indices will be calculated and published once per day.
6. Applicants expect that each Conventional Fund will have an
annual tracking error of less than 5% over the course of the year
(excluding the impact of expenses and interest, if any) to the
performance of its Underlying Index. For Leveraged Funds and Inverse
Funds, applicants expect a tracking error of less than 5% over the
course of a year (excluding the impact of expenses and interest, if
any) to the specified multiple or inverse multiple, respectively, of
the performance of the relevant Underlying Index.
7. Each Fund will issue Creation Units of approximately 25,000 to
100,000 ETS. Applicants expect the initial offering price of a Creation
Unit to be a minimum of $1 million. All orders to purchase Creation
Units must be placed on a Business Day with the Distributor by or
through 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.
The Distributor also will be responsible for delivering the Prospectus
to those persons purchasing Creation Units and for maintaining records
of the orders
[[Page 54181]]
and acknowledgements of acceptance for orders.
8. Creation Units of Conventional and Leveraged Funds generally
will be purchased and redeemed in exchange for an ``in-kind'' transfer
of securities (``In-Kind Payment'') and cash. Inverse Funds will
generally be purchased and redeemed entirely for cash because of the
limited transferability of Financial Instruments.\6\ An investor making
an In-Kind Payment will be required to transfer to the Trust a
``Deposit Basket'' consisting of: (a) A basket of securities consisting
of some or all of the securities in the relevant Underlying Index or
other securities selected by the Adviser to correspond to the
performance of the Underlying Index (the ``Deposit Securities''); and
(b) a ``Balancing Amount.'' The Balancing Amount will be equal to the
differential, if any, between the total aggregate market value of the
Deposit Securities, or in the case of redemptions, the Redemption
Securities (defined below), and the NAV per Creation Unit.\7\ An
investor purchasing or redeeming a Creation Unit from a Fund will be
charged a fee (``Transaction Fee'') to prevent the dilution of the
interests of the remaining shareholders resulting from the Fund
incurring costs in connection with the purchase and redemption of the
Creation Units.\8\ The maximum Transaction Fee and any variations or
waivers of the Transaction Fee will be disclosed in the prospectus for
ETS (``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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\6\ The Trust may also accept and deliver all-cash payments for
the purchase and redemption of Creation Units of any Fund in certain
limited circumstances.
\7\ On each Business Day, prior to the opening of trading on the
New York Stock Exchange, the Trust's index receipt agent will make
available the list of the names and the required number of shares of
each security included in the current Deposit Basket and the
Balancing Amount for each Fund. Such Deposit Basket will apply to
all purchases of Creation Units until a new Deposit Basket for a
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 ETS basis the sum of the current value of the
Deposit Securities, and the estimated amount of cash and Money
Market Instruments held in the portfolio of a Conventional or
Leveraged Fund. For Leveraged Funds, the amount would also include,
on a per share basis, the marked-to-market gains or losses of the
Financial Instruments held by the 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 Fund's
Financial Instruments.
\8\ A purchaser permitted to substitute cash for certain Deposit
Securities 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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9. Persons purchasing Creation Units from a Fund may hold the ETS
or sell some or all of them in the secondary market. ETS of the 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 member firms will act as a specialist (``Exchange
Specialist'') or market maker (``Market Maker'') and maintain a market
on the Primary Listing Exchange for ETS. The price of ETS traded on an
Exchange will be based on a current bid/offer market. The initial
trading price for ETS of each Fund will fall in the range of $50 to
$250. Transactions involving the sale of ETS 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.\9\ An Exchange Specialist or Market Maker, in providing
for a fair and orderly secondary market for ETS, also may purchase or
redeem Creation Units for use in its market-making activities.
Applicants expect that the market price of ETS 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 ETS at or close to 4 p.m. stays close to the NAV on that Business
Day.
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\9\ ETS will be registered in book-entry form only. DTC or its
nominee will be the record or registered owner of all outstanding
ETS. DTC or its participants will maintain records reflecting the
beneficial owners of ETS.
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11. ETS will not be individually redeemable. ETS 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 ETS to constitute a Creation Unit. An investor
redeeming a Creation Unit of a Conventional or Leveraged Fund generally
will receive an In-Kind Payment of securities published by the Trust's
index receipt agent (the ``Redemption Securities''), the Balancing
Amount in effect on the date a request for redemption is made, minus
any Transaction Fee.
12. Applicants state that in accepting Deposit Securities and
satisfying redemptions with Redemption Securities,\10\ the relevant
Funds will comply with the federal securities laws, including that the
Deposit Securities and Fund Securities are sold in transactions that
would be exempt from registration under the Securities Act.\11\ As a
general matter, the Deposit Securities and Redemption Securities will
correspond pro rata to the securities held by each Conventional Fund
and Leveraged Fund, but Redemption Securities received on redemption
may not always be identical to Deposit Securities deposited in
connection with the purchase of Creation units for the same day.
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\10\ Applicants state that a cash-in-lieu amount will replace
any ``to-be-announced'' (``TBA'') transaction that is listed as a
Deposit Security or Redemption Security of any Fund. A TBA
transaction is a method of trading mortgage-backed securities where
the buyer and seller agree upon general trade parameters such as
agency, settlement date, par amount and price. The actual pools
delivered generally are determined two days prior to the settlement
date. The amount of substituted cash in the case of TBA transactions
will be equivalent to the value of the TBA transaction listed as a
Deposit Security or Redemption Security.
\11\ In accepting Deposit Securities and satisfying redemptions
with Redemption Securities that are restricted securities eligible
for resale pursuant to rule 144A under the Securities Act, the
relevant Funds will comply with the conditions of rule 144A,
including in satisfying redemptions with such rule 144A eligible
restricted Redemption Securities. The Prospectus will also state
that an Authorized Participant that is not a ``Qualified
Institutional Buyer'' as defined in rule 144A under the Securities
Act will not be able to receive, as part of a redemption, restricted
securities eligible for resale under rule 144A.
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13. Applicants state that neither the Trust nor any 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 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 ETS 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 ETS. The Trust will provide copies of its annual and
semi-annual shareholder reports to DTC participants for distribution to
beneficial holders of ETS.
Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the Act for an
exemption from sections 2(a)(32), 5(a)(1), 22(d), 22(e), and 24(d) of
the Act and rule 22c-
[[Page 54182]]
1 under the Act, and under sections 6(c) and 17(b) of the Act for 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 owner, 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 ETS will not be individually redeemable, applicants
request an order that would permit the Trust to issue ETS that are
redeemable in Creation Units only. Applicants state that investors may
purchase ETS of a Fund in Creation Units and redeem Creation Units from
the Trust. Applicants further state that because the market price of
ETS will be disciplined by arbitrage opportunities, investors should be
able to sell ETS in the secondary market at or close to 4:00 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 ETS will take place
at negotiated prices, not at a current offering price described in a
Fund's 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 ETS.
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-trading schemes by principal underwriters and contract
dealers, (b) prevent unjust discrimination or preferential treatment
among buyers, and (c) ensure an orderly distribution of investment
company 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 ETS to trade in the secondary market at negotiated
prices. Applicants state that (a) secondary market trading in ETS does
not directly involve Trust assets 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 ETS 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 ETS 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 seek relief from section 24(d) to permit dealers selling ETS
in the secondary markets to rely on the prospectus delivery exemption
provided by section 4(3) of the Securities Act.\12\
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\12\ Applicants state that they are not seeking relief from the
prospectus delivery requirement for non-secondary market
transactions, such as transactions in which an investor purchases
ETS from the Funds or an underwriter. Applicants further state that
each Fund's Prospectus will caution broker-dealers and others that
some activities on their part, depending on the circumstances, may
result in their being deemed statutory underwriters and subject them
to the prospectus delivery and liability provisions of the
Securities Act. 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 ETS, and sells those ETS directly to customers, or
if it chooses to couple the creation of a supply of new ETS with an
active selling effort involving solicitation of secondary market
demand for ETS. Each Fund's Prospectus will state that whether a
person is an underwriter depends upon all of the facts and
circumstances pertaining to that person's activities. 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 ETS 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 ETS
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 ETS, 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 ETS will be exchange-listed, prospective investors will
have access to several types of market information about ETS.
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 ETS
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
Fund, daily trading volume, the NAV and the reported closing price. The
website will also include, for each Fund, a calculation of the premium
or discount of the reported closing price against NAV, and data in
chart format displaying the frequency distribution of discounts and
premiums of the reported closing price against the NAV, within
appropriate ranges, for each of the four previous calendar quarters.
10. Applicants will make available for distribution to secondary
market purchasers of ETS a product description (``Product
Description'') that describes, in plain English, the Trust, relevant
Fund and its ETS. Applicants state that,
[[Page 54183]]
while not intended as a substitute for a Prospectus, the Product
Description will contain information about ETS that is tailored to meet
the needs of investors purchasing ETS in the secondary market. The
Product Description will also disclose the potential for deviation over
time between the return of the Leveraged Funds or Inverse Funds and the
multiple return of the corresponding Underlying Index and provide an
example of this deviation in returns over time in the same manner as in
the Prospectus.
Section 22(e)
11. Section 22(e) of the Act generally prohibits a registered
investment company from suspending the right of redemption or
postponing the date of payment of redemption proceeds for more than
seven days after the tender of a security for redemption. Applicants
state that settlement of redemptions for Funds based on Underlying
Foreign Indices (``Foreign Funds'') is contingent not only on the
settlement cycle of the United States market, but also on delivery
cycles in local markets for underlying foreign securities held by the
Foreign Funds. Applicants state that local market delivery cycles for
transferring Redemption Securities to redeeming investors, coupled with
local market holiday schedules, will, under certain circumstances,
require a delivery process longer than seven calendar days for Foreign
Funds. Applicants request relief under section 6(c) of the Act from
section 22(e) to allow Foreign Funds to pay redemption proceeds up to
14 calendar days after the tender of a Creation Unit for redemption.
Except as disclosed in the relevant Foreign Fund's Prospectus, Product
Description and/or SAI, applicants expect that each Foreign Fund will
be able to deliver redemption proceeds within seven days.\13\ With
respect to future Foreign Funds, applicants seek the same relief from
section 22(e) only to the extent that circumstances similar to those
described in the application exist.
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\13\ Rule 15c6-1 under the Exchange Act requires that most
securities transactions be settled within three business days of the
trade. Applicants acknowledge that no relief obtained from the
requirements of section 22(e) will affect any obligations applicants
may have under rule 15c6-1.
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12. Applicants state that section 22(e) was designed to prevent
unreasonable, undisclosed and unforeseen delays in the payment of
redemption proceeds. Applicants assert that the requested relief will
not lead to the problems that section 22(e) was designed to prevent.
Applicants state that the SAI will disclose those local holidays (over
the period of at least one year following the date of the SAI), if any,
that are expected to prevent the delivery of redemption proceeds in
seven calendar days, and the maximum number of days needed to deliver
the proceeds for each Foreign Fund. Applicants are not seeking relief
from section 22(e) with respect to Foreign Funds that do not effect
creations and redemptions of Creation Units in-kind.
Sections 17(a)(1) and 17(a)(2) of the Act
13. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such a person (``Second-Tier Affiliate''), from selling any security to
or purchasing any security from the company. Section 2(a)(3) of the Act
defines ``affiliated person'' to include (a) 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, (b) any
person 5% or more of whose outstanding voting securities are directly
or indirectly owned, controlled or held with the power to vote by the
other person, and (c) 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 more than 25% of another person's voting
securities.
14. Applicants request an exemption from section 17(a) of the Act
pursuant to sections 17(b) and 6(c) of the Act to permit persons to
effectuate in-kind purchases and redemptions with a Fund when they are
affiliated persons of the Fund or Second-Tier Affiliates solely by
virtue of one or more of the following: (a) Holding 5% or more, or more
than 25%, of the outstanding ETS of one or more Funds; (b) having an
affiliation with a person with an ownership interest described in (a);
or (c) holding 5% or more, or more than 25%, of the shares of one or
more other registered investment companies (or series thereof) advised
by the Adviser or an entity, controlling, controlled by or under common
control with the Adviser.
15. 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
assert that no useful purpose would be served by prohibiting these
types of affiliated persons from purchasing or redeeming Creation Units
through ``in-kind'' transactions. The deposit procedures for both in-
kind purchases and in-kind redemptions of Creation Units will be the
same for all purchases and redemptions. Deposit Securities and
Redemption Securities will be valued in the same manner as the
securities held by the Funds. 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 other
holders of ETS. Applicants also believe that in-kind purchases and
redemptions will not result in self-dealing or overreaching of the
Fund.
Applicants' Conditions
Applicants agree that any order of granting the requested relief
will be subject to the following conditions:
1. The Prospectus and Product Description will clearly disclose
that, for purposes of the Act, ETS are issued by the Funds and the
acquisition of ETS 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 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 Fund regarding the terms of the
investment.
2. As long as the Trust operates in reliance on the requested
order, the ETS will be listed on an Exchange.
3. Neither the Trust nor any Fund will be advertised or marketed as
an open-end investment company or a mutual fund. The Prospectus will
prominently disclose that ETS are not individually redeemable shares
and will disclose that the owners of ETS may acquire those ETS from a
Fund and tender those ETS for redemption to a Fund in Creation Units
only. Any advertising material that describes the purchase or sale of
Creation Units or refers to redeemability will prominently disclose
that ETS are not individually redeemable, and that owners of ETS may
acquire those ETS from a Fund and tender those ETS for redemption to a
Fund in Creation Units only.
4. Before a 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
[[Page 54184]]
ETS to deliver a Product Description to purchasers of ETS.
5. The Trust's Web site, which will be publicly accessible at no
charge, will contain the following information, on a per ETS basis, for
each Fund: (a) The prior Business Day's NAV and the reported closing
price, and a calculation of the premium or discount of such price
against such NAV; and (b) data in chart format displaying the frequency
distribution of discounts and premiums of the daily closing price
against the NAV, within appropriate ranges, for each of the four
previous calendar quarters (or the life of the Fund, if shorter). In
addition, the Product Description for each Fund will state that the
Trust's Web site has information about the premiums and discounts at
which the ETS have traded.
6. The Prospectus and annual report for each Fund also will
include: (a) The information listed in condition 5(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 Fund, if shorter); and (b) the following data,
calculated on a per ETS basis for one, five and ten year periods (or
life of the Fund, if shorter), (i) the cumulative total return and the
average annual total return based on NAV and closing price, and (ii)
the cumulative total return of the relevant Underlying Index.
7. The requested relief to permit ETF operations will expire on the
effective date of any Commission rule under the Act that provides
relief permitting the operation of index-based exchange-traded funds
and exchange-traded funds that seek to return a multiple, the inverse
or an inverse multiple of an index.
For the Commission, by the Division of Investment Management,
under delegated authority.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-21763 Filed 9-17-08; 8:45 am]
BILLING CODE 8010-01-P
