
[Federal Register: September 18, 2008 (Volume 73, Number 182)]
[Notices]               
[Page 54179-54184]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18se08-87]                         

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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.

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    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'').
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    \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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    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.
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    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\
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    \5\ ``Depositary Receipts'' include American Depositary 
Receipts, Global Depositary Receipts and European Depositary 
Receipts.
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    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
