[Federal Register: November 6, 2007 (Volume 72, Number 214)]
[Notices]
[Page 62705-62709]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06no07-120]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 28039; 812-13416]
Rafferty Asset Management, et al.; Notice of Application
October 30, 2007.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 12(d)(1)(J)
of the Investment Company Act of 1940 (the ``Act'') for exemption from
sections 12(d)(1)(A) and (B) of the Act and under sections 6(c) and
17(b) of the Act for an exemption from section 17(a) of the Act.
-----------------------------------------------------------------------
Summary of the Application: The order would permit certain management
investment companies and unit investment trusts registered under the
Act to acquire shares of certain open-end management investment
companies registered under the Act, that are outside of the same group
of investment companies as the acquiring investment companies.
Applicants: Rafferty Asset Management, LLC (``Rafferty'' or
``Adviser''), Direxion Funds (``DF'') and Direxion Insurance Trust LLC
(``DIT,'' together with DF, the ``Trusts'').
Filing Dates: The application was filed on August 10, 2007, and amended
on October 26, 2007. Applicants have agreed to file an amendment during
the notice period, the substance of which is reflected in this notice.
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 November 26, 2007, and should be accompanied by proof of
service on applicants, in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street, NE,. Washington, DC 20549-1090; Applicants, 33 Whitehall
Street, 10th Floor, New York, NY 10004.
FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at
(202) 551-6817, or Janet M. Grossnickle, 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 Desk, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington DC 20549-0102 (telephone (202) 551-5850).
Applicants' Representations
1. The Trusts are open-end management investment companies
registered under the Act and are each comprised of separate series
(``Funds'') that pursue distinct investment objectives and strategies.
Shares of Funds of DF are sold publicly to retail investors, and shares
of Funds of DIT are sold to insurance company separate accounts funding
variable life and variable annuity contracts. The Adviser is registered
as an investment adviser
[[Page 62706]]
under the Investment Advisers Act of 1940 (``Advisers Act'') and serves
as investment adviser to each Fund.\1\
---------------------------------------------------------------------------
\1\ The term ``Adviser'' includes all entities controlling,
controlled by or under common control with Rafferty and its
successors in interest. A successor in interest is an entity
resulting from a reorganization of Rafferty into another
jurisdiction or a change in the type of business organization.
---------------------------------------------------------------------------
2. Applicants request relief to permit registered management
investment companies and their series (``Investing Companies'') and
registered unit investment trusts and their series (``Investing
Trusts,'' and together with the Investing Companies, ``Investing
Funds'') that are outside of the same ``group of investment
companies,'' within the meaning of section 12(d)(1)(G)(ii) of the Act,
as the Trusts, to acquire shares of the Funds in excess of the limits
in section 12(d)(1)(A) of the Act, and to permit a Fund, any principal
underwriter for a Fund, and any broker or dealer registered under the
Securities Exchange Act of 1934 (``Broker'') to sell shares of each
Fund to an Investing Fund in excess of the limits of section
12(d)(1)(B) of the Act. Applicants request that the relief apply to:
(a) Other existing and future registered open-end management investment
companies and series thereof (included in the term ``Funds'') advised
by the Adviser and in the same group of investment companies, within
the meaning of section 12(d)(1)(G)(ii) of the Act, as the Trusts; (b)
each Investing Fund that enters into a Participation Agreement (as
defined below) with a Fund to purchase shares of the Fund; and (c) any
principal underwriter to a Fund or Broker selling shares of a Fund.\2\
---------------------------------------------------------------------------
\2\ All entities that currently intend to rely on the requested
order are named as applicants. Any other entity that relies on the
order in the future will comply with the terms and conditions of the
application. An Investing Fund may rely on the requested order only
to invest in the Funds and not in any other registered investment
company.
---------------------------------------------------------------------------
3. Each Investing Company will be advised by an investment adviser
within the meaning of section 2(a)(20)(A) of the Act and registered as
an investment adviser under the Advisers Act (``Investing Fund
Adviser''). An Investing Fund Adviser may contract with an investment
adviser which meets the definition of section 2(a)(20)(B) of the Act (a
``Subadviser''). Each Investing Trust will have a sponsor (``Sponsor'')
and a trustee (``Trustee''). Applicants represent that to ensure that
the Investing Funds comply with the terms and conditions of the
requested relief from section 12(d)(1) of the Act, an Investing Fund
must enter into a participation agreement between a Trust, on behalf of
the relevant Funds, and the Investing Fund (``Participation
Agreement'') before investing in a Fund beyond the limits imposed by
section 12(d)(1)(A). The Participation Agreement will require the
Investing Funds to adhere to the terms and conditions of the requested
order. The Participation Agreement will include an acknowledgment from
an Investing Fund that it may rely on the requested order only to
invest in the Funds and not in any other registered investment company.
4. Applicants state that the Funds will offer the Investing Funds
simple and efficient investment vehicles to achieve their asset
allocation or diversification objectives. Applicants state that the
Funds also provide high quality, professional investment program
alternatives to Investing Funds that do not have sufficient assets to
make comparable investments.
Applicants' Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(A) of the Act, in relevant part, prohibits a
registered investment company from acquiring shares of an investment
company if the securities represent more than 3% of the total
outstanding voting stock of the acquired company, more than 5% of the
total assets of the acquiring company, or, together with the securities
of any other investment companies, more than 10% of the total assets of
the acquiring company. Section 12(d)(1)(B) of the Act prohibits a
registered open-end investment company, its principal underwriter, and
any Broker from selling its shares to another investment company if the
sale will cause the acquiring company to own more than 3% of the
acquired company's voting stock, or if the sale will cause more than
10% of the acquired company's voting stock to be owned by investment
companies generally.
2. Section 12(d)(1)(J) of the Act provides that the Commission may
exempt any person, security, or transaction, or any class or classes of
persons, securities or transactions, from any provision of section
12(d)(1) if the exemption is consistent with the public interest and
the protection of investors. Applicants seek an exemption under section
12(d)(1)(J) of the Act to permit Investing Funds to acquire shares of
the Funds in excess of the limits in section 12(d)(1)(A) of the Act,
and a Fund, any principal underwriter for a Fund and any Broker to sell
shares of a Fund to an Investing Fund in excess of the limits of
section 12(d)(1)(B) of the Act.
3. Applicants state that the proposed arrangement and conditions
will adequately address the policy concerns underlying sections
12(d)(1)(A) and (B) of the Act, which include concerns about undue
influence by a fund of funds over underlying funds, excessive layering
of fees, and overly complex fund structures. Accordingly, applicants
believe that the requested exemption is consistent with the public
interest and the protection of investors.
4. Applicants believe that neither the Investing Fund nor an
Investing Fund Affiliate would be able to exert undue influence over
the Funds.\3\ To limit the control that an Investing Fund may have over
a Fund, applicants propose a condition prohibiting the Investing Fund
Adviser, Sponsor, and any person controlling, controlled by, or under
common control with the Investing Fund Adviser or Sponsor, and any
investment company or issuer that would be an investment company but
for section 3(c)(1) or 3(c)(7) of the Act that is advised or sponsored
by the Investing Fund Adviser or Sponsor, or any person controlling,
controlled by, or under common control with the Investing Fund Adviser
or Sponsor (``Investing Fund Advisory Group'') from controlling
(individually or in the aggregate) a Fund within the meaning of section
2(a)(9) of the Act. The same prohibition would apply to each
Subadviser, any person controlling, controlled by or under common
control with the Subadviser, and any investment company or issuer that
would be an investment company but for section 3(c)(1) or 3(c)(7) of
the Act (or portion of such investment company or issuer) advised or
sponsored by the Subadviser or any person controlling, controlled by or
under common control with the Subadviser (``Subadviser Group'').
Applicants propose other conditions to limit the potential for undue
influence over the Funds, including that no Investing Fund or Investing
Fund Affiliate (except to the extent it is acting in its capacity as an
investment adviser to a Fund) will cause a Fund to purchase a security
in an offering of securities during the existence of any underwriting
or selling syndicate of which a principal underwriter is an
Underwriting Affiliate (``Affiliated Underwriting''). An ``Underwriting
Affiliate'' is a principal underwriter in any underwriting or selling
syndicate that is an officer,
[[Page 62707]]
director, member of an advisory board, Investing Fund Adviser,
Subadviser, Sponsor, or employee of the Investing Fund, or a person of
which any such officer, director, member of an advisory board,
Investing Fund Adviser, Subadviser, Sponsor or employee is an
affiliated person; however any person whose relationship to a Fund is
covered by section 10(f) of the Act is not an Underwriting Affiliate.
---------------------------------------------------------------------------
\3\ ``Investing Fund Affiliates'' are the Investing Fund
Adviser, Subadviser, Sponsor, promoter, and principal underwriter of
the Investing Fund, and any person controlling, controlled by, or
under common control with any of these entities. ``Fund Affiliates''
are the investment adviser(s), promoter, and principal underwriter
of the Fund, and any person controlling, controlled by, or under
common control with any of these entities.
---------------------------------------------------------------------------
5. Applicants do not believe that the proposed arrangement will
involve excessive layering of fees. The board of directors or trustees
of each Investing Company, including a majority of the directors or
trustees who are not ``interested persons'' (within the meaning of
section 2(a)(19) of the Act) (``Disinterested Trustees''), will find
that the advisory fees charged under the advisory contract are based on
services provided that will be in addition to, rather than duplicative
of, the services provided under the advisory contract(s) of any Fund in
which the Investing Company may invest. In addition, an Investing Fund
Adviser, Sponsor, or Trustee, as applicable, will waive fees otherwise
payable to it by the Investing Fund in an amount at least equal to any
compensation (including fees received pursuant to any plan adopted by a
Fund under rule 12b-1 under the Act) received from a Fund by the
Investing Fund Adviser, Sponsor or Trustee or an affiliated person
thereof, other than any advisory fees paid to the Investing Fund
Adviser, Sponsor or Trustee, or an affiliated person thereof by a Fund
in connection with the investment by the Investing Fund in the Fund.
Applicants also state that with respect to registered separate accounts
that invest in any Investing Fund, no sales load will be charged at the
Investing Fund level or at the Fund level. Other sales charges and
service fees, as defined in Rule 2830 of the Conduct Rules of the
National Association of Securities Dealers, Inc., (``Rule 2830''), if
any, will only be charged at the Investing Fund level or at the Fund
level, not both.\4\ With respect to other investments in any Investing
Fund, any sales charges and/or service fees charged with respect to
shares of the Investing Fund will not exceed the limits applicable to a
fund of funds as set forth in Rule 2830.
---------------------------------------------------------------------------
\4\ Applicants represent that each Investing Fund will represent
in the Participation Agreement that no insurance company sponsoring
a registered separate account funding variable insurance contracts
will be permitted to invest in the Investing Fund unless the
insurance company has certified to the Investing Fund that the
aggregate of all fees and charges associated with each contract that
invests in the Investing Fund, including fees and charges at the
separate account, Investing Fund, and Fund levels, will be
reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the insurance
company.
---------------------------------------------------------------------------
6. Applicants submit that the proposed arrangement will not create
an overly complex fund structure. Applicants propose condition 12 to
ensure that the proposed structure will not result in unnecessary
complexity. Further, the Participation Agreement will require each
Investing Fund that exceeds the 5% or 10% limitation in section
12(d)(1)(A)(ii) and (iii) of the Act to disclose in its prospectus that
it may invest in registered investment companies, and to disclose, in
``plain English,'' in its prospectus the unique characteristics of the
Investing Fund investing in registered investment companies, including
but not limited to the expense structure and any additional expenses of
investing in registered investment companies. Each Investing Fund also
will comply with the disclosure requirements set forth in Investment
Company Act Release No. 27399 (June 20, 2006).
7. Applicants also note that a Fund may choose to reject any
investment by an Investing Fund. The prospectus of each Fund discloses
that the Fund may choose to reject a purchase order at the discretion
of the Fund.
B. Section 17(a)
1. Section 17(a) of the Act generally prohibits sales or purchases
of securities between a registered investment company and any
affiliated person of the company. Section 2(a)(3) of the Act defines an
``affiliated person'' of another person to include any person 5% or
more of whose outstanding voting securities are directly or indirectly
owned, controlled, or held with power to vote by the other person.
Applicants seek relief from section 17(a) to permit a Fund that is an
affiliated person of an Investing Fund because the Investing Fund holds
5% or more of the Fund's shares to sell its shares to and redeem its
shares from an Investing Fund.\5\
---------------------------------------------------------------------------
\5\ Applicants acknowledge that receipt of any compensation by
(a) an affiliated person of an Investing Fund, or an affiliated
person of such person, for the purchase by the Investing Fund of
shares of a Fund or (b) an affiliated person of a Fund, or an
affiliated person of such person, for the sale by the Fund of its
shares to an Investing Fund is subject to section 17(e) of the Act.
The Participation Agreement also will include this acknowledgment.
---------------------------------------------------------------------------
2. Section 17(b) of the Act authorizes the Commission to grant an
order permitting a transaction otherwise prohibited by section 17(a) if
it finds that (a) the terms of the proposed transaction are fair and
reasonable and do not involve overreaching on the part of any person
concerned, (b) the proposed transaction is consistent with the policies
of each registered investment company involved, and (c) the proposed
transaction is consistent with the general purposes of the Act. Section
6(c) of the Act permits the Commission to exempt any person or
transactions from any provision of the Act if such exemption is
necessary or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the Act. Applicants submit that the proposed
arrangement satisfies the standards for relief under sections 17(b) and
6(c) of the Act.
3. Applicants believe that any proposed transactions directly
between Funds and the Investing Funds will be consistent with the
policies of each Fund and Investing Fund. The Participation Agreement
will require any Investing Fund that purchases shares from a Fund to
represent that the purchase of shares from the Fund by an Investing
Fund will be accomplished in compliance with the investment
restrictions of the Investing Fund and will be consistent with the
investment policies set forth in the Investing Fund's registration
statement.
4. Applicants also state that the terms of the arrangement are fair
and reasonable and do not involve overreaching. Applicants note that
all shares of the Funds sold and redeemed by the Funds will be sold and
redeemed at net asset value as required by rule 22c-1 under the Act,
without regard to the identity of the purchasing or redeeming investor.
Applicants state that the proposed arrangement will be consistent with
the policies of each Investing Fund and Fund and with the general
purposes of the Act.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. The members of the Investing Fund Advisory Group will not
control (individually or in the aggregate) a Fund within the meaning of
section 2(a)(9) of the Act. The members of the Subadviser Group will
not control (individually or in the aggregate) a Fund within the
meaning of section 2(a)(9) of the Act. If, as a result of a decrease in
the outstanding voting securities of a Fund, the Investing Fund
Advisory Group or the Subadviser Group, each in the aggregate, becomes
a holder of more than 25% of the outstanding voting securities of a
Fund, it (except for any member of the Investing Fund Advisory Group or
Subadviser Group that is a separate account) will vote its shares of
[[Page 62708]]
the Fund in the same proportion as the vote of all other holders of the
Fund's shares. This condition does not apply to the Subadviser Group
with respect to a Fund for which the Subadviser or a person
controlling, controlled by, or under common control with the Subadviser
acts as the investment adviser within the meaning of section
2(a)(20)(A) of the Act. A registered separate account will seek voting
instructions from its contract holders and will vote its shares in
accordance with the instructions received and will vote those shares
for which no instructions were received in the same proportion as the
shares for which instructions were received. An unregistered separate
account will either (a) vote its shares of the Fund in the same
proportion as the vote of all other holders of the Fund's shares, or
(b) seek voting instructions from its contract holders and vote its
shares in accordance with the instructions received and vote those
shares for which no instructions were received in the same proportion
as the shares for which instructions were received.
2. No Investing Fund or Investing Fund Affiliate will cause any
existing or potential investment by the Investing Fund in shares of a
Fund to influence the terms of any services or transactions between the
Investing Fund or an Investing Fund Affiliate and the Fund or a Fund
Affiliate.
3. The board of directors or trustees of an Investing Company,
including a majority of the Disinterested Trustees, will adopt
procedures reasonably designed to assure that the Investing Fund
Adviser and any Subadviser are conducting the investment program of the
Investing Company without taking into account any consideration
received by the Investing Company or an Investing Fund Affiliate from a
Fund or a Fund Affiliate in connection with any services or
transactions.
4. Once an investment by an Investing Fund in the securities of a
Fund exceeds the limit in section 12(d)(1)(A)(i) of the Act, the board
of trustees of the Fund (``Board''), including a majority of the
Disinterested Trustees, will determine that any consideration paid by
the Fund to an Investing Fund or an Investing Fund Affiliate in
connection with any services or transactions (a) is fair and reasonable
in relation to the nature and quality of the services and benefits
received by the Fund, (b) is within the range of consideration that the
Fund would be required to pay to another unaffiliated entity in
connection with the same services or transactions, and (c) does not
involve overreaching on the part of any person concerned. This
condition does not apply with respect to any services or transactions
between a Fund and its investment adviser(s), or any person
controlling, controlled by, or under common control with such
investment adviser(s).
5. No Investing Fund or Investing Fund Affiliate (except to the
extent it is acting in its capacity as an investment adviser to a Fund)
will cause a Fund to purchase a security in any Affiliated
Underwriting.
6. The Board of a Fund, including a majority of the Disinterested
Trustees, will adopt procedures reasonably designed to monitor any
purchases of securities by the Fund in an Affiliated Underwriting once
an investment by an Investing Fund in the securities of the Fund
exceeds the limit in section 12(d)(1)(A)(i) of the Act, including any
purchases made directly from an Underwriting Affiliate. The Board of
the Fund will review these purchases periodically, but no less
frequently than annually, to determine whether the purchases were
influenced by the investment by the Investing Fund in the Fund. The
Board of the Fund will consider, among other things, (a) whether the
purchases were consistent with the investment objectives and policies
of the Fund, (b) how the performance of securities purchased in an
Affiliated Underwriting compares to the performance of comparable
securities purchased during a comparable period of time in
underwritings other than Affiliated Underwritings or to a benchmark
such as a comparable market index, and (c) whether the amount of
securities purchased by the Fund in Affiliated Underwritings and the
amount purchased directly from an Underwriting Affiliate have changed
significantly from prior years. The Board of the Fund will take any
appropriate actions based on its review, including, if appropriate, the
institution of procedures designed to assure that purchases of
securities in Affiliated Underwritings are in the best interests of
shareholders.
7. The Fund will maintain and preserve permanently in an easily
accessible place a written copy of the procedures described in the
preceding condition, and any modifications to such procedures, and will
maintain and preserve for a period of not less than six years from the
end of the fiscal year in which any purchase in an Affiliated
Underwriting occurred, the first two years in an easily accessible
place, a written record of each purchase of securities in Affiliated
Underwritings once an investment by an Investing Fund in the securities
of the Fund exceeds the limit in section 12(d)(1)(A)(i) of the Act,
setting forth from whom the securities were acquired, the identity of
the underwriting syndicate's members, the terms of the purchase, and
the information or materials upon which the determinations of the Board
of the Fund were made.
8. Before investing in a Fund in excess of the limits in section
12(d)(1)(A) of the Act, the Investing Fund and the Fund will execute a
Participation Agreement stating without limitation that their boards of
directors or trustees and their investment advisers, or the Sponsor and
Trustee, as applicable, understand the terms and conditions of the
order and agree to fulfill their responsibilities under the order. At
the time of its investment in shares of a Fund in excess of the limit
in section 12(d)(1)(A)(i), an Investing Fund will notify the Fund of
the investment. At such time, the Investing Fund will also transmit to
the Fund a list of the names of each Investing Fund Affiliate and
Underwriting Affiliate. The Investing Fund will notify the Fund of any
changes to the list of the names as soon as reasonably practicable
after a change occurs. The Fund and the Investing Fund will maintain
and preserve a copy of the order, the Participation Agreement and the
list with any updated information for the duration of the investment
and for a period of not less than six years thereafter, the first two
years in an easily accessible place.
9. Before approving any advisory contract under section 15 of the
Act, the board of directors or trustees of each Investing Company,
including a majority of the Disinterested Trustees, will find that the
advisory fees charged under such advisory contract are based on
services provided that will be in addition to, rather than duplicative
of, the services provided under the advisory contract(s) of any Fund in
which the Investing Company may invest. These findings and their basis
will be recorded fully in the minute books of the appropriate Investing
Company.
10. An Investing Fund Adviser, Sponsor or Trustee, as applicable,
will waive fees otherwise payable to it by the Investing Fund in an
amount at least equal to any compensation (including fees from any plan
adopted by a Fund under rule 12b-1 under the Act) received from a Fund
by the Investing Fund Adviser, Sponsor or Trustee, or an affiliated
person thereof, other than any advisory fees paid to the Investing Fund
Adviser, Sponsor or Trustee, or an affiliated person thereof, by a Fund
in
[[Page 62709]]
connection with the investment by the Investing Fund in the Fund. Any
Subadviser will waive fees otherwise payable to the Subadviser,
directly or indirectly, by the Investing Company in an amount at least
equal to any compensation received from a Fund by the Subadviser, or an
affiliated person thereof, other than any advisory fees paid to the
Subadviser or its affiliated person by a Fund, in connection with the
investment by the Investing Company in the Fund made at the direction
of the Subadviser. In the event that the Subadviser waives fees, the
benefit of the waiver will be passed through to the Investing Company.
11. With respect to registered separate accounts that invest in any
Investing Fund, no sales load will be charged at the Investing Fund
level or at the Fund level. Other sales charges and service fees, as
defined in Rule 2830, if any, will only be charged at the Investing
Fund level or at the Fund level, not both. With respect to other
investments in an Investing Fund, any sales charges and/or service fees
charged with respect to shares of the Investing Fund will not exceed
the limits applicable to a fund of funds as set forth in Rule 2830.
12. No Fund will acquire securities of any investment company or
company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of
the limits contained in section 12(d)(1)(A) of the Act, except to the
extent permitted by section 12(d)(1)(E) of the Act or exemptive relief
from the Commission permitting the Fund to purchase shares of an
affiliated money market fund for short-term cash management purposes.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-21694 Filed 11-5-07; 8:45 am]
BILLING CODE 8011-01-P