Document ID: SEC-2005-0384-0001
Agency: sec
Document Type: Notice
Title: Rydex ETF Trust, et al.; Notice of Application
Posted Date: 2005-12-14T05:00Z

[Federal Register: December 14, 2005 (Volume 70, Number 239)]
[Notices]               
[Page 74056-74059]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14de05-103]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27183; 812-12935]

 
Rydex ETF Trust, et al.; Notice of Application

December 8, 2005.
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 an 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 amend a prior order to 
permit principal underwriters and brokers and dealers to sell shares of 
certain registered open-end management investment companies, certain of 
which operate as exchange-traded funds, to other registered open-end 
management investment companies that are not part of the same group of 
investment companies.\1\ The order would also amend a condition in 
another prior order.\2\
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    \1\ PADCO Advisors, Inc., et al., Investment Company Act Rel. 
Nos. 24678 (Oct. 5, 2000) (notice) and 24722 (Oct. 31, 2000) (order) 
(``Original Order'').
    \2\ Rydex ETF Trust, et al., Investment Company Act Rel. Nos. 
25948 (Feb. 27, 2003) (notice) and 25970 (Mar. 25, 2003) (order) 
(``ETF Order'').

Applicants: Rydex ETF Trust, Rydex Series Funds, Rydex Dynamic Funds, 
PADCO Advisors, Inc. (``PADCO'') and PADCO Advisors II, Inc. (``PADCO 
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II'').

Filing Dates: The application was filed on February 28, 2003, and 
amended on February 19, 2004, June 4, 2004 and September 29, 2005. 
Applicants have agreed to file a final amendment during the notice 
period, the substance of which is reflected here.

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 January 3, 2006, 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 20549-9303; Applicants, 9601 Blackwell 
Road, Suite 500, Rockville, MD 20850.

FOR FURTHER INFORMATION CONTACT: Stacy L. Fuller, Branch Chief, and 
Michael W. Mundt, Senior Special Counsel, at (202) 551-6821 (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, 100 F Street, NE., Washington, DC 
20549-0102 (tel. 202-551-5850).

Applicants' Representations:

    1. Rydex Series Funds and Rydex Dynamic Funds (the ``Original 
Trusts'')

[[Page 74057]]

and Rydex ETF Trust are open-end management investment companies 
registered under the Act, each of which is comprised of separate series 
(``Rydex Funds'' or ``Funds''). PADCO and PADCO II, which do business 
as Rydex Investments, are Maryland corporations registered as 
investment advisers under the Investment Advisers Act of 1940 
(``Advisers Act''). All Rydex Funds are, and will be, advised by PADCO, 
PADCO II or an entity that is controlling, controlled by or under 
common control with PADCO and PADCO II and is registered as an 
investment adviser under the Advisers Act, and are, and will be, in the 
same group of investment companies, as defined in section 
12(d)(1)(G)(ii) of the Act.
    2. The Commission issued the Original Order to the Original Trusts 
and PADCO upon their application (``Original Application'') to permit 
registered open-end management investment companies (``Funds of 
Funds'') that are not part of the same group of investment companies as 
the Original Trusts to acquire shares of the Rydex Funds beyond the 
limits of section 12(d)(1)(A) of the Act, and to permit the Original 
Trusts, and each existing and future registered open-end management 
investment company that is part of the same group of investment 
companies as the Original Trusts to sell shares beyond the limits in 
section 12(d)(1)(B) of the Act. The Commission issued the ETF Order to 
permit the series of Rydex ETF Trust (``Rydex ETF Funds'') to issue 
shares of limited redeemability (``Rydex ETF Shares'' or ``Shares'') 
that trade in the secondary market at negotiated prices.
    3. Applicants request an order amending both the Original Order and 
the ETF Order. The requested order would amend the Original Order to 
(a) permit any principal underwriter of a Rydex Fund and broker or 
dealer (``Broker'') registered under the Securities Exchange Act of 
1934 knowingly to sell shares of Rydex Funds, including Rydex ETF 
Shares, beyond the limits set forth in section 12(d)(1)(B) to Funds of 
Funds and (b) modify certain terms and conditions of the Original 
Order. In addition, the requested order would amend a condition of the 
ETF Order in order to render it consistent with the relief from section 
12(d)(1) granted by the Original Order as modified by the requested 
order.\3\
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    \3\ Applicants state that, except for Brokers and Funds of 
Funds, all parties that currently intend to rely on the requested 
order are named as applicants. Any other party that relies on the 
requested order in the future, including principal underwriters, 
Brokers and Funds of Funds, will comply with the terms and 
conditions of the Original Application, as amended by this 
application. Applicants acknowledge that Funds of Funds may rely on 
the requested order only to invest in Rydex Funds and not in any 
other registered investment company. Applicants state that Funds of 
Funds do not include Rydex Funds.
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Applicants' Legal Analysis

A. Original Order

    1. Section 12(d)(1)(B) prohibits any registered open-end investment 
company, principal underwriter or Broker from knowingly selling any 
security issued by an open-end investment company (``acquired 
company'') to another investment company (``acquiring company'') if the 
sale would cause either the acquiring company to own more than 3% of 
the acquired company's voting stock or investment companies generally 
to own more than 10% of the acquired company's voting stock. Applicants 
state that the Rydex Funds, including Rydex ETF Funds, are permitted 
under the Original Order to sell their shares to Funds of Funds in 
excess of the limits of section 12(d)(1)(B). However, applicants state 
that because Rydex ETF Shares have begun to be listed and traded on a 
national securities exchange, as defined in section 2(a)(26) of the 
Act, or on The Nasdaq Stock Market since the Original Order, Brokers 
are now virtually certain to be involved in sales of Rydex ETF Shares 
to Funds of Funds, which may require the requested relief. Accordingly, 
applicants seek to amend the Original Order to permit any principal 
underwriter and Broker knowingly to sell shares of Rydex Funds to Funds 
of Funds in excess of the limits prescribed by section 12(d)(1)(B).
    2. Applicants also seek to clarify the Original Order in certain 
respects. First, applicants seek to clarify that a Fund of Funds that 
intends to rely on the amended order will enter into a participation 
agreement with the relevant Rydex Fund before exceeding any of the 
investment limits of section 12(d)(1)(A). Second, applicants seek to 
amend the Original Order to better address situations where a Fund of 
Funds employs an investment adviser within the meaning of section 
2(a)(20)(A) of the Act (``Fund of Funds Adviser'') and one or more 
investment advisers within the meaning of section 2(a)(20)(B) of the 
Act (``Subadvisers''). Applicants state that any investment adviser to 
a Fund of Funds will be registered, or exempt from registration, under 
the Advisers Act.
    3. Applicants state that their legal analysis is unchanged from 
that provided in the Original Application. Specifically, applicants 
state that they will continue to be, and that any principal underwriter 
and Brokers will be, fully subject to all of the terms and conditions 
of the Original Order, as amended by the requested order. Applicants 
posit that the proposed amendments raise no additional regulatory or 
investor protection concerns that are not addressed by the terms and 
conditions of the requested order. Applicants, therefore, contend that 
the previously requested relief, as it would be amended, will be (a) 
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, (b) consistent with the public interest and the 
protection of investors, and (c) conducted on terms that are reasonable 
and fair and do not involve overreaching on the part of any person 
concerned, and consistent with the policy of each registered fund 
involved and with the purposes of the Act.

B. ETF Order

    4. Existing condition 2 to the ETF Order provides that the 
prospectus (``Prospectus'') and the product description (``Product 
Description'') of each Rydex ETF Fund will disclose that Rydex ETF 
Shares are issued by a Rydex Fund and that the acquisition of Rydex ETF 
Shares is subject to the restrictions of section 12(d)(1). In light of 
the relief requested to permit Funds of Funds to purchase, and the 
principal underwriter, Brokers and Rydex ETF Funds to sell, Rydex ETF 
Shares in excess of the limits of sections 12(d)(1)(A) and (B), 
respectively, applicants seek to replace existing condition 2 with 
condition 14, as stated below. Condition 14 generally provides that the 
Funds of Funds will be alerted that they may invest in Rydex ETF Funds 
in excess of the limits of section 12(d)(1) to the extent that they 
comply with the terms and conditions of the Original Order, as amended 
by the requested order, including the requirement that they enter into 
a participation agreement with the Rydex ETF Fund regarding the terms 
of the investment.

Applicants' Conditions

A. Original Order

    Applicants agree the conditions to the Original Order will be 
superseded by, and the requested order will be subject to, the 
following conditions:
    1. (a) The Fund of Funds Adviser, (b) any person controlling, 
controlled by, or under common control with the Fund of Funds Adviser, 
and (c) any investment

[[Page 74058]]

company or issuer that would be an investment company but for section 
3(c)(1) or 3(c)(7) of the Act that is advised or sponsored by the Fund 
of Funds Adviser, or any person controlling, controlled by, or under 
common control with the Fund of Funds Adviser (collectively, the 
``Adviser Group'') will not control (individually or in the aggregate) 
a Rydex Fund within the meaning of section 2(a)(9) of the Act. (a) Any 
Subadviser, (b) any person controlling, controlled by, or under common 
control with the Subadviser, and (c) any investment company or issuer 
that would be an investment company but for section 3(c)(1) or 3(c)(7) 
of the Act (or portion of such investment company or issuer) advised or 
sponsored by the Subadviser or any person controlling, controlled by, 
or under common control with the Subadviser (collectively, the 
``Subadviser 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 Adviser Group or the Subadviser Group, each in the 
aggregate, becomes a holder of more than 25 percent of the outstanding 
voting securities of a Rydex Fund, it 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. This condition does not apply to the Subadviser 
Group with respect to a Rydex Fund for which the Subadviser or a person 
controlling, controlled by, or under common control with the Subadviser 
acts as the investment adviser within the meaning of section 
2(a)(20)(A) of the Act.
    2. No Fund of Funds or Fund of Funds Adviser, Subadviser, promoter, 
principal underwriter, or any person controlling, controlled by, or 
under common control with any of those entities (each, a ``Fund of 
Funds Affiliate'') will 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(s), 
promoter, principal underwriter, or 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 Funds Adviser and any Subadviser 
are 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. Once an investment by a Fund of Funds in the securities of a 
Rydex Fund exceeds the limit in section 12(d)(1)(A)(i) of the Act, the 
board of trustees of the Rydex Fund (``Board of Trustees''), including 
a majority of the disinterested trustees, will determine that any 
consideration paid by the Rydex Fund to the 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. This condition does not apply with respect to any 
services or transactions between a Rydex Fund and its investment 
adviser(s), or any person controlling, controlled by, or under common 
control with such investment adviser(s).
    5. No Fund of Funds or Fund of Funds Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to a Rydex 
Fund) will cause a Rydex Fund to purchase a security in an offering of 
securities during the existence of any underwriting or selling 
syndicate of which a principal underwriter is an officer, director, 
member of an advisory board, Fund of Funds Adviser, Subadviser or 
employee of the Fund of Funds, or a person of which any such officer, 
director, member of an advisory board, Fund of Funds Adviser, 
Subadviser or employee is an affiliated person (each, an ``Underwriting 
Affiliate,'' except that any person whose relationship to the Rydex 
Fund is covered by section 10(f) of the Act is not an Underwriting 
Affiliate). An offering of securities during the existence of an 
underwriting or selling syndicate of which a principal underwriter is 
an Underwriting Affiliate is 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 
once an investment by a Fund of Funds in the securities of the Rydex 
Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act, 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 the Rydex Fund. 
The Board of Trustees will consider, among other things, (i) whether 
the purchases were consistent with the investment objectives and 
policies of the Rydex Fund, (ii) 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 (iii) whether the amount of 
securities purchased by the Rydex Fund in Affiliated Underwritings and 
the amount purchased directly from an Underwriting Affiliate have 
changed significantly from prior years. The Board of Trustees shall 
take any appropriate actions based on its review, including, if 
appropriate, the institution of procedures designed to assure that 
purchases of securities in Affiliated Underwritings are in the best 
interest of shareholders.
    7. Each Rydex Fund 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 shall maintain and 
preserve for a period of not less than six years from the end of the 
fiscal year in which any purchase in an Affiliated Underwriting 
occurred, the first two years in an easily accessible place, a written 
record of each purchase of securities in Affiliated Underwritings once 
an investment by a Fund of Funds in the securities of the Rydex Fund 
exceeds the limit of section 12(d)(1)(A)(i), 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 Trustees' determinations were made.
    8. Prior to an investment in a Rydex Fund in excess of the limits 
in section 12(d)(1)(A), each Fund of Funds and the Rydex Fund will 
execute an agreement stating, without limitation, that their boards of 
directors and their investment advisers understand the terms and 
conditions of the order and agree to fulfill their responsibilities 
under the order. At the time of its investment in 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 will also transmit to the Rydex Fund a list of the names of each 
Fund

[[Page 74059]]

of Funds Affiliate and Underwriting Affiliate. The Fund of Funds will 
notify the Rydex Fund of any changes to the list of the names 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 the duration 
of the investment and for a period of not less than six years 
thereafter, 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 such advisory contract are based on services provided 
that will be in addition to, rather than duplicative of, the services 
provided under the advisory contract(s) 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 the Fund of Funds in an amount at least equal to any compensation 
(including fees received pursuant to any plan adopted by a Rydex Fund 
under rule 12b-1 under the Act) received from a Rydex Fund by the Fund 
of Funds Adviser, or an affiliated person of the Fund of Funds Adviser, 
other than any advisory fees paid to the Fund of Funds Adviser or its 
affiliated person by the Rydex Fund, in connection with the investment 
by the Fund of Funds in the Rydex Fund. Any Subadviser will waive fees 
otherwise payable to the Subadviser, directly or indirectly, by the 
Fund of Funds in an amount at least equal to any compensation received 
from a Rydex Fund by the Subadviser, or an affiliated person of the 
Subadviser, other than any advisory fees paid to the Subadviser or its 
affiliated person by the Rydex Fund, in connection with the investment 
by the Fund of Funds in the Rydex Fund made at the direction of the 
Subadviser. In the event that the Subadviser waives fees, the benefit 
of the waiver will be passed through to the Fund of Funds.
    11. Any sales charges and/or service fees charged with respect to 
shares of the Funds of Funds will not exceed the limits applicable to a 
fund of funds as set forth in rule 2830 of the NASD Conduct Rules.
    12. No Rydex Fund will acquire securities of any investment company 
or company relying on section 3(c)(1) or 3(c)(7) of the Act 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.
    13. The board of directors of any Fund of Funds and the Board of 
Trustees of any Rydex Fund will satisfy the fund governance standards 
as defined in rule 0-1(a)(7) under the Act by the later of (i) the 
compliance date for the rule or (ii) the date on which the Fund of 
Funds and the Rydex Fund execute a Participation Agreement.

B. ETF Order

    Applicants agree to replace condition 2 of the ETF Order with the 
following condition:
    14. Each Fund's Prospectus and Product Description will clearly 
disclose that, for purposes of the Act, Shares are issued by a Fund and 
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 the registered investment company 
enter into an agreement with the Fund regarding the terms of the 
investment.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E5-7339 Filed 12-13-05; 8:45 am]

BILLING CODE 8010-01-P