Document ID: SEC-2009-0824-0001
Agency: sec
Document Type: Notice
Title: Applications: X Exchange-Traded Funds, Inc., et al.
Posted Date: 2009-06-17T04:00Z

[Federal Register Volume 74, Number 115 (Wednesday, June 17, 2009)]
[Notices]
[Pages 28735-28737]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-14192]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28766; File No. 812-13499]

X Exchange-Traded Funds, Inc., et al.; Notice of Application

June 11, 2009.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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Summary of Application: Applicants request an order to amend a prior 
order that permits: (a) Series of open-end management investment 
companies to issue shares (``Shares'') redeemable only in large 
aggregations (``Creation Units''); (b) secondary market transactions in 
the Shares to occur at negotiated prices; (c) dealers to sell Shares to 
purchasers in the secondary market unaccompanied by a prospectus when 
prospectus delivery is not required by the Securities Act of 1933 
(``Securities Act''); and (d) 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 (``Prior 
Order'').\1\ Applicants seek to amend the Prior Order in order to 
provide that (a) a series will invest at least 80%, rather than 90%, of 
its total assets in the component securities (``Component Securities'') 
of its underlying index (``Underlying Index''); (b) the Underlying 
Index may be reconstituted and rebalanced no more frequently than on a 
monthly, rather than on a quarterly, basis (``Monthly 
Reconstitution''); and (c) the Indicative Optimized Portfolio Value (as 
defined below) may be calculated and disseminated by a national 
securities exchange (``Exchange'') or by a major market data vendor. 
Applicants also seek to amend the Prior Order to delete the relief 
granted in the Prior Order from section 24(d) of the Act and revise the 
applications on which the Prior Order was issued (``Prior 
Applications'') accordingly and to amend the terms and conditions of 
the Prior Applications with respect to certain disclosure requirements.
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    \1\ HealthShares, Inc., et al., Investment Company Act Release 
Nos. 27553 (November 16, 2006) (notice) and 27594 (December 7, 2006) 
(order), as amended by HealthShares, Inc., et al., Investment 
Company Act Release Nos. 27916 (July 27, 2007) (notice) and 27930 
(August 20, 2007) (order).

Applicants: X Exchange-Traded Funds, Inc. (``X Funds''); XShares 
Advisors LLC (formerly, X-Shares Advisors, LLC) (the ``Advisor''); 
XShares Group, Inc. (formerly, Ferghana-Wellspring LLC); and TDX 
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Independence Funds, Inc. (formerly, TDAX Funds, Inc.) (``TDX Funds'').

Filing Dates: The application was filed on November 9, 2007, and 
amended on

[[Page 28736]]

April 1, 2008, January 27, 2009 and April 20, 2009.

Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on July 6, 2009 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, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-1090. Applicants: Attn. David W. 
Jaffin, 420 Lexington Avenue, Suite 2550, New York, NY 10170, and 
Domenick Pugliese, Esq., Paul, Hastings, Janofsky & Walker LLP, Park 
Avenue Tower, 75 East 55th Street, New York, NY 10022.

FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at 
(202) 551-6876 or Mary Kay Frech, 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 via the 
Commission's Web site by searching for the file number, or an applicant 
using the Company name box, at http://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicants' Representations

    1. TDX Funds, organized as a Maryland corporation, is registered 
under the Act as an open-end management investment company and is 
comprised of five series. X Funds, organized as a Maryland corporation, 
is an open-end management investment company and is comprised of two 
series, including the Nations Large Cap Enhanced Covered Call ETF (the 
``Nations Fund''). The Advisor, a Delaware limited liability company, 
is registered as an investment adviser under the Investment Advisers 
Act of 1940 and serves or will serve as investment adviser to the Funds 
(defined below). XShares Group, Inc., a Delaware corporation, is the 
parent company of the Advisor.
    2. Applicants currently are permitted to offer series that operate 
pursuant to the Prior Order, as well as series that may be created in 
the future and are advised by the Advisor or an entity controlled by or 
under common control with the Advisor and that comply with the terms 
and conditions of the Prior Order (``Future Funds,'' together with the 
TDX Funds and X Funds, the ``Funds''). Applicants state that all 
representations and conditions contained in the Prior Applications 
would apply to the Funds, except as described in the current 
application, as summarized in this notice.
    3. Applicants state that the Nations Fund requires the requested 
relief in order to operate in accordance with its intended investment 
strategy. The Nations Fund employs a ``passive management'' investment 
strategy designed to track the performance, before fees and expenses, 
of the NationsShares Large Cap Enhanced Covered Call Index (the 
``NationsShares Index''). The Prior Order provides that each Fund would 
invest at least 90% of its total assets in Component Securities of its 
Underlying Index. Applicants wish to amend the Prior Order to provide 
that each Fund, including the Nations Fund, must invest at least 80% of 
its total assets in the Component Securities and investments that have 
economic characteristics that are substantially identical to the 
economic characteristics of the Component Securities of its Underlying 
Index. Under this approach, the Nations Fund may invest up to 20% of 
its assets in certain futures, options and swap contracts, as well as 
cash and cash equivalents. Applicants expect that the returns of a Fund 
should continue to be highly correlated with the returns of its 
Underlying Index, expecting that the correlation coefficient between a 
Fund and its Underlying Index will at least be 95% over extended 
periods.
    4. In the Prior Order, the specific criteria for determining the 
Component Securities in each Underlying Index (the ``Index Composition 
Methodology'') provides that the Underlying Indexes will be 
reconstituted no more frequently than quarterly. The Nations Fund seeks 
to replicate the NationsShares Index, an index that is reconstituted 
monthly. Applicants seek to amend the Prior Order to permit the Funds 
to use an Underlying Index that may be reconstituted as frequently as 
monthly. Applicants believe that the Monthly Reconstitution will not 
have any impact on the operation of the Funds or the efficiency of the 
Funds' arbitrage mechanism. Because the Index Composition Methodology 
is published and transparent, and because any changes to the Index 
Composition Methodology must be published 60 days in advance of 
implementation, information about the current constituents of each 
Underlying Index, and potential changes to the list of current 
constituents as a result of any reconstitution, will be readily 
ascertainable by market participants.
    5. The Prior Order currently represents that the Indicative 
Optimized Portfolio Value (``IOPV'') will be calculated and 
disseminated widely every 15 seconds by the Exchange.\2\ Applicants 
seek to amend the Prior Order to permit the calculation and/or 
dissemination of the IOPV either by the Exchange or by a major market 
data vendor. The IOPV will be calculated by the Exchange or a major 
market data vendor every 15 seconds during the Exchange's regular 
trading hours and disseminated every 15 seconds by such entity. 
Applicants contend that this will provide the Fund with additional 
flexibility to engage vendors with the appropriate expertise and 
resources to most accurately and efficiently calculate and disseminate 
the Fund's IOPV. Applicants believe that the IOPV will have visibility 
comparable to that which would be obtained had it been calculated by 
the Exchange. In either case, the IOPV will continue to be disseminated 
on the consolidated tape.
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    \2\ As described in the Prior Applications, the IOPV represents 
the sum of the current value of the Deposit Securities and the 
estimated Cash Requirement, on a per Share basis. The ``Deposit 
Securities'' are the securities that have been selected by the 
Advisor or Sub-Advisor to correspond generally to the performance of 
the relevant Underlying Index. The ``Cash Requirement'' is the cash 
payment needed to equalize any differences between the market value 
of the Deposit Securities per Creation Unit and the net asset value 
(``NAV'') per Creation Unit.
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    6. Applicants seek to amend the terms and conditions of the Prior 
Applications to provide that all representations and conditions 
contained in the Prior Applications that require a Fund to disclose 
particular information in the Fund's prospectus (``Prospectus'') and/or 
annual report shall be effective with respect to the Fund until the 
time that the Fund complies with the disclosure requirements adopted by 
the Commission in Investment Company Act Release No. 28584 (Jan. 13, 
2009) (``Summary Prospectus Rule''). Applicants state that such 
amendment is warranted because the Commission's amendments to Form N-1A 
with regard to exchange-traded funds as part of the Summary Prospectus 
Rule reflect the Commission's view with respect to the appropriate 
types of prospectus and annual report disclosures for an exchange-
traded fund.

[[Page 28737]]

    7. Applicants also seek to amend the Prior Order to delete the 
relief granted from section 24(d) of the Act. Applicants state that the 
deletion of the exemption from section 24(d) that was granted in the 
Prior Order is warranted because the adoption of the Summary Prospectus 
Rule should supplant any need by a Fund to use a product description 
(``Product Description''). The deletion of the relief granted with 
respect to section 24(d) of the Act from the Prior Order will also 
result in the deletion of related discussions in the Prior 
Applications, revision of the Prior Applications to delete references 
to Product Descriptions including in the conditions, and the deletion 
of condition 7 of the Prior Order.

Applicants' Conditions

    Applicants agree that any amended order of the Commission granting 
the requested relief will be subject to the same conditions as those 
imposed by the Prior Order, except for condition 7 to the Prior Order, 
which will be deleted, and conditions 2 and 5, which are revised as 
follows: \3\
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    \3\ All representations and conditions contained in the 
application and the Prior Applications that require a Fund to 
disclose particular information in the Fund's Prospectus and/or 
annual report shall remain effective with respect to the Fund until 
the time that the Fund complies with the disclosure requirements 
adopted by the Commission in Investment Company Act Release No. 
28584 (Jan. 13, 2009). Defined terms used in the following 
conditions that are not otherwise defined in this notice or the 
application have the same meanings as in the Prior Applications.
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    Condition 2. Each Fund's Prospectus will clearly disclose that, for 
the purposes of the Act, Shares are issued by the Funds and that the 
acquisition of Shares by investment companies is subject to the 
restrictions of section 12(d)(1) of the Act, except as permitted by an 
exemptive order that permits registered investment companies to invest 
in a Fund beyond the limits of section 12(d)(1), subject to certain 
terms and conditions, including that a registered investment company 
enter into an agreement with the Fund regarding the terms of the 
investment.
    Condition 5. The Web site maintained for the Corporation, which is 
and will be publicly accessible at no charge, will contain the 
following information, on a per Share basis, for each Fund: (a) The 
prior Business Day's NAV and the Bid/Ask Price and a calculation of the 
premium or discount of the Bid/Ask Price at the time of calculation of 
the NAV against such NAV; and (b) data in chart format displaying the 
frequency distribution of discounts and premiums of the daily Bid/Ask 
Price against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Florence E. Harmon,
 Deputy Secretary.
[FR Doc. E9-14192 Filed 6-16-09; 8:45 am]
BILLING CODE 8010-01-P