[Federal Register: August 14, 2007 (Volume 72, Number 156)]
[Notices]
[Page 45469-45479]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14au07-101]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56218; File No. SR-Amex-2007-74]
Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto
Relating to the Listing and Trading of Shares of Funds of the Rydex ETF
Trust
August 7, 2007.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 13, 2007, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change (``Exchange Notice'') as
described in Items I, II, and III below, which Items have been
substantially prepared by the Exchange. On July 31, 2007, Amex
submitted Amendment No. 1 to the proposed rule change. The Commission
is publishing this notice to solicit comments on the proposed rule
[[Page 45470]]
change, as amended, from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade the shares (the ``Shares'')
of forty-five funds of the Rydex ETF Trust (the ``Trust'') \3\ based on
numerous domestic securities indexes. The text of the proposed rule
change is available at Amex, the Commission's Public Reference Room,
and http://www.amex.com.
---------------------------------------------------------------------------
\3\ The Trust is registered as a business trust under the
Delaware Corporate Code.
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Amex Rules 1000A-AEMI and 1001A-1005A provide standards for the
listing of Index Fund Shares, which are securities issued by an open-
end management investment company for exchange trading. These
securities are registered under the Investment Company Act of 1940
(``1940 Act''), as well as under the Act. Index Fund Shares are defined
in Amex Rule 1000A-AEMI(b)(1) generally as securities based on a
portfolio of stocks or fixed income securities that seek to provide
investment results that correspond generally to the price and yield of
a specified foreign or domestic stock index or fixed income securities
index. Amex Rule 1000A-AEMI(b)(2) permits the Exchange to list and
trade Index Fund Shares that seek to provide investment results that
exceed the performance of an underlying securities index by a specified
multiple or that seek to provide investment results that correspond to
a specified multiple of the inverse or opposite of the index's
performance.\4\
---------------------------------------------------------------------------
\4\ See Amex Rule 1000A-AEMI(b)(2)(iii) and Commentary .02
thereto (providing that the listing and trading of Index Fund Shares
under paragraph (b)(2) thereof cannot be approved by the Exchange
pursuant to Rule 19b-4(e) under the Act (17 CFR 240.19b-4(e)).
---------------------------------------------------------------------------
The Exchange proposes to list under Amex Rule 1000A-AEMI the Shares
of forty-five new funds of the Trust that are designated as the Rydex
Leveraged Funds (the ``Leveraged Funds''), Rydex Inverse Funds (the
``Inverse Funds''), and Rydex Leveraged Inverse Funds (the ``Leveraged
Inverse Funds,'' and together with the Leveraged Funds and Inverse
Funds, collectively, the ``Funds''). Each of the Funds will have a
distinct investment objective by attempting, on a daily basis, to
correspond to a specified multiple of the performance, or the inverse
performance, of a particular equity securities index as described
below.
The Funds will be based on the following benchmark indexes: (1) The
S&P 500 Index; (2) the S&P MidCap 400 Index; (3) the S&P Small Cap 600
Index; (4) the Russell 1000 Index; (5) the Russell 2000 Index; (6) the
Russell 3000 Index; (7) the S&P 500 Consumer Discretionary Index; (8)
the S&P 500 Consumer Staples Index; (9) the S&P 500 Energy Index; (10)
the S&P 500 Financials Index; (11) the S&P 500 HealthCare Index; (12)
the S&P 500 Industrials Index; (13) the S&P 500 Information Technology
Index; (14) the S&P 500 Materials Index; and (15) the S&P 500 Utilities
Index (each index individually referred to as an ``Underlying Index,''
and all Underlying Indexes collectively referred to as the ``Underlying
Indexes'').\5\
---------------------------------------------------------------------------
\5\ Amex states that certain exchange-traded funds (``ETFs'')
and/or options based on each of the Underlying Indexes are currently
listed and traded on the Exchange. See infra notes 10-21 and
accompanying text. The Statement of Additional Information (``SAI'')
for the Funds discloses that each Fund reserves the right to
substitute a different Underlying Index. Substitutions can occur if
an Underlying Index becomes unavailable, no longer serves the
investment needs of shareholders, the Fund experiences difficulty in
achieving investment results that correspond to the applicable
Underlying Index, or for any other reason determined in good faith
by the Board (as defined herein). In such instance, the substitute
index would attempt to measure the same general market as the then
current Underlying Index. Consistent with applicable law,
shareholders would be notified (either directly or through their
respective intermediary) if a Fund's Underlying Index is replaced.
As explained herein, the continued listing standards under Amex Rule
1002A would apply to the Shares. See Amex Rule 1002A(b)(i)(B)
(providing that the Exchange will consider the suspension of trading
in, or removal from listing of, a series of Index Fund Shares if,
among other circumstances, the Underlying Index or portfolio is
replaced with a new index or portfolio, subject to certain
exceptions).
---------------------------------------------------------------------------
The Leveraged Funds will seek daily investment results, before fees
and expenses, that correspond to twice (200%) the daily performance of
the corresponding Underlying Indexes. The net asset value (``NAV'') of
the Shares of each of these Leveraged Funds, if successful in meeting
its objective, should increase, on a percentage basis, approximately
twice as much as the respective Fund's Underlying Index gains when the
prices of the securities in such Underlying Index increase on a given
day, and should decrease approximately twice as much as the respective
Underlying Index loses when such prices decline on a given day.
The Inverse Funds will seek daily investment results, before fees
and expenses, that correspond to the inverse or opposite of the daily
performance (-100%) of the Underlying Indexes. If each of these Inverse
Funds is successful in meeting its objective, the NAV of the Shares of
each Inverse Fund should increase approximately as much, on a
percentage basis, as the respective Underlying Index loses when the
prices of the securities in the Underlying Index decline on a given
day, or should decrease approximately as much as the respective
Underlying Index gains when the prices of the securities in the
Underlying Index rise on a given day.
The Leveraged Inverse Funds will seek daily investment results,
before fees and expenses, that correspond to twice the inverse (-200%)
of the daily performance of the Underlying Indexes. If each of these
Leveraged Inverse Funds is successful in meeting its objective, the NAV
of the Shares of each Leveraged Inverse Fund should increase
approximately twice as much, on a percentage basis, as the respective
Underlying Index loses when the prices of the securities in the
Underlying Index decline on a given day, or should decrease
approximately twice as much as the respective Underlying Index gains
when the prices of the securities in the Underlying Index rise on a
given day.
Rydex Investments is the investment advisor (the ``Advisor'') to
each Fund. The Advisor is registered under the Investment Advisers Act
of 1940.\6\
[[Page 45471]]
While the Advisor will manage each Fund, the Trust's Board of Trustees
(the ``Board'') will have overall responsibility for the Funds'
operations. The composition of the Board is, and will be, in compliance
with the requirements of Section 10 of the 1940 Act.\7\ Rydex
Distributors, Inc. (the ``Distributor''), a broker-dealer registered
under the Act, will act as the distributor and principal underwriter of
the Shares. State Street Bank & Trust will act as the index receipt
agent (the ``Index Receipt Agent'') for which it will receive fees. The
Index Receipt Agent will be responsible for transmitting the Deposit
List (as defined herein) to the National Securities Clearing
Corporation (``NSCC'') and for the processing, clearance, and
settlement of purchase and redemption orders through the facilities of
the Depository Trust Company (``DTC'') and NSCC on behalf of the Trust.
The Index Receipt Agent will also be responsible for the coordination
and transmission of files and purchase and redemption orders between
the Distributor and the NSCC.
---------------------------------------------------------------------------
\6\ The Trust, Advisor, and Distributor (``Applicants'') have
filed with the Commission an application for an order under the 1940
Act (the ``Application'') for the purpose of exempting the Funds of
the Trust from various provisions of the 1940 Act. See Investment
Company Act Release No. 27703 (February 20, 2007), 72 FR 8810
(February 27, 2007) (File No. 812-13337) (providing notification of
an application for an order under Section 6(c) of the 1940 Act for
an exemption from Sections 2(a)(32), 5(a)(1), 22(d), and 24(d) of
the 1940 Act and Rule 22c-1 under the 1940 Act, and under Sections
6(c) and 17(b) of the Act for an exemption from Sections 17(a)(1)
and (a)(2) of the 1940 Act).
\7\ 15 U.S.C. 80a-10 (setting forth certain restrictions and
requirements with respect to affiliations or interest of directors,
officers, and employees of registered investment companies).
---------------------------------------------------------------------------
Shares of the Funds issued by the Trust will be a class of
exchange-traded securities that represent an interest in the portfolio
of a particular Fund.\8\ The Shares will be registered in book-entry
form only, and the Trust will not issue individual share certificates.
DTC or its nominee will be the record or registered owner of all
outstanding Shares. Beneficial ownership of Shares will be shown on the
records of DTC or DTC participants.
---------------------------------------------------------------------------
\8\ The Trust is registered as a business trust under the
Delaware Corporate Code.
---------------------------------------------------------------------------
Underlying Indexes
While the Exchange proposes to list and trade the Shares of the
Funds pursuant to section 19(b)(1) of the Act, the Exchange represents
that the Underlying Index components comply with the generic listing
standards set forth in Commentary .02 to Amex Rule 1000A-AEMI.\9\
---------------------------------------------------------------------------
\9\ E-mail from Jeffrey P. Burns, Associate General Counsel,
Amex, to Edward Cho, Special Counsel, Division of Market Regulation,
Commission, dated August 1, 2007 (clarifying the basis for the
Exchange's proposal to list and trade the Shares) (``Amex
Confirmation'').
---------------------------------------------------------------------------
S&P 500 Index. The S&P 500 Index is a capitalization-weighted index
composed of 500 common stocks, which are chosen by Standard & Poor's
(``S&P'') on a statistical basis. As of July 10, 2007, the S&P 500
Index included companies with an average capitalization of $27.895
billion. This Underlying Index has been approved for options trading
and is also the basis for an ETF.\10\
---------------------------------------------------------------------------
\10\ See Securities Exchange Act Release No. 31591 (December 11,
1992), 57 FR 60253 (December 18, 1992) (SR-Amex-92-18) (approving
the listing and trading of portfolio depository receipts (``PDRs''),
including receipts based on the S&P 500 Index).
---------------------------------------------------------------------------
S&P MidCap 400 Index. The S&P MidCap 400 Index is a modified
capitalization-weighted index composed of 400 mid-cap stocks chosen by
S&P for market size, liquidity, and industry group representation. This
Underlying Index covers approximately 7% of the total market
capitalization of the U.S. equities market. As of July 10, 2007, the
S&P MidCap 400 Index included companies with an average capitalization
of $3.219 billion. This Underlying Index has been approved for options
trading and is also the basis for an ETF.\11\
---------------------------------------------------------------------------
\11\ See Securities Exchange Act Release No. 35534 (March 24,
1995), 60 FR 16686 (March 31, 1995) (SR-Amex-94-52) (approving the
listing and trading of PDRs based on the S&P 400 Midcap Index).
---------------------------------------------------------------------------
S&P SmallCap 600 Index. The S&P SmallCap 600 Index is a measure of
small-cap company stock performance. It is a float-adjusted, market-
capitalization-weighted index of 600 U.S. operating companies.
Securities are selected for inclusion in this Underlying Index by an
S&P committee through a non-mechanical process that factors criteria
such as liquidity, price, market capitalization, financial viability,
and public float. As of July 10, 2007, the S&P SmallCap 600 Index
included companies with an average capitalization of $1.075 billion.
This Underlying Index has been approved for options trading and is also
the basis for an ETF.\12\
---------------------------------------------------------------------------
\12\ See Securities Exchange Act Release No. 35532 (March 24,
1995), 60 FR 16518 (March 30, 1995) (SR-CBOE-94-43) (approving the
listing and trading of options on the S&P SmallCap 600 Index).
---------------------------------------------------------------------------
Russell 1000 Index. The Russell 1000 Index measures the performance
of the 1,000 largest companies in, and represents approximately 92% of
the total market capitalization of, the Russell 3000 Index. As of July
10, 2007, the Russell 1000 Index included companies with an average
market capitalization of approximately $16.193 billion. This Underlying
Index has been approved for options trading and is also the basis for
an ETF.\13\
---------------------------------------------------------------------------
\13\ See Securities Exchange Act Release No. 53191 (January 30,
2006), 71 FR 6111 (February 6, 2006) (SR-Amex-2005-061) (approving
the listing and trading of options on the Russell Indexes, including
the Russell 1000, 2000, and 3000 Indexes).
---------------------------------------------------------------------------
Russell 2000 Index. The Russell 2000 Index measures the performance
of the 2,000 smallest companies in, and represents approximately 8% of
the total market capitalization of, the Russell 3000 Index. As of July
10, 2007, the Russell 2000 Index included companies with an average
market capitalization of approximately $899 million. This Underlying
Index has been approved for options trading and is also the basis for
an ETF.\14\
---------------------------------------------------------------------------
\14\ See id.
---------------------------------------------------------------------------
Russell 3000 Index. The Russell 3000 Index measures the performance
of the 3,000 largest U.S. companies based on total market
capitalization and represents approximately 98% of the investable U.S.
equity market. As of July 10, 2007, the Russell 3000 Index included
companies with an average market capitalization of approximately $6.165
billion. This Underlying Index has been approved for options trading
and is also the basis for an ETF.\15\
---------------------------------------------------------------------------
\15\ See id.
---------------------------------------------------------------------------
S&P 500 Consumer Discretionary Index. The S&P 500 Consumer
Discretionary Index consists of the common stocks of the following
industries that comprise the Consumer Discretionary sector of the S&P
500 Index: automobiles and components, consumer durables, apparel,
hotels, restaurants, leisure, media, and retailing. As of July 10,
2007, the S&P 500 Consumer Discretionary Index included companies with
an average capitalization of $16.685 billion. This Underlying Index is
the basis for both the Select Sector SPDR--Consumer Discretionary ETF
and the Rydex S&P Equal Weight Consumer Discretionary ETF listed and
traded on the Exchange.
S&P 500 Consumer Staples Index. The S&P 500 Consumer Staples Index
consists of the common stocks of the following industries that comprise
the Consumer Staples sector of the S&P 500 Index: food and drug
retailing, beverages, food products, tobacco, household products, and
personal products. As of July 10, 2007, the S&P 500 Consumer Staples
Index included companies with an average capitalization of $35.494
billion. This Underlying Index is the basis for both the Select Sector
SPDR--Consumer Staples ETF \16\ and the Rydex S&P Equal Weight Consumer
Staples ETF listed and traded on the Exchange.
---------------------------------------------------------------------------
\16\ See Securities Exchange Act Release No. 40749 (December 4,
1998), 63 FR 68483 (December 11, 1998) (SR-Amex-98-29) (approving
the listing and trading of certain Select SPDR ETFs).
---------------------------------------------------------------------------
S&P 500 Energy Index. The S&P 500 Energy Index consists of the
common stocks of the following industries that comprise the Energy
sector of the S&P 500 Index: oil and gas exploration, production,
marketing, refining and/or transportation, and energy equipment and
services industries. As of July 10,
[[Page 45472]]
2007, the S&P 500 Energy Index included companies with an average
capitalization of $46.785 billion. This Underlying Index is the basis
for both the Select Sector SPDR--Energy ETF \17\ and the Rydex S&P
Equal Weight Energy ETF listed and traded on the Exchange.
---------------------------------------------------------------------------
\17\ See id.
---------------------------------------------------------------------------
S&P 500 Financials Index. The S&P 500 Financials Index consists of
the common stocks of the following industries that comprise the
Financials sector of the S&P 500 Index: banks, diversified financials,
brokerage, asset management insurance, and real estate, including real
estate investment trusts. As of July 10, 2007, the S&P 500 Financials
Index included companies with an average capitalization of $30.683
billion. This Underlying Index is the basis for both the Select Sector
SPDR--Financials ETF \18\ and the Rydex S&P Equal Weight Financials ETF
listed and traded on the Exchange.
---------------------------------------------------------------------------
\18\ See id.
---------------------------------------------------------------------------
S&P 500 Health Care Index. The S&P 500 Health Care Index consists
of the common stocks of the following industries that comprise the
Health Care sector of the S&P 500 Index: health care equipment and
supplies, health care providers and services, and biotechnology and
pharmaceuticals. As of July 10, 2007, the S&P 500 Health Care Index
included companies with an average capitalization of $29.614 billion.
This Underlying Index is the basis for both the Select Sector SPDR--
Health Care ETF and the Rydex S&P Equal Weight Health Care ETF listed
and traded on the Exchange.
S&P 500 Industrials Index. The S&P 500 Industrials Index consists
of the common stocks of the following industries that comprise the
Industrials sector of the S&P 500 Index: aerospace and defense,
building products, construction and engineering, electrical equipment,
conglomerates, machinery, commercial services and supplies, air freight
and logistics, airlines, and marine, road, and rail transportation
infrastructure. As of July 10, 2007, the S&P 500 Industrials Index
included companies with an average capitalization of $28.706 billion.
This Underlying Index is the basis for both the Select Sector SPDR--
Industrials ETF \19\ and the Rydex S&P Equal Weight Industrials ETF
listed and traded on the Exchange.
---------------------------------------------------------------------------
\19\ See id.
---------------------------------------------------------------------------
S&P 500 Information Technology Index. The S&P 500 Information
Technology Index consists of the common stocks of the following
industries that comprise the Information Technology sector of the S&P
500 Index: internet equipment, computers and peripherals, electronic
equipment, office electronics and instruments, semiconductor equipment
and products, diversified telecommunication services, and wireless
telecommunication services. As of July 10, 2007, the S&P 500
Information Technology Index included companies with an average
capitalization of $30.947 billion. This Underlying Index is the basis
for both the Select Sector SPDR--Technology ETF \20\ and the Rydex S&P
Equal Weight Technology ETF listed and traded on the Exchange.
---------------------------------------------------------------------------
\20\ See id.
---------------------------------------------------------------------------
S&P 500 Materials Index. The S&P 500 Materials Index consists of
the common stocks of the following industries that comprise the
Materials sector of the S&P 500 Index: chemicals, construction
materials, containers and packaging, metals and mining, and paper and
forest products. As of July 10, 2007, the S&P 500 Materials Index
included companies with an average capitalization of $15.358 billion.
This Underlying Index is the basis for both the Select Sector SPDR--
Materials ETF and the Rydex S&P Equal Weight Materials ETF listed and
traded on the Exchange.
S&P 500 Utilities Index. The S&P 500 Utilities Index consists of
the common stocks of the following industries that comprise the
Utilities sector of the S&P 500 Index: electric utilities, gas
utilities, multi-utilities, unregulated power and water utilities, and
telecommunication service companies, including fixed-line, cellular,
wireless, high bandwidth, and fiber-optic cable networks. As of July
10, 2007, the S&P 500 Utilities Index included companies with an
average capitalization of $14.794 billion. This Underlying Index is the
basis for both the Select Sector SPDR--Utilities ETF \21\ and the Rydex
S&P Equal Weight Utilities ETF listed and traded on the Exchange.
---------------------------------------------------------------------------
\21\ See id.
---------------------------------------------------------------------------
Investment Objective of the Funds
Each Leveraged Fund will seek investment results that correspond,
before fees and expenses, to twice (200%) the daily performance of an
Underlying Index and will invest its assets based upon the same
strategies as conventional index funds. Rather than hold positions in
equity securities and financial instruments intended to create exposure
to 100% of the daily performance of an Underlying Index, these Funds
will hold positions in equity securities and certain financial
instruments \22\ designed to create exposure equal to twice (200%),
before fees and expenses, the daily performance of an Underlying Index.
These Leveraged Funds generally will hold at least 80% of their net
assets, plus any borrowings for investment purposes, in the component
equity securities of the relevant Underlying Index and Financial
Instruments with economic characteristics that should perform similar
to that of the relevant Underlying Index. The remainder of assets will
be devoted to certain Financial Instruments and money market
instruments \23\ that are intended to create the additional needed
exposure to such Underlying Index necessary to pursue its investment
objective.
---------------------------------------------------------------------------
\22\ The financial instruments to be held by any of the Funds
may include stock index futures contracts, options on futures
contracts, options on securities and indices, equity caps, collars
and floors, as well as swap agreements, forward contracts,
repurchase agreements, and reverse repurchase agreements (the
``Financial Instruments'').
\23\ Money market instruments include U.S. government securities
and repurchase agreements (the ``Money Market Instruments''). The
Exchange states that repurchase agreements held by the Funds will be
consistent with Rule 2a-7 of the 1940 Act (17 CFR 270.2a-7), i.e.,
remaining maturities of 397 days or less and rated investment-grade.
---------------------------------------------------------------------------
The Inverse Funds will seek daily investment results, before fees
and expenses, of the inverse or opposite (-100%) of the Underlying
Index, and the Leveraged Inverse Funds will seek daily investment
results, before fees and expenses, of twice the inverse or opposite (-
200%) of the daily performance of the Underlying Index. Each of these
Funds will generally hold at least 80% of their respective net assets,
plus any borrowings for investment purposes, in instruments with
economic characteristics that should perform opposite to that of the
Underlying Index. Each Inverse and Leveraged Inverse Fund will rely on
establishing positions in Financial Instruments that provide, on a
daily basis, the inverse or opposite of, or twice the inverse or
opposite of, as the case may be, the performance of the relevant
Underlying Index. Normally, 100% of the value of the portfolios of each
Inverse and Leveraged Inverse Fund will be devoted to Financial
Instruments and Money Market Instruments.
While the Advisor will attempt to minimize any ``tracking error''
between the investment results of a particular Fund and the performance
(and specified multiple thereof) or the inverse performance (and
specified multiple thereof) of its Underlying Index, certain factors
may tend to cause
[[Page 45473]]
the investment results of a Fund to vary from such relevant Underlying
Index or specified multiple thereof.\24\ The Leveraged Funds are
expected to be highly correlated to each respective Underlying Index
and investment objective (0.95 or greater). The Inverse and Leveraged
Inverse Funds are expected to be highly inversely correlated to each
respective Underlying Index and investment objective (-0.95 or
greater).\25\ In each case, the Funds are expected to have a daily
tracking error of less than 5% (excluding expenses and interest, if
any) relative to the specified multiple or inverse multiple of the
performance of the relevant Underlying Index.
---------------------------------------------------------------------------
\24\ The Exchange states that several factors may cause a Fund
to vary from the relevant Underlying Index and investment objective
including: (1) A Fund's expenses, including brokerage fees (which
may be increased by high portfolio turnover) and the cost of the
investment techniques employed by that Fund; (2) less than all of
the securities in the benchmark Underlying Index being held by a
Fund and securities not included in the benchmark Underlying Index
being held by a Fund; (3) an imperfect correlation between the
performance of instruments held by a Fund, such as futures
contracts, and the performance of the underlying securities in the
cash market; (4) bid-ask spreads (the effect of which may be
increased by portfolio turnover); (5) holding instruments traded in
a market that has become illiquid or disrupted; (6) a Fund's Share
prices being rounded to the nearest cent; (7) changes to the
benchmark Underlying Index that are not disseminated in advance; (8)
the need to conform a Fund's portfolio holdings to comply with
investment restrictions or policies or regulatory or tax law
requirements; (9) early and unanticipated closings of the markets on
which the holdings of a Fund trade, resulting in the inability of
the Fund to execute intended portfolio transactions; and (10) market
movements that run counter to a Fund's investments.
\25\ Correlation is the strength of the relationship between (1)
the change in a Fund's NAV and (2) the change in the benchmark
Underlying Index (investment objective). The statistical measure of
correlation is known as the ``correlation coefficient.'' A
correlation coefficient of +1 indicates a perfect positive
correlation, while a value of -1 indicates a perfect negative
(inverse) correlation. A value of zero would mean that there is no
correlation between the two variables.
---------------------------------------------------------------------------
The Exchange believes that the Shares will not trade at a material
discount or premium to the underlying securities held by a Fund based
on potential arbitrage opportunities. The arbitrage process, which
provides the opportunity to profit from differences in prices of the
same or similar securities, increases the efficiency of the markets and
serves to prevent potentially manipulative efforts. If the price of a
Share deviates enough from the Creation Unit (as defined herein), on a
per-Share basis, to create a material discount or premium, an arbitrage
opportunity is created allowing the arbitrageur to either buy the
Shares at a discount, immediately cancel them in exchange for the
Creation Unit and sell the underlying securities in the cash market at
a profit, or sell the Shares short at a premium and buy the Creation
Unit in exchange for the Shares to deliver against the short position.
In both instances the arbitrageur locks in a profit and the markets
move back into line.
The Portfolio Investment Methodology
The Advisor will seek to establish an investment exposure in each
portfolio corresponding to each Fund's investment objective based on
its ``Portfolio Investment Methodology,'' as described below. The
Exchange states that the Portfolio Investment Methodology is a
mathematical model based on well-established principles of finance that
are widely used by investment practitioners, including conventional
index fund managers.
As set forth in the Application, the Portfolio Investment
Methodology was designed to determine for each Fund the portfolio
investments needed to achieve its stated investment objectives. The
Portfolio Investment Methodology takes into account a variety of
specified criteria, the most important of which are: (1) Net assets
(taking into account creations and redemptions) in each Fund's
portfolio at the end of each trading day; (2) the amount of required
exposure to the Underlying Index; and (3) the positions in equity
securities, Financial Instruments, and/or Money Market Instruments at
the beginning of each trading day. The Advisor, pursuant to such
methodology, will then mathematically determine the end-of-day
positions to establish the required amount of exposure to the
Underlying Index, which will consist of equity securities, Financial
Instruments, and/or Money Market Instruments. The difference between
the start-of-day positions and the required end-of-day positions is the
actual amount of equity securities, Financial Instruments, and/or Money
Market Instruments that must be bought or sold for the day (the
``Solution''). The Solution represents the required exposure and, when
necessary, is converted into an order or orders to be filled that same
day.
Generally, portfolio trades effected pursuant to the Solution are
reflected in the NAV on the first business day (T+1) after the date the
relevant trade is made. Therefore, the NAV calculated for a Fund on a
given day should reflect the trades executed pursuant to the prior
day's Solution. For example, trades pursuant to the Solution calculated
on a Monday afternoon are executed on behalf of the Fund in question on
that day. These trades will then be reflected in the NAV for that Fund
that is calculated as of 4 p.m. Eastern Time (``ET'') on Tuesday.
The timeline for the Portfolio Investment Methodology is as
follows. Authorized Participants (``APs'' or ``Authorized
Participants'') \26\ have a 3 p.m. ET cut-off for orders submitted by
telephone, facsimile, and other electronic means of communication and a
4 p.m. ET cut-off for orders received via mail.\27\ Orders are received
by the Distributor and relayed to the Advisor within ten minutes. The
Advisor will know by 3:10 p.m. ET the number of creation/redemption
orders by APs for that day. Orders are then placed at approximately
3:40 p.m. ET as market-on-close orders. At 4 p.m. ET, the Advisor will
again look at the exposure to make sure that the orders placed are
consistent with the Solution, and as described above, the Advisor will
execute any other transactions in Financial Instruments to assure that
the Fund's exposure is consistent with the Solution.
---------------------------------------------------------------------------
\26\ An Authorized Participant is: (1) Either (a) a broker-
dealer or other participant in the continuous net settlement system
of the NSCC, or (b) a DTC participant; and (2) a party to a
participant agreement with the Distributor.
\27\ The Exchange states that AP orders by mail are exceedingly
rare.
---------------------------------------------------------------------------
Description of Investment Techniques
In attempting to achieve its individual investment objectives, a
Fund may invest its assets in equity securities, Financial Instruments,
and Money Market Instruments. The Leveraged Funds will hold at least
80% of their net assets in the equity securities comprising the
relevant Underlying Index. The remainder of assets, if any, will be
devoted to Financial Instruments and Money Market Instruments that are
intended to create additional needed exposure to such Underlying Index
necessary to pursue the Leveraged Funds' investment objectives. The
Inverse and Leveraged Inverse Funds generally will not invest in equity
securities comprising the applicable Underlying Index, but rather will
hold only Financial Instruments and Money Market Instruments. To the
extent, applicable, each Fund will comply with the requirements of the
1940 Act with respect to ``cover'' for Financial Instruments and, thus,
may hold a significant portion of its assets in liquid instruments in
segregated accounts.
Each Fund may engage in transactions in futures contracts on
designated contract markets where such contracts trade and will only
purchase and sell futures contracts traded on a U.S. futures exchange
or board of trade. Each Fund will comply with the
[[Page 45474]]
requirements of Rule 4.5 of the regulations promulgated by the
Commodity Futures Trading Commission (``CFTC'').\28\
---------------------------------------------------------------------------
\28\ The Exchange states that CFTC Rule 4.5 provides an
exclusion for investment companies registered under the 1940 Act
from the definition of the term ``commodity pool operator'' upon the
filing of a notice of eligibility with the National Futures
Association.
---------------------------------------------------------------------------
Each Fund may enter into swap agreements and/or forward contracts
for the purposes of attempting to gain exposure to the equity
securities of its Underlying Index without actually transacting such
securities. The Exchange states that the counterparties to the swap
agreements and/or forward contracts will be major broker-dealers and
banks. The creditworthiness of each potential counterparty is assessed
by the Advisor's credit committee pursuant to guidelines approved by
the Board. Existing counterparties are reviewed periodically by the
Board. Each Fund may also enter into repurchase and reverse repurchase
agreements with terms of less than one year and will only enter into
such agreements with: (1) Members of the Federal Reserve System; (2)
primary dealers in U.S. government securities; or (3) major broker-
dealers. Each Fund may also invest in Money Market Instruments, in
pursuit of its investment objectives, as ``cover'' for Financial
Instruments, as described above, or to earn interest.
The Trust will adopt certain fundamental policies consistent with
the 1940 Act, and each Fund will be classified as ``non-diversified''
under the 1940 Act. Each Fund, however, intends to maintain the
required level of diversification and otherwise conduct its operations
so as to qualify as a ``regulated investment company'' or ``RIC'' for
purposes of the Internal Revenue Code to relieve the Trust and the
Funds of any liability for Federal income tax to the extent that its
earnings are distributed to shareholders.\29\
---------------------------------------------------------------------------
\29\ See Exchange Notice n.16 (providing a description of the
Internal Revenue Code requirements pertaining to RICs). The Exchange
Notice is available at Amex's Web site (http://www.amex.com).
---------------------------------------------------------------------------
Availability of Information About the Shares and Underlying Indexes
The Trust's Internet Web site (http://www.rydexinvestments.com),
which is and will be publicly accessible at no charge, will contain the
following information for each Fund's Shares: (1) The prior business
day's closing NAV, the reported closing price, and a calculation of the
premium or discount of such price in relation to the closing NAV; (2)
data for a period covering at least the four previous calendar quarters
(or the life of a Fund, if shorter) indicating how frequently each
Fund's Shares traded at a premium or discount to NAV based on the daily
closing price and the closing NAV, and the magnitude of such premiums
and discounts; (3) its prospectus and product description; and (4)
other quantitative information, such as daily trading volume. The
prospectus and/or product description for each Fund will inform
investors that the Trust's Internet Web site has information about the
premiums and discounts at which the Fund's Shares have traded.\30\
---------------------------------------------------------------------------
\30\ The Exchange states that the Application requests relief
from Section 24(d) of the 1940 Act (15 U.S.C. 80a-24(d)), which
would permit dealers to sell Shares in the secondary market
unaccompanied by a statutory prospectus when prospectus delivery is
not required by the Securities Act of 1933. Additionally, if a
product description is being provided in lieu of a prospectus,
Commentary .06 of Amex Rule 1000A-AEMI requires that Amex members
and member organizations provide to all purchasers of a series of
Index Fund Shares a written description of the terms and
characteristics of such securities, in a form prepared by the open-
end management investment company issuing such securities, not later
than the time of confirmation of the first transaction in such
series is delivered to such purchaser. Furthermore, any sales
material will reference the availability of such circular and the
prospectus. Amex Confirmation (confirming the Amex rule requiring
the delivery of a written description of the terms and
characteristics of the Shares).
---------------------------------------------------------------------------
Amex will disseminate for each Fund on a daily basis by means of
the Consolidated Tape Association (``CT'') and CQ High Speed Lines
information with respect to an Indicative Intra-Day Value (the ``IIV'')
(as defined and discussed herein), recent NAV, number of Shares
outstanding, and the estimated cash amount and total cash amount per
Creation Unit. The Exchange will make available on its Web site daily
trading volume, closing prices, NAV, and the final dividend amounts to
be paid for each Fund.
Each Fund's total portfolio composition will be disclosed on the
Web site of the Trust or another relevant Internet Web site as
determined by the Trust and/or the Exchange. The Trust will provide Web
site disclosure of each Fund's portfolio holdings daily and will
include, as applicable, the names and number of Shares held of each
specific equity security, the specific types of Financial Instruments
and characteristics of such Financial Instruments, and the cash
equivalents and amount of cash held in the portfolio of each Fund. This
public Web site disclosure of the portfolio composition of each Fund
and the disclosure by the Advisor of the ``IIV File'' (as described
below) and the portfolio composition file or ``PCF'' (as described
below) will occur at the same time. Therefore, the same portfolio
information (including accrued expenses and dividends) will be provided
on the public Internet Web site(s), as well as in the IIV File and PCF
provided to Authorized Participants. The format of the public Web site
disclosure and the IIV File and PCF will differ because the public Web
site will list all portfolio holdings, while the IIV File and PCF will
similarly provide the portfolio holdings, but in a format appropriate
for Authorized Participants, i.e., the exact components of a Creation
Unit.\31\ Accordingly, each investor will have access to the current
portfolio composition of each Fund through the Trust's Web site and/or
the Exchange's Web site.
---------------------------------------------------------------------------
\31\ The composition will be used to calculate the NAV later
that day.
---------------------------------------------------------------------------
Beneficial owners of Shares (``Beneficial Owners'') will receive
all of the statements, notices, and reports required under the 1940 Act
and other applicable laws. They will receive, for example, annual and
semi-annual Fund reports, written statements accompanying dividend
payments, proxy statements, annual notifications detailing the tax
status of Fund distributions, and Form 1099-DIVs. Some of these
documents will be provided to Beneficial Owners by their brokers, while
others will be provided by the Fund through the brokers.
The daily closing value and the percentage change in the daily
closing value for each Underlying Index will be publicly available on
various Internet Web sites, and data regarding each Underlying Index
will be available from the respective Underlying Index provider.
Several independent data vendors also package and disseminate
Underlying Index data in various value-added formats (including vendors
displaying both securities and Underlying Index levels and vendors
displaying Underlying Index levels only). The value of each Underlying
Index will be updated intra-day on a real-time basis as its individual
component securities change in price. These intra-day values of each
Underlying Index will be disseminated at least every 15 seconds
throughout the trading day by Amex or another organization authorized
by the relevant Underlying Index provider.
Creation and Redemption of Shares
Each Fund will issue and redeem Shares only in aggregations of at
least 50,000 (each aggregation, a ``Creation Unit''). Purchasers of
Creation Units will be able to separate the Creation Units into
individual Shares. Once the
[[Page 45475]]
number of Shares in a Creation Unit is determined, it will not change
thereafter (except in the event of a stock split or similar
revaluation). The initial value of a Share for each of the Funds is
expected to be in the range of $50-$250.
At the end of each business day, the Trust will prepare the list of
names and the required number of Shares of each Deposit Security (as
defined herein) to be included in the next trading day's Creation Unit
for each Leveraged Fund (the ``Deposit List''). The Trust will then add
to the Deposit List the cash information effective as of the close of
business on that business day and create a PCF for each Fund, which
will be transmitted to NSCC before the open of business the next
business day. The information in the PCF will be available to all
participants in the NSCC system.
Because the NSCC's system for the receipt and dissemination to its
participants of the PCF is not currently capable of processing
information with respect to Financial Instruments, the Advisor has
developed an ``IIV File,'' which it will use to disclose the Funds'
holdings of Financial Instruments.\32\ The IIV File will contain, for
each Leveraged Fund (to the extent that it holds Financial Instruments)
and Inverse and Leveraged Inverse Fund, information sufficient by
itself or in connection with the PCF and other available information
for market participants to calculate a Fund's IIV and effectively value
such Fund.
---------------------------------------------------------------------------
\32\ The Trust or the Advisor will post the IIV File to a
password-protected Internet Web site before the opening of business
on each business day, and all Authorized Participants and the
Exchange will have access to a password and the Web site containing
the IIV File. The Funds, however, will disclose each business day to
the public identical information, but in a format appropriate to
public investors, at the same time the Funds disclose the IIV File
and PCF, as applicable, to industry participants.
---------------------------------------------------------------------------
For example, the following information would be provided in the IIV
File for a Leveraged Fund holding equity securities and Financial
Instruments and an Inverse Fund and/or Leveraged Inverse Fund holding
swaps and futures contracts (certain Financial Instruments): (A) The
total value of the equity securities held by the Leveraged Fund; (B)
the notional value of the swaps held by such Funds (together with an
indication of the Underlying Index on which such swap is based and
whether the Funds' position is long or short); (C) the most recent
valuation of the swaps held by the Funds; (D) the notional value of any
futures contracts (together with an indication of the Underlying Index
on which such contract is based, whether the Funds' position is long or
short, and the contract's expiration date) held by the Funds; (E) the
number of futures contracts held by the Funds (together with an
indication of the Underlying Index on which such contract is based,
whether the Funds' position is long or short, and the contract's
expiration date); (F) the most recent valuation of the futures
contracts held by the Funds; (G) the total assets and total number of
Shares outstanding of each Fund; and (H) a ``net other assets'' figure
reflecting expenses and income of the Funds to be accrued during and
through the following business day and accumulated gains or losses on
the Funds' Financial Instruments through the end of the business day
immediately preceding the publication of the IIV File. To the extent
that any Fund holds cash or cash equivalents about which information is
not available in a PCF, information regarding such Fund's cash and cash
equivalent positions will be disclosed in the IIV File for such Fund.
The information in the IIV File will be sufficient for participants
in the NSCC system to calculate the IIV for the Inverse and Leveraged
Inverse Funds and, together with the information on equity securities
contained in the PCF, will be sufficient for calculation of the IIV for
the Leveraged Funds, during such next business day. The IIV File,
together with the applicable information in the PCF in the case of
Leveraged Funds, will also be the basis for the next business day's NAV
calculation.
Under normal circumstances, the Leveraged Funds will be created and
redeemed either entirely for cash and/or for a deposit basket of equity
securities (``Deposit Securities''), plus a Balancing Amount (as
defined herein), as described below. Under normal circumstances, the
Inverse and Leveraged Inverse Funds will be created and redeemed
entirely for cash. The IIV File published before the open of business
on a business day will, however, permit NSCC participants to calculate
(by means of calculating the IIV) the amount of cash required to create
a Creation Unit and the amount of cash that will be paid upon
redemption of a Creation Unit, for each Inverse and Leveraged Inverse
Fund for that business day.
For the Leveraged Funds, the PCF will be prepared by the Trust
after 4 p.m. ET and transmitted by the Index Receipt Agent to NSCC by
6:30 p.m. ET. All Authorized Participants who are NSCC participants and
the Exchange will have access to the Internet Web site containing the
IIV File. The IIV File will reflect the trades made on behalf of a Fund
and the creation/redemption orders, in each case, for that business
day. Accordingly, by 6:30 p.m. ET, Authorized Participants will know
the composition of the Fund's portfolio for the next trading day.
Creation of the Leveraged Funds. Typically, persons \33\ purchasing
Creation Units from a Leveraged Fund must make an in-kind deposit of a
basket of Deposit Securities consisting of the securities selected by
the Advisor from among those securities contained in the Fund's
portfolio, together with an amount of cash specified by the Advisor
(the ``Balancing Amount''), plus the applicable transaction fee (the
``Transaction Fee''). The Deposit Securities and the Balancing Amount
collectively are referred to as the ``Creation Deposit.'' The Balancing
Amount is a cash payment designed to ensure that the value of a
Creation Deposit is identical to the value of the Creation Unit. The
Balancing Amount is an amount equal to the difference between the NAV
of a Creation Unit and the market value of the Deposit Securities.\34\
---------------------------------------------------------------------------
\33\ Authorized Participants are the only persons who may place
orders to create and redeem Creation Units. Authorized Participants
must be registered broker-dealers or other securities market
participants, such as banks and other financial institutions that
are exempt from registration as broker-dealers to engage in
securities transactions, who are participants in DTC. See supra note
26.
\34\ While not typical, if the market value of the Deposit
Securities is greater than the NAV of a Creation Unit, then the
Balancing Amount will be a negative number, in which case the
Balancing Amount will be paid by the Leveraged Fund to the
purchaser, rather than vice-versa.
---------------------------------------------------------------------------
The Balancing Amount will be determined shortly after 4 p.m. ET
each business day. Although the Balancing Amount for most ETFs is a
small amount reflecting accrued dividends and other distributions, for
the Leveraged Funds it is expected to be larger due to changes in the
value of the Financial Instruments, i.e., daily mark-to-market. For
example, assuming a basket of Deposit Securities is valued at $5
million for a Leveraged Fund, if the market increases 10%, such basket
of Deposit Securities would be equal to $5.5 million at 4 p.m. ET. The
value of the Leveraged Fund Shares would increase by 20% or $1 million
to equal $6 million total. With such basket of Deposit Securities
valued at $5.5 million, the Balancing Amount would be $500,000. The
values of the next day's basket of Deposit Securities and Balancing
Amount are announced between 5:30 p.m. ET and 6 p.m. ET each business
day. The Balancing Amount may, at times, represent a significant
portion of the aggregate purchase price (or in the case of redemptions,
the redemption proceeds). This may occur because the mark-to-
[[Page 45476]]
market value of the Financial Instruments held by the Leveraged Funds,
if any, is included in the Balancing Amount. The Transaction Fee is a
fee imposed by the Funds on investors purchasing (or redeeming)
Creation Units.
The Trust will make available through DTC or the Distributor on
each business day, prior to the opening of trading on the Exchange, the
Deposit List indicating the Deposit Securities to be included in the
Creation Deposit for each Leveraged Fund.\35\ The Trust also will make
available on a daily basis information about the previous day's
Balancing Amount.
---------------------------------------------------------------------------
\35\ In accordance with the Advisor's Code of Ethics, personnel
of the Advisor with knowledge about the composition of a Creation
Deposit will be prohibited from disclosing such information to any
other person, except as authorized in the course of their
employment, until such information is made public.
---------------------------------------------------------------------------
The Leveraged Funds reserve the right to permit or require an
Authorized Participant to substitute an amount of cash and/or a
different security to replace any prescribed Deposit Security.\36\
Substitutions might be permitted or required, for example, because one
or more Deposit Securities may be unavailable or may not be available
in the quantity needed to make a Creation Deposit. Brokerage
commissions incurred by a Fund to acquire any Deposit Security not part
of a Creation Deposit are expected to be immaterial, and in any event,
the Advisor may adjust the relevant Transaction Fee to ensure that the
Fund collects the extra expense from the purchaser. Orders to create or
redeem Shares of the Leveraged Funds must be placed through an
Authorized Participant.
---------------------------------------------------------------------------
\36\ In certain limited instances, a Leveraged Fund may require
a purchasing investor to purchase a Creation Unit entirely for cash.
For example, on days when a substantial rebalancing of a Fund's
portfolio is required, the Advisor might prefer to receive cash
rather than in-kind stocks so that it has liquid resources on hand
to make the necessary purchases.
---------------------------------------------------------------------------
Redemption of the Leveraged Funds. Leveraged Fund Shares in
Creation Unit-size aggregations will be redeemable on any day on which
the New York Stock Exchange LLC is open in exchange for a basket of
securities (``Redemption Securities''). As it does for Deposit
Securities, the Trust will make available to Authorized Participants on
each business day prior to the opening of trading a list of the names
and number of shares of Redemption Securities for each Fund. The
Redemption Securities given to redeeming investors in most cases will
be the same as the Deposit Securities required of investors purchasing
Creation Units on the same day.\37\ Depending on whether the NAV of a
Creation Unit is higher or lower than the market value of the
Redemption Securities, the redeemer of a Creation Unit will either
receive from or pay to the Leveraged Fund a cash amount equal to the
difference (the ``Redemption Balancing Amount''). In the typical
situation where the Redemption Securities are the same as the Deposit
Securities, this cash amount will be equal to the Balancing Amount
described above in the creation process involving Deposit Securities.
The redeeming investor also must pay to the Leveraged Fund a
transaction fee (``Redemption Transaction Fee'') to cover transaction
costs.\38\
---------------------------------------------------------------------------
\37\ The Exchange states that there may be circumstances,
however, where the Deposit Securities and Redemption Securities
could differ. For example, if ABC stock were replacing XYZ stock in
a Fund's Underlying Index at the close of a day's trading session,
the day's prescribed Deposit Securities might include ABC, but not
XYZ, while the day's prescribed Redemption Securities might include
XYZ, but not ABC.
\38\ Redemptions in which cash is substituted for one or more
Redemption Securities may be assessed a higher Redemption
Transaction Fee to offset the transaction cost to the Fund of
selling those particular Redemption Securities. This Redemption
Transaction Fee is expected to be between $500 and $1,000.
---------------------------------------------------------------------------
A Leveraged Fund has the right to make redemption payments in cash,
in-kind, or a combination of each, provided that the value of its
redemption payments equals the NAV of the Shares tendered at the time
of tender, and the Redemption Balancing Amount. The Advisor currently
contemplates that Creation Units of each Leveraged Fund will be
redeemed principally in-kind with respect to the Redemption Securities
and the Redemption Balancing Amount in cash largely resulting from the
value of the Financial Instruments included in the Leveraged Fund.
In order to facilitate delivery of Redemption Securities, each
redeeming Authorized Participant, acting on behalf of a Beneficial
Owner or DTC participant, must have arrangements with a broker-dealer,
bank, or other custody provider in each jurisdiction in which any of
the Redemption Securities are customarily traded. If neither the
redeeming Beneficial Owner nor the Authorized Participant has such
arrangements, and it is not otherwise possible to make other
arrangements, the Leveraged Fund may, in its discretion, redeem the
Leveraged Fund Shares for cash.
Creation and Redemption of the Inverse and Leveraged Inverse Funds.
The Inverse and Leveraged Inverse Funds will be purchased and redeemed
entirely for cash. The use of an all-cash payment for the purchase and
redemption of Creation Unit aggregations of these Funds is due to the
limited transferability of Financial Instruments.
Placement of Creation Unit Purchases and Redemption Orders.
Creation Unit aggregations of the Funds will be purchased at NAV, plus
a Transaction Fee. For the Inverse and Leveraged Inverse Funds, the
purchaser will make a cash payment by 12 p.m. ET on the third business
day following the date on which the request was made (T+3). For the
Leveraged Funds, the purchaser will make an in-kind payment and/or all-
cash payment generally on the third business day following the date on
which the request was made (T+3). Purchasers of either Fund in Creation
Unit aggregations must satisfy certain creditworthiness criteria
established by the Advisor and approved by the Board, as provided in
the participation agreement between the Trust and Authorized
Participants.
Creation Unit aggregations of the Leveraged Funds will be
redeemable either in-kind or all in cash equal to the NAV, less the
Redemption Transaction Fee. Creation Unit aggregations of the Inverse
and Leveraged Inverse Funds will be redeemable for an all-cash payment
equal to the NAV, less the Redemption Transaction Fee. A Leveraged Fund
has the right to make redemption payments in cash, in-kind, or a
combination of each, provided that the value of its redemption payments
equals the NAV of the Shares tendered for redemption at the time of
tender.\39\
---------------------------------------------------------------------------
\39\ The Exchange states that, in the event an Authorized
Participant has submitted a redemption request in good order and is
unable to transfer all or part of a Creation Unit aggregation for
redemption, a Fund may nonetheless accept the redemption request in
reliance on the Authorized Participant's undertaking to deliver the
missing Fund Shares as soon as possible, which undertaking shall be
secured by the Authorized Participant's delivery and maintenance of
collateral. The Authorized Participant's participant agreement will
permit the Fund to buy the missing Shares at any time and will
subject the Authorized Participant to liability for any shortfall
between the cost to the Fund of purchasing the Shares and the value
of the collateral.
---------------------------------------------------------------------------
Dividends
Dividends, if any, from net investment income will be declared and
paid at least annually by each Fund in the same manner as by other
open-end investment companies. Certain Funds may pay dividends on a
semi-annual or more frequent basis. Distributions of realized
securities gains, if any, generally will be declared and paid once a
year.
[[Page 45477]]
Dividends and other distributions on the Shares of each Fund will
be distributed, on a pro rata basis to Beneficial Owners of such
Shares. Dividend payments will be made through DTC and DTC participants
to Beneficial Owners then of record with proceeds received from each
Fund.
The Trust will not make the DTC book-entry Dividend Reinvestment
Service (the ``Dividend Reinvestment Service'') available for use by
Beneficial Owners for reinvestment of their cash proceeds, but certain
individual brokers may make a Dividend Reinvestment Service available
to Beneficial Owners. The SAI will inform investors of this fact and
direct interested investors to contact such investor's broker to
ascertain the availability and a description of such a service through
such broker. The SAI will also caution interested Beneficial Owners
that they should note that each broker may require investors to adhere
to specific procedures and timetables in order to participate in the
service, and such investors should ascertain from their broker such
necessary details. Shares acquired pursuant to such service will be
held by the Beneficial Owners in the same manner and subject to the
same terms and conditions as those for original ownership of Shares.
Brokerage commissions, charges, and other costs, if any, incurred in
purchasing Shares in the secondary market with the cash from the
distributions generally will be an expense borne by the individual
Beneficial Owners participating in reinvestment through such service.
Dissemination of Indicative Intra-Day Value (IIV)
In order to provide updated information relating to each Fund for
use by investors, professionals, and persons wishing to create or
redeem Shares, the Exchange will disseminate through the facilities of
the CT: (1) Continuously throughout the trading day, the market value
of a Share; and (2) at least every 15 seconds throughout the trading
day, a calculation of the IIV,\40\ as calculated by the Exchange (the
``IIV Calculator''). Comparing these two figures helps an investor to
determine whether, and to what extent, the Shares may be selling at a
premium or a discount to NAV.
---------------------------------------------------------------------------
\40\ The IIV is also referred to by other issuers as an
``Estimated NAV,'' ``Underlying Trading Value,'' ``Indicative
Optimized Portfolio Value (IOPV),'' and ``Intraday Indicative
Value'' in various places such as the prospectus and marketing
materials for different exchange-traded funds.
---------------------------------------------------------------------------
The IIV Calculator will calculate an IIV for each Fund in the
manner discussed below. The IIV is designed to provide investors with a
reference value that can be used in connection with other related
market information. The IIV does not necessarily reflect the precise
composition of the current portfolio held by each Fund at a particular
point in time. Therefore, the IIV on a per-Share basis disseminated
during Amex trading hours should not be viewed as a real-time update of
the NAV of a particular Fund, which is calculated only once a day.
While the IIV that will be disseminated by Amex is expected to be close
to the most recently calculated Fund NAV on a per-Share basis, it is
possible that the value of the portfolio held by a Fund may diverge
from the IIV during any trading day. In such case, the IIV will not
precisely reflect the value of the Fund portfolio.
IIV Calculation for the Leveraged Funds. The IIV Calculator will
disseminate the IIV throughout the trading day for the Leveraged Funds
holding equity securities and Financial Instruments, if any. The IIV
Calculator will determine such IIV by: (1) Calculating the estimated
current value of equity securities held by such Fund by (a) calculating
the percentage change in the value of the Deposit Securities indicated
on the Deposit List (as provided by the Trust) and applying that
percentage value to the total value of the equity securities in the
Fund as of the close of trading on the prior trading day (as provided
by the Trust) or (b) calculating the current value of all of the equity
securities held by the Fund (as provided by the Trust); (2) calculating
the mark-to-market gains or losses from the Fund's total return equity
swap exposure based on the percentage change to the Underlying Index
and the previous day's notional values of the swap contracts, if any,
held by such Fund (which previous day's notional value will be provided
by the Trust); (3) calculating the mark-to-market gains or losses from
futures, options, and other Financial Instrument positions by taking
the difference between the current value of those positions held by the
Fund, if any (as provided by the Trust), and the previous day's value
of such positions; (4) adding the values from (1), (2), and (3) above
to an estimated cash amount provided by the Trust (which cash amount
will include the swap costs), to arrive at a value; and (5) dividing
that value by the total number of Shares outstanding (as provided by
the Trust) to obtain current IIV.
IIV Calculation for the Inverse and Leveraged Inverse Funds. The
IIV Calculator will disseminate the IIV throughout the trading day for
the Inverse and Leveraged Inverse Funds. The IIV Calculator will
determine such IIV by: (1) Calculating the mark-to-market gains or
losses from the Fund's total return equity swap exposure based on the
percentage change to the Underlying Index and the previous day's
notional values of the swap contracts, if any, held by such Funds
(which previous day's notional value will be provided by the Trust);
(2) calculating the mark-to-market gains or losses from futures,
options, and other Financial Instrument positions by taking the
difference between the current value of those positions held by the
Funds, if any (as provided by the Trust), and the previous day's value
of such positions; (3) adding the values from (1) and (2) above to an
estimated cash amount provided by the Trust (which cash amount will
include the swap costs), to arrive at a value; and (4) dividing that
value by the total number of Shares outstanding (as provided by the
Trust) to obtain current IIV.
Criteria for Initial and Continued Listing
The Shares are subject to the criteria for initial and continued
listing of Index Fund Shares under Amex Rule 1002A. A minimum of two
Creation Units (at least 100,000 Shares) will be required to be
outstanding at the start of trading. This minimum number of Shares
required to be outstanding at the start of trading will be comparable
to requirements that have been applied to previously listed series of
Index Fund Shares. The Exchange believes that the proposed minimum
number of Shares outstanding at the start of trading is sufficient to
provide market liquidity. The Exchange, pursuant to Amex Rule
1002A(a)(ii), will obtain a representation from the Trust (for each
Fund), prior to listing, that the NAV per Share for each Fund will be
calculated daily and made available to all market participants at the
same time. The Exchange represents that the Trust is required to comply
with Rule 10A-3 under the Act \41\ for the initial and continued
listing of the Shares.
---------------------------------------------------------------------------
\41\ 17 CFR 240.10A-3 (setting forth listing standards relating
to audit committees).
---------------------------------------------------------------------------
Amex Trading Rules and Trading Halts
The Shares are equity securities subject to Amex rules governing
the trading of equity securities. The Exchange states that Amex Rule
154-AEMI(c)(ii) \42\ and Amex Rule 190,
[[Page 45478]]
Commentary .04,\43\ apply to Index Fund Shares listed on the Exchange,
including the Shares, and the Shares will be deemed ``Eligible
Securities,'' as defined in Amex Rule 230, for purposes of the
Intermarket Trading System Plan.
---------------------------------------------------------------------------
\42\ Amex Rule 154-AEMI(c)(ii) provides that stop and stop limit
orders to buy or sell a security, the price of which is derivatively
priced based upon another security or index of securities, may be
elected by a quotation. The Exchange states that the Shares are
eligible for this treatment.
\43\ Commentary .04 states that nothing in Amex Rule 190(a)
should be construed to restrict a specialist registered in a
security issued by an investment company from purchasing and
redeeming the listed security or securities that can be subdivided
or converted into the listed security from the issuer as appropriate
to facilitate the maintenance of a fair and orderly market.
---------------------------------------------------------------------------
In addition to other factors that may be relevant, the Exchange may
consider factors such as those set forth in Amex Rule 918C(b) in
exercising its discretion to halt or suspend trading in Index Fund
Shares. These factors include, but are not limited to, (1) The extent
to which trading is not occurring in securities comprising an
Underlying Index and/or the Financial Instruments of a Fund, or (2)
whether other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. In the case of
Financial Instruments held by a Fund, the Exchange represents that a
notification procedure will be implemented so that timely notice from
the Advisor is received by the Exchange when a particular Financial
Instrument is in default or shortly to be in default. Notification from
the Advisor will be made by phone, facsimile, or e-mail. The Exchange
would then determine on a case-by-case basis whether a default of a
particular Financial Instrument justifies a trading halt of the Shares.
Trading in Shares of the Funds will also be halted if the circuit
breaker parameters under Amex Rule 117 have been reached.
Amex Rule 1002A(b)(ii) sets forth the trading halt parameters with
respect to Index Fund Shares. If the IIV or the Underlying Index value
applicable to that series of Index Fund Shares is not being
disseminated as required, the Exchange may halt trading during the day
in which the interruption to the dissemination of the IIV or the
Underlying Index value occurs. If the interruption to the dissemination
of the IIV or the Underlying Index value persists past the trading day
in which it occurred, the Exchange will halt trading no later than the
beginning of the trading day following the interruption.
Information Circular
The Exchange, in an Information Circular to Exchange members and
member organizations, prior to the commencement of trading, will inform
members and member organizations regarding the application of
Commentary .06 of Amex Rule 1000A-AEMI to the Funds.\44\ The
Information Circular will further inform members and member
organizations of the prospectus and/or product description delivery
requirements that apply to the Funds.\45\
---------------------------------------------------------------------------
\44\ See supra note 30.
\45\ The Exchange states that the any product description used
in reliance on Section 24(d) of the 1940 Act (15 U.S.C. 80a-24(d))
will comply with all representations and conditions set forth in the
Application. See id.
---------------------------------------------------------------------------
The Information Circular will also provide guidance with regard to
member firm compliance responsibilities when effecting transactions in
the Shares and highlighting the special risks and characteristics of
the Funds and Shares as well as applicable Exchange rules. In
particular, the Information Circular will set forth the requirements
relating to Commentary .05 to Amex Rule 411 (Duty to Know and Approve
Customers). Specifically, the Information Circular will remind members
of their obligations in recommending transactions in the Shares so that
members have a reasonable basis to believe that: (1) The recommendation
is suitable for a customer given reasonable inquiry concerning the
customer's investment objectives, financial situation, needs, and any
other information known by such member; and (2) that the customer can
evaluate the special characteristics, and is able to bear the financial
risks, of such investment. In connection with the suitability
obligation, the Information Circular will also provide that members
make reasonable efforts to obtain the following information: (a) The
customer's financial status; (b) the customer's tax status; (c) the
customer's investment objectives; and (d) such other information used
or considered to be reasonable by such member or registered
representative in making recommendations to the customer. In addition,
the Information Circular will disclose that the procedures for
purchases and redemptions of Shares in Creation Units are described in
each Fund's prospectus and SAI, and that Shares are not individually
redeemable, but are redeemable only in Creation Unit aggregations or
multiples thereof.
Surveillance
The Exchange represents that its surveillance procedures are
adequate to properly monitor the trading of the Shares. Specifically,
Amex will rely on its existing surveillance procedures governing Index
Fund Shares. In addition, the Exchange also has a general policy
prohibiting the distribution of material, non-public information by its
employees.
2. Statutory Basis
The proposed rule change is consistent with section 6(b) of the
Act,\46\ in general, and furthers the objectives of section
6(b)(5),\47\ in particular, in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, and, in general, to protect investors and the public
interest.
---------------------------------------------------------------------------
\46\ 15 U.S.C. 78f(b).
\47\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will impose no
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange states that no written comments were solicited or
received with respect to the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) As the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which Amex consents, the Commission will:
A. By order approve such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
The Commission is considering granting accelerated approval of the
proposed rule change at the end of a 15-day comment period.\48\
---------------------------------------------------------------------------
\48\ In the Exchange Notice, Amex requested accelerated approval
of this proposed rule change prior to the 30th day after the date of
publication of the notice of the filing thereof.
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing,
[[Page 45479]]
including whether the proposed rule change is consistent with the Act.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-Amex-2007-74 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F. Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Amex-2007-74. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room, 100 F. Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-Amex-2007-74 and should be
submitted on or before August 29, 2007.
---------------------------------------------------------------------------
\49\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\49\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-15818 Filed 8-13-07; 8:45 am]
BILLING CODE 8010-01-P