[Federal Register Volume 65, Number 198 (Thursday, October 12, 2000)]
[Notices]
[Pages 60698-60700]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26183]



[[Page 60698]]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24678; 812-10528]


PADCO Advisors, Inc., et al.; Notice of Application

October 5, 2000.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 12(d)(1)(J) 
of the Investment Company Act of 1940 (the ``Act'') for exemption from 
sections 12(d)(1)(A) and (B) and under sections 6(c) and 17(b) of the 
Act for an exemption from section 17(a) of the Act.

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SUMMARY OF THE APPLICATION: The order would permit certain registered 
open-end management investment companies to acquire shares of other 
registered open-end management investment companies outside the same 
group of investment companies.

APPLICANTS: PADCO Advisors, Inc., Rydex Series Funds and Rydex Dynamic 
Funds.

FILING DATES: The application was filed on February 17, 1997, and 
amended on February 27, 1998, and on October 2, 2000.

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 applicant 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 30, 2000, 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.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicants. 6116 Executive Boulevard, Ste. 400, Rockville, 
MD 20852.

FOR FURTHER INFORMATION CONTACT: Michael W. Mundt, Branch Chief, and 
Nadya B. Roytblat, Assistant Director, at (202) 942-0564 (Office of 
Investment Company Regulation, Division of Investment Management).

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 Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. The Rydex Series Funds and the Rydex Dynamic Funds (together the 
``Trusts'') are open-end management investment companies registered 
under the Act comprised of separate series, each of which pursues a 
distinct set of investment objectives and policies. PADCO Advisers, 
Inc. is a Maryland corporation registered as an investment adviser 
under the Investment Advisers Act of 1940 (``Advisers Act'') and serves 
as investment adviser to the series of the Trusts (each, a ``Rydex 
Fund'').
    2. Applicants request relief to permit registered open-end 
management investment companies that are not part of the same ``group 
of investment companies,'' as that term is defined in section 
12(d)(1)(G)(ii) of the Act, as the Trusts (each, a ``Fund of Funds''), 
to acquire shares of Rydex Funds. Each Fund of Funds will be advised by 
an investment adviser that is registered under the Advisers Act (``Fund 
of Funds Adviser''). Applicants request that the relief apply to: (a) 
Each open-end management investment company that currently or 
subsequently is part of the same ``group of investment companies,'' 
within the meaning of section 12(d)(1)(G)(ii) of the Act as the Trusts 
(together with the Rydex Funds, ``Underlying Funds''); and (b) each 
Fund of Funds that enters into a participation agreement 
(``Participation Agreement'') with an Underlying Fund to purchase 
shares of the Underlying Fund.\1\
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    \1\ All investment companies that currently intend to rely on 
the requested order are named as applicants. Any other investment 
company that relies on the order in the future will comply with the 
terms and conditions of the application. A Fund of Funds may rely on 
the requested order only to invest in Underlying Funds and not in 
any other registered investment company.
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    3. Applicants state that the Rydex Funds will offer Fund of Funds 
simple and efficient vehicles to achieve their asset allocation or 
diversification objectives. Applicants also assert that the Rydex Funds 
provide high quality and low cost professional investment program 
alternatives to Fund of Funds that do not have sufficient assets to 
operate a comparable fund.

Applicants' Legal Analysis

A. Section 12(d)(1)

    1. Section 12(d)(1)(A) of the Act prohibits a registered investment 
company from acquiring shares of an investment company if the 
securities represent more than 3% of the total outstanding voting stock 
of the acquired company, more than 5% of the total assets of the 
acquiring company, or, together with the securities of any other 
investment companies, more than 10% of the total assets of the 
acquiring company. Section 12(d)(1)(B) of the Act prohibits a 
registered open-end investment company from selling its shares to 
another investment company if the sale will cause the acquiring company 
to own more than 3% of the acquired company's voting stock, or if the 
sale will cause more than 10% of the acquired company's voting stock to 
be owned by investment companies generally.
    2. Section 12(d)(1)(J) of the Act provides that the Commission may 
exempt any person, security, or transaction, or any classes of persons, 
securities or transactions, from any provision of section 12(d)(1) if 
the exemption is consistent with the public interest and the protection 
of investors. Applicants seek an exemption under section 12(d)(1)(J) to 
permit a Fund of Funds to acquire shares of the Rydex Funds and to 
permit the Rydex Funds to sell shares to the Fund of Funds beyond the 
limits set forth in sections 12(d)(1)(A) and (B).
    3. Applicants state that the proposed arrangement and conditions 
will adequately address the policy concerns underlying sections 
12(d)(1)(A) and (B), which include concerns about undue influence by a 
fund of funds over underlying funds, excessive layering of fees, and 
overly complex fund structures. Accordingly, applicants believe that 
the requested exemption is consistent with the public interest and the 
protection of investors.
    4. Applicants state that the proposed arrangement will not result 
in undue influence by a Fund of Funds or its affiliates over the Rydex 
Funds. To limit the control that a Fund of Funds may have over a Rydex 
Fund, applicants propose a condition prohibiting the Fund of Funds 
Adviser and certain affiliates (individually or in the aggregate) from 
controlling a Rydex Fund within the meaning of section 2(a)(9) of the 
Act. To limit further the potential for undue influence over Rydex 
Funds, applicants propose conditions 2 through 7, stated below, to 
preclude a Fund of Funds and its affiliate entities from taking 
advantage of a Rydex Fund with respect to transactions between the 
entities and to ensure the transactions will be on an arm's length 
basis.
    5. As an additional assurance that a Fund of Funds understands the 
implications of an investment by a Fund

[[Page 60699]]

of Funds under the requested order, each Fund of Funds and the 
appropriate Trust will execute a Participation Agreement stating that 
the board of directors of the Fund of Funds and the Fund of Funds 
Adviser understand the terms and conditions of the order and agree to 
fulfill their responsibilities under the order. Applicants note that a 
Rydex Fund may choose to reject an investment from a Fund of Funds.
    6. Applicants do not believe that the proposed arrangement will 
involve excessive layering of fees. The board of directors of each Fund 
of Funds, including a majority of the disinterested directors, will be 
required to determine that the advisory fees charged to the Fund of 
Funds are based on services provided that will be in addition to, 
rather than duplicative of, the services provided under the advisory 
contract of any Rydex Fund in which the Fund of Funds may invest. In 
addition, a Fund of Funds Adviser will waive fees otherwise payable to 
it by a Fund of Funds in an amount at least equal to any compensation 
received by the Fund of Funds Adviser or an affiliated person of the 
Fund of Funds Adviser from the Rydex Funds in connection with the 
investment by the Fund of Funds in the Rydex Funds. Applicants also 
state that any sales charges and/or service fees charged with respect 
to shares of a Fund of Funds will not exceed the applicable limits set 
forth in rule 2830 of the Conduct Rules of the National Association of 
Securities Dealers (``NASD Conduct Rules'').
    7. Applicants state that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that a Rydex Fund 
will be prohibited from acquiring securities of any investment company 
in excess of the limits contained in section 12(d)(1)(A), except to the 
extent permitted by section 12(d)(1)(E) of the Act \2\ or an exemptive 
order allowing a Rydex Fund to purchase shares of an affiliated money 
market fund for short-term cash management purposes. Applicants also 
represent that the Participation Agreement will require that a Fund of 
Funds' prospectus and sales literature disclose, in ``plain English,'' 
the unique characteristics of a Fund of Funds investing in the Rydex 
Funds, including, but not limited to, the expense structure and any 
additional expenses of investing in the Rydex Funds.
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    \2\ A Rydex Fund may operate as a ``feeder fund'' that invests 
all of its assets in another investment company (the ``master 
fund'') in reliance on section 12(d)(1)(E) of the Act. Applicants 
state that in such situations, the master fund would be in the same 
group of investment companies as the Rydex Fund and no other feeder 
funds would invest in the master fund.
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B. Section 17(a)

    1. Section 17(a) of the Act generally prohibits sales or purchases 
of securities between a registered investment company and any 
affiliated person of the company. Section 2(a)(3) of the Act defines an 
``affiliated person'' of another person to include any person 5% or 
more of whose outstanding voting securities are directly or indirectly 
owned, controlled, or held with power to vote by the other person.
    2. Applicants state that a Rydex Fund could become an affiliated 
person of a Fund of Funds if the Fund of Funds acquires more than 5% of 
a Rydex Fund's outstanding voting securities. In light of this possible 
affiliation, section 17(a) could prevent a Rydex Fund from selling 
shares to and redeeming shares from the Fund of Funds.
    3. Section 17(b) of the Act authorizes the Commission to grant an 
order permitting a transaction otherwise prohibited by section 17(a) if 
it finds that (a) the terms of the proposed transaction are fair and 
reasonable and do not involve overreaching on the part of any person 
concerned; (b) the proposed transaction is consistent with the policies 
of each registered investment company involved; and (c) the proposed 
transaction is consistent with the general purposes of the Act. Section 
6(c) of the Act permits the Commission to exempt any person or 
transactions from any provision of the Act if 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.
    4. Applicants submit that the proposed arrangement satisfies the 
standards for relief under sections 17(b) and 6(c) of the Act. 
Applicants state that the terms of the arrangement are fair and 
reasonable and do not involve overreaching. Applicants note that the 
consideration paid for the sale and redemption of shares of the Rydex 
Funds will be based on the net asset values of the Rydex Funds. 
Applicants state that the proposed arrangement will be consistent with 
the policies of each Fund of Funds and Rydex Fund and with the general 
purposes of the Act.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. (a) A Fund of Funds Adviser, (b) any person controlling, 
controlled by, or under common control with a Fund of Funds Adviser, 
and (c) any investment company and any issuer that would be an 
investment company but for sections 3(c)(1) or 3(c)(7) of the Act who 
is advised by a Fund of Funds Adviser or any person controlling, 
controlled by, or under common control with a Fund of Funds Adviser 
(collectively, the ``Group'') will not control (individually or in the 
aggregate) a Rydex Fund within the meaning of section 2(a)(9) of the 
Act. If, as a result of a decrease in the outstanding voting securities 
of a Rydex Fund, the Group, in the aggregate, becomes a holder of more 
than 25 percent of the outstanding voting securities of a Rydex Fund, 
the Group will vote its shares of the Rydex Fund in the same proportion 
as the vote of all other holders of the Rydex Fund's shares.
    2. A Fund of Funds and its investment adviser, promoter, and 
principal underwriter, and any person controlling, controlled by, or 
under common control with any of those entities (each a ``Fund of Funds 
Affiliate'') will not cause any existing or potential investment by the 
Fund of Funds in shares of a Rydex Fund to influence the terms of any 
services or transactions between the Fund of Funds or a Fund of Funds 
Affiliate and the Rydex Fund or its investment adviser, promoter, 
principal underwriter, and any person controlling, controlled by, or 
under common control with any of those entities (each a ``Rydex Fund 
Affiliate'').
    3. The board of directors of a Fund of Funds, including a majority 
of the disinterested directors, will adopt procedures reasonably 
designed to assure that the Fund of Fund's Adviser is conducting the 
investment program of the Fund of Funds without taking into account any 
consideration received by the Fund of Funds or a Fund of Funds 
Affiliate from a Rydex Fund or a Rydex Fund Affiliate in connection 
with any services or transactions.
    4. The board of trustees of each Trust (``Board of Trustees''), 
including a majority of the disinterested trustees, will determine that 
any consideration paid by a Rydex Fund to a Fund of Funds or a Fund of 
Funds Affiliate in connection with any services or transactions: (a) Is 
fair and reasonable in relation to the nature and quality of the 
services and benefits received by the Rydex Fund; (b) is within the 
range of consideration that the Rydex Fund would be required to pay to 
another unaffiliated entity in connection with the same services or 
transactions; and (c) does not involve overreaching on the part of any 
person concerned.

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    5. No Fund of Funds or Fund of Funds Affiliate will cause a Rydex 
Fund to purchase a security from any underwriting or selling syndicate 
in which a principal underwriter is an officer, director, member of an 
advisory board, investment adviser, or employee of the Fund of Funds, 
or a person of which any such officer, director, member of an advisory 
board, investment adviser, employee is an affiliated person (each an 
``Underwriting Affiliate''). An offering of securities during the 
existence of an underwriting or selling syndicate of which principal 
underwriter is an Underwriting Affiliate is considered an ``Affiliated 
Underwriting.''
    6. The Board of Trustees, including a majority of the disinterested 
trustees, will adopt procedures reasonably designed to monitor any 
purchases of securities by a Rydex Fund in an Affiliated Underwriting, 
including any purchases made directly from an Underwriting Affiliate. 
The Board of Trustees will review these purchases periodically, but no 
less frequently than annually, to determine whether the purchases were 
influenced by the investment by the Fund of Funds in shares of the 
Rydex Fund.
    The Board of Trustees should consider, among other things: (a) 
Whether the purchases were consistent with the investment objectives 
and policies of the Rydex Fund; (b) how the performance of securities 
purchased in an Affiliated Underwriting compares to the performance of 
comparable securities purchased during a comparable period of time in 
underwritings other than Affiliated Underwritings or to a benchmark 
such as a comparable market index; and (c) whether the amount of 
securities purchased by the Rydex Fund in Affiliated Underwritings and 
the amount purchased directly from an Underwriting Affiliate have 
significantly from prior years. The Board of Trustees will take any 
appropriate actions based on its review, including, if appropriate, the 
institution of procedures designed to assure that purchases of 
securities from Affiliated Underwritings are in the best interests of 
shareholders.
    7. The Trusts shall maintain and preserve permanently in an easily 
accessible place a written copy of the procedures described in the 
preceding condition, and any modifications, and will maintain and 
preserve for a period not less than six years from the end of the 
fiscal year in which any purchase from an Affiliated Underwriting 
occurred, the first two years in an easily accessible place, a written 
record of each purchase, setting forth from whom the securities were 
acquired, the identity of the underwriting syndicate's members, the 
terms of the purchase, and the information or materials upon which the 
Board of Trustee's determinations were made.
    8. Prior to an investment in shares of a Rydex Fund in excess of 
the limit in section 12(d)(1)(A)(i), each Fund of Funds and the 
appropriate Trust will execute an agreement stating, without 
limitation, that the board of directors of the Fund of Funds and the 
Fund of Funds Adviser have read the notice of the application 
requesting the order, understand the terms and conditions of the order 
and agree to fulfill their responsibilities under the order. At the 
time of its investment in shares of a Rydex Fund in excess of the limit 
in section 12(d)(1)(A)(i), a Fund of Funds will notify the Rydex Fund 
of the investment. At such time, the Fund of Funds also will transmit 
to the Rydex Fund a list of the names of each Fund of Funds Affiliate 
and Underwriting Affiliate.
    The Fund of Funds will notify the Rydex Fund of any changes to the 
list as soon as reasonably practicable after a change occurs. The Rydex 
Fund and the Fund of Funds will maintain and preserve a copy of the 
order, the agreement, and the list with any updated information for a 
period of not less than six years from the end of the fiscal year in 
which any investment occurred, the first two years in an easily 
accessible place.
    9. Prior to approving any advisory contract under section 15 of the 
Act, the board of directors of each Fund of Funds, including a majority 
of the disinterested directors, will find that the advisory fees 
charged under the contract are based on services provided that will be 
in addition to, rather than duplicative of, the services provided under 
the advisory contract of any Rydex Fund in which the Fund of Funds may 
invest. These findings and their basis will be recorded fully in the 
minute books of the appropriate Fund of Funds.
    10. A Fund of Funds Adviser will waive fees otherwise payable to it 
by a Fund of Funds in an amount at least equal to any compensation 
(including fees received pursuant to a plan adopted by a Rydex Fund 
under rule 12b-1 under the Act) received by the Fund of Funds Adviser 
or an affiliated person of the Funds of Funds Adviser from the Rydex 
Funds in connection with the investment by the Funds of Funds in the 
Rydex Funds.
    11. Any sales charges and/or service fees with respect to shares of 
the Fund of Funds will not exceed the applicable limits set forth in 
rule 2830 of the NASD Conduct Rules.
    12. No Rydex Fund will acquire securities of any other investment 
company in excess of the limits contained in section 12(d)(1)(A) of the 
Act, except to the extent permitted by section 12(d)(1)(E) of the Act 
or an exemptive order that allows the Rydex Fund to purchase shares of 
an affiliated money market fund for short-term cash management 
purposes.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-26183 Filed 10-11-00; 8:45 am]
BILLING CODE 8010-01-M