SECURITIES AND EXCHANGE COMMISSION
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON. D.C. 20549
D I V I S I O N OF
June 20,2006
[Revised - November 15,20061
MARKET REGULATION
Kathleen H. Moriarty, Esq.
Carter, Ledyard & Milbwn
2 Wall Street
New York, NY 10005-2072
Re:
ProShares Trust
File No. TP 06-82
Dear Ms. Moriarty:
In your letter dated June 20,2006,' as supplemented by conversations with the staff of the
Division of Market Regulation ("Staff '), ProShares Trust et al. (the "Trust") on behalf of itself, the
American Stock Exchange LLC ("Amex") or any other national securities exchange or national
securities association on or through which the exchange traded shares of the Trust ("Shares"), may
subsequently trade, SEI Investments Distribution Co., and persons or entities engaging in
transactions in Shares, requests from the Staff or from the Commission, exemptions from, or
interpretive or no-action advice regarding Rules 10a-1, 14e-5, and lob- 17 under the Securities
Exchange Act of 1934 as amended ("Exchange Act"), and Rules 101 and 102 of Regulation M and
Rule 200(g) of Regulation SHO, as well as interpretive and no-action advice regarding the Class
Relief Letter.
The Trust was organized on May 29,2002 as a Delaware statutory trust. The Trust is
registered with the Commission under the Investment Company Act of 1940 (as amended "1 940
Act") as an open-end management investment company. The Trust currently consists of twelve
separate investment portfolios. Each Fund has a distinct investment objective whch is different
than that of the other Funds. Each of the Funds attempts to acheve its investment objective by
corresponding to a specified multiple of the daily performance, or the inverse daily performance, of
a particular Underlying Index. The Funds are indexed funds employing the same types of
investment strategies as conventional index funds.
Rather than holding positions intended to create exposure to 100% of the daily performance
of an Underlying Index, the Ultra500 Fund, the Ultra100 Fund, the Ultra30 Fund and the UltraMidCap400 Fund (the "Leveraged Funds") hold positions designed to create exposure equal to twice
(200%), before fees and expenses, the daily performance of an Underlying Index. To accomplish
this goal, each Leveraged Fund holds 85% to 100% of its total assets in the Component Securities
of the relevant Underlying Index and the remainder of its assets is devoted to Financial Instruments
I
We have enclosed a photocopy of your letter. Each defined term in this letter has the same meaning as defined
in your letter, unless we note otherwise.
Kathleen H. Moriarty, Esq.
Carter, Ledyard & Milburn
June 20,2006
Page 2 of 8
and Money Market Instruments that are intended to create the additional exposure needed to such
Underlying Index necessary to pursue the Funds' investment objectives.
The Short500 Fund, the Short100 Fund, the Short30 Fund, ind the ShortMid-Cap400 Fund
(the "Inverse Funds") seek daily investment results corresponding, before fees and expenses, to the
inverse of the daily performance of an Underlying Index. The Inverse Funds do not invest in equity
securities but rather create short exposure to the relevant Underlying Index. In other words, rather
than creating short positions in the individual equity security components of the relevant Underlying
Index, each Inverse Fund will rely on establishing positions in Financial Instruments and Money
Market Instruments. If an Inverse Fund is successful in meeting its objective, its net asset value
should gain approximately as much, on a percentage basis, as any decrease in the relevant
Underlying Index when the prices of Component Securities in such index decline on any given day
and should lose approximately as much, on a percentage basis, as any increase in the relevant
Underlying Index when the prices of such Component Securities increase on a given day.
Normally, 100% of the value of the portfolios of the Inverse Funds will be devoted to such
Financial and Money Market Instruments.
Like the Inverse Funds, the UltraShort S&P500 Fund, the UltraShort QQQ Fund, the
UltraShort Dow30 Fund, and the UltraShort Midcap400 Fund (the "Ultra Inverse Funds") will not
invest in equity securities, but will create short exposure to the relevant Underlying Index utilizing
Financial Instruments and Money Market Instruments. If an Ultra Inverse Fund is successful in
meeting its objective, its net asset value should gain approximately twice (200%) as much, on a
percentage basis, as any decrease in the relevant Underlying Index when the prices of Component
Securities in such index decline on any given day and should lose approximately twice (200%) as
much, on a percentage basis, as any increase in the relevant Underlying Index when the prices of
such Component Securities increase on a given day. Normally, 100% of the value of the portfolios
of the Ultra Inverse Funds will be devoted to such Financial Instruments and Money Market
Instruments.
Response:
Rule 10a-1
Rule 200 of Regulation SHO defines "short sale" and Rule 10a-1 under the Exchange Act
governs short sales generally. Paragraph (a) of Rule 10a-1 covers transactions in any security
registered on a national securities exchange, if trades in such security are reported pursuant to an
effective transaction reporting plan, and prohibits short sales with respect to these securities unless
such sales occur on a "plus tick," (that is, a price above the price at which the immediately
preceding sale was effected), or "zero-plus tick," (that is, at the last sale price if it was higher than
the last different price). Rule 10a-1 is designed to prevent the market price of a security registered
on, or admitted to unlisted trading privileges on, a national securities exchange fi-om being
manipulated downward by unrestricted short selling.
On the basis of your representations and the facts presented, and without necessarily
concurring in your analysis, in particular the composite and derivative nature of the Leveraged
Kathleen H. Moriarty, Esq.
Carter, Ledyard & Milburn
June 20,2006
Page 3 of 8
Funds, it would not appear that trading in the shares of the Leveraged Funds would be susceptible to
the practices that Rule 10a-1 is designed to prevent. In particular, the Trust anticipates that the
market value of the shares of the Leveraged Funds will rise or fall based on changes in the value of
the Component Securities of the Underlying Index and supply and demand.
In addition, on the basis of your representations and the facts presented, and without
necessarily concurring in your analysis, in particular that the market price of shares of the Inverse
Funds and the Ultra Inverse Funds will rise or fall primarily in accordance with the inverse changes
in the value of the Component Securities of the relevant Underlying Index and therefore the Trust
expects that such Shares should not experience a significant decline in market value unless the value
of such Component Securities had similarly increased, and that the use of Financial and Money
Market Instruments by the Inverse Funds and the Ultra Inverse Funds will neither alter the arbitrage
opportunities nor inhibit arbitrage activity with respect to shares of the Inverse Funds and the Ultra
Inverse Funds, it would not appear that trading in the shares of the Inverse Funds and the Ultra
Inverse Funds would be susceptible to the practices that Rule 10a-1 is designed to prevent.
Accordingly, the Commission hereby grants an exemption fiom Rule 10a-1 to permit sales of the
Shares of the Funds without regard to the "tick" requirements of Rule 1Oa- 1.
We note that the exemption from Rule 10a-1 would not apply to secondary market portfolio
sales of Equity Securities made in connection with the redemption of the shares of the Leveraged
Funds. In addition, this exemption is contingent upon each of the Leveraged Funds maintaining at
least 20 Equity Securities.
Rule 200(g) of Regulation SHO
Rule 200(g) of Regulation SHO provides that a broker-dealer must mark all sell orders of
any equity security as "long," "short," or "short exempt." Rule 200(g)(2) requires that a short sale
order must be marked "short exempt" if the seller is relying on an exception fi-om the tick test of
Rule 10a-1 under the Exchange Act or any short sale price test of any exchange or national
securities association.
Accordingly, in conjunction with the exemption granted above to pennit sales of Shares of the
Funds without regard to the "tick" requirements of Rule 10a-1, on the basis of your representations
and the facts presented, and without necessarily concurring in your analysis, the Staff will not
recommend to the Commission enforcement action under Rule 200(g) of Regulation SHO if a
broker-dealer marks "short," rather than "short exempt," a short sale that is effected in the Shares of
the Funds, subject to the following conditions:
i.
..
11.
For each exempt short sale, the various market centers that execute such sales have instituted
procedures to "mask" the short sale character of the transaction so that they are executed as
short exempt;
Such market centers monitor on a regular basis to confirm that any such product or
transaction continues to meet the conditions for the exemptive relief and re-institute the
price test for any product or transaction that fails to satisfy such conditions;
'
Kathleen H. Moriarty, Esq.
Carter, Ledyard & Milburn
June 20,2006
Page 4 of 8
...
111.
iv.
A broker-dealer executing exempt short sales will mark such sales as "short," and in no
event will such sales be marked "long"; and
The market centers will maintain an audit trail of all such trade executions, whch is capable
of being produced and subject to review upon request by the Commission and other
appropriate regulatory authorities.
Regulation M
Redeemable securities issued by an open-end management investment company are
excepted from the provisions of Rule 101 and 102 of Regulation M. The Commission granted the
Trust an exemption ftom certain provisions of the 1940 Act in order to permit the Trust to maintain
its registration as an open-end investment company and to issue shares that are redeemable only in
Creation Unit size aggregations of Shares.
Rule 101 of Regulation M
Generally, Rule 101 of Regulation M is an anti-manipulation regulation that, subject to
certain exemptions, prohibits any "distribution participant" and its "affiliated purchasers" from
bidding for, purchasing, or attempting to induce any person to bid for or purchase any security
which is the subject of a distribution until after the applicable restricted period except as specifically
permitted in the ~ e g u l a t i o n The
. ~ provisions of Rule 101 of Regulation M apply to underwriters,
prospective underwriters, brokers, dealers, or other persons who have agreed to participate or are
participating in a distribution of securities.
On the basis of your representations and the facts presented, and without necessarily
concurring in your analysis, particularly that the Trust is a registered open-end management
investment company that will continuously redeem at net asset value Creation Unit size
aggregations of the shares of the Leveraged Funds, and the secondary market price of the shares of
the Leveraged Funds should not vary substantially from the net asset value of such Shares, which is
based on the value of the Leveraged Funds' Portfolio Securities, the Staff hereby confirms that the
Trust is excepted under paragraph (c)(4) of Rule 101 of Regulation M with respect to the Leveraged
Funds, thus permitting persons who may be deemed to be participating in a distribution of shares of
Kathleen H. Moriarty, Esq.
Carter, Ledyard & Milburn
June 20,2006
Page 5 of 8
the Leveraged Funds to bid for or purchase such Shares during their participation in such
di~tribution.~
The Staff also confirms the interpretation of Rule 101 of Regulation M that a redemption of
Creation Unit size aggregations of shares of the Leveraged Funds and the receipt of Equity
Securities in exchange therefor by a participant in a distribution of shares of the Leveraged Funds
would not constitute an "attempt to induce any person to bid for or purchase a covered security,
during the applicable restricted period" within the meaning of Regulation M, and therefore would
not violate Regulation M.
Rule 102 of Regulation M
Rule 102 of Regulation M prohibits issuers, selling security holders, or any affiliated
purchaser of such person from bidding for, purchasing, or attempting to induce any person to bid for
or purchase a covered security during the applicable restricted period in connection with a
distribution of securities effected by or on behalf of an issuer or selling security holder. Rule 100 of
Regulation M defines "distribution" to mean any offering of securities that is distinguished from
ordinary trading transactions by the magnitude of the offering and the presence of special selling
efforts and selling methods.
On the basis of your representations and the facts presented, particularly that the Trust is a
registered open-end management investment company that will redeem at net asset value Creation
Units of shares of the Leveraged Funds, the Staff hereby confirms that the Trust is excepted under
paragraph (d)(4) of Rule 102 of Regulation M with respect to the Leveraged Funds, thus permitting
the Leveraged Funds to redeem shares of the Leveraged Funds during the continuous offering of
such Shares.
Rule 14e-5
Rule 14e-5 under the Exchange Act, among other things, prohibits a person making a tender
offer or exchange offer for any equity security from directly or indirectly, purchasing or arranging
to purchase any subject or related securities except as part of the offer, from the time the offer is
publicly announced until its expiration.
3
We note that Regulation M does not prohibit a distribution participant and its affiliated purchasers from
bidding for and purchasing component equity securities in accordance with the exceptions contained in
paragraphs (b)(6) and (c)(l) of Rule 101. Rule 101(b)(6)(i) excepts basket transactions in which bids or
purchases are made in the ordinary course of business in connection with a basket of 20 or more securities in
which a covered security does not comprise more that 5% of the value of the basket purchased. Rule
lOl(b)(6)(ii) excepts adjustments to such a basket made in the ordinary course of business as a result of a
change in the composition of a standardized index. Also, Rule 101(c)(l) excepts transactions in activelytraded securities, that is, securities that have an average daily trading volume value of at least $1 million and
are issued by an issuer whose common equity securities have a public float value of at least $150 million;
provided however, that such securities are not issued by the distribution participant or an affiliate of the
distribution participant.
Kathleen H. Moriarty, Esq.
Carter, Ledyard & Milburn
June 20,2006
Page 6 of 8
Rule 14e-5 explicitly includes dealer-managers within the rule's definition of "covered
person." Accordingly, while acting as dealer-manager of a tender offer for an Equity Security, a
dealer-manager is prohibited from purchasing or arranging to purchase that Equity Security until the
expiration of the offer.
On the basis of your representations and the facts presented, particularly that purchases or
redemptions of shares of the Leveraged Funds would not appear to result in the abuses at which
Rule 14e-5 is directed, and that any bids or purchases by dealer-managers would not be effected for
the purpose of facilitating a tender offer, the Commission hereby grants an exemption from Rule
14e-5 to permit any person acting as dealer-manager of a tender offer for an Equity Security to: (1)
redeem shares of the Leveraged Funds in Creation Unit size aggregations to the Trust for Equity
Securities that may include a security subject to the tender offer; and (2) purchase shares of the
Leveraged Funds during such offer.4
Rule lob-17
Rule lob-17, with certain exceptions, requires an issuer of a class of publicly traded
securities to give notice of certain specified actions (for example, a dividend distribution, stock
split, or rights offering) relating to such class of securities in accordance with Rule lob-l7(b).
On the basis of your representations and the facts presented, and without necessarily
concurring in your analysis, particularly that the Commission has determined to grant an exemption
from the 1940 Act to register the Trust as an open-end management investment company
notwithstanding the fact that it issues Shares with limited redeemability, the Commission hereby
grants an exemption fiom the requirements of Rule lob-17 to the Trust with respect to transactions
in the shares.'
Rule lob-10; Section 1l(d)(l); Rule 1ldl-2; Rules 15cl-5 and 15cl-6
The Leveraged Funds are managed to track a multiple of a particular index and Inverse
Funds and Ultra Inverse Funds are managed to track the inverse, or a multiple of the inverse, of a
particular index all of the components of which are publicly available. The Trust seeks
confirmation that the phrase "managed to track a particular index" in condition 3 of the Class Relief
~ e t t eincludes
r~
funds such as the Leveraged Funds, the Inverse Funds, and the Ultra Inverse Funds
4
The Staff also c o n f i i its no-action position under Rule 14e-5 when a broker-dealer, acting as a dealermanager of a tender offer for a component equity securities, purchases such component equity securities in the
secondary market for the purpose of tendering them to purchase a Creation Unit size aggregation of shares of
the Leveraged Funds, if such transactions are effected as adjustments to such a basket in the ordinary course of
business as a result of a change in the composition of the relevant index.
5
We also note that compliance with Rule lob-17 would be impractical in light of the nature of the Fyds. This is
because it is not possible for the Trust to accurately project ten days in advance what dividend, if any, would
be paid on a particular record date.
6
Condition 3 in the Class Relief Letter states: "The ETF (a) consists of a basket of twenty or more Component
Securities, with no one Component Security constituting more than 25% of the total value of the ETF, and is
Kathleen H. Moriarty, Esq.
Carter, Ledyard & Milburn
June 20,2006
Page 7 of 8
that are managed to track a multiple of a particular index or managed to track the inverse, or a
multiple of the inverse, of a particular index all of the components of which are publicly available.
Accordingly, with respect to the Leveraged Funds, to the extent that a broker-dealer meets the other
requirements in the Class Relief Letter, it could rely on the exemptive and no-action relief contained
therein.
In addition, because of the holdings of the Inverse Funds and Ultra Inverse Funds, the Trust
believes that they do not satisfy condition 3 of the Class Relief Letter. However, given the nature of
the assets in the Inverse Funds and the Ultra Inverse Funds, the Trust requests the Staff confirm that
it will not recommend enforcement action to the Commission if a broker-dealer treats Shares of the
Inverse Funds and the Ultra Inverse Funds, for purposes of the relief fiom Section 11(d)(l) of the
Exchange Act, and Rule 11dl -2 thereunder, in the Class Relief Letter, as shares of a Qualifying
ETF (as defined in the Class Relief Letter). Accordingly, with respect to the Inverse Funds and the
Ultra Inverse Funds, to the extent that a broker-dealer meets the other requirements in the Class
Relief Letter, it could rely on the exemptive and no-action relief contained therein.
The foregoing exemptions from Rules 10a-1, 14e-5, and lob- 17 under the Exchange Act,
and Rules 101 and 102 of Regulation M, and no-action positions taken under Rule 200(g) of
Regulation SHO and the Class Relief Letter are based solely on your representations and the facts
presented to Staff, and are strictly limited to the application of those rules to transactions involving
the shares of the specified Funds under the circumstances described above and in your letter. Such
transactions should be discontinued, pending presentation of the facts for our consideration, in the
event that any material change occurs with respect to any of those facts or representations.
Moreover, the foregoing exemptions fkom Rules 10a-1, 14e-5, and lob- 17 under the Exchange Act,
and Rules 101 and 102 of Regulation M, and no-action positions taken under Rule 200(g) of
Regulation SHO and the Class Relief Letter are subject to the condition that such transactions in
shares of the specified Funds, Equity Security, or any related securities are not made for the purpose
of creating actual, or apparent, active trading in or raising or otherwise affecting the price of such
securities.
These exemptions, interpretations, and no-action positions are subject to modification or
revocation if at any time the Commission or Staff determines that such action is necessary or
appropriate in furtherance of the purposes of the Exchange Act. In addition, persons relying on
these exemptions, interpretations, and no-action positions are directed to the anti-fraud and antimanipulation provisions of the Exchange Act, particularly Sections 9(a), 10(b), and Rule lob-5
thereunder. Responsibility for compliance with these and other provisions of the federal or state
securities laws must rest with persons relying on these exemptions, interpretations, and no-action
positions. The Staff expresses no view with respect to other questions that the proposed
transactions may raise, including, but not limited to, the adequacy of disclosure concerning, and the
managed to track a particular index all of the components of which are publicly available; or (b) solely for
purposes of the exemptive relief for Broker-Dealer APs fiom Section 1l(d)(l) of the Exchange Act, is an ETF
with respect to which the staff of the Division of Market Regulation ("Staff ') has granted Non-AP BrokerDealers (as defined [in the Class Relief Letter]) relief fiom the requirements of Section 1l(d)(l) in a letter
dated prior to the date of this letter, provided that the ETF has not changed in such a way as to materially affect
any of the facts or representations in such prior letter."
Kathleen H. Moriarty, Esq.
Carter, Ledyard & Milburn
June 20,2006
Page 8 of 8
applicability of other federal and state laws to, the proposed transactions.
For the Commission, by the Division of Market
Regulation, pursuant to delegated authority,
Brian B. Bussey
Assistant Chief Counsel
Attachment
CARTERLEDYARD
& M~LBURN
LLP
Counselors at Law
/'
\
'
2 wall Street
New York, NY 10005-2072
Kathleen E Moriarty
Pormer
Direct Diol: 212-238-8665
Emoil: moriorru@dm com
1401 Eye Street, N.W
Wushington,DC 20005
(202) 898-1515
5 70 Lexington Avenue
New York NY 10022
(212) 371-2720
Mr. James A. Brigagliano, Esq.
Acting Associate Director
Trading Practices and Processing
Division of Market Regulation
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
,
Re:
Request of ProShares Trust (formerly, xtrashares Trust and ProFunds
ETF Trust) et al. for Exemptive, Interpretive or No-Action Relief from Section
Il(d)(l) of the Securities Exchange Act of 1934 and Rules 1Oa-1; lob-10; lob-17;
lldl-2; 14e-5; 15cl-5; 15cl-6, Rules 101 and 102 of Regulation M
and Rule 200(g) of Regulation SHO promulgated under said Act
Dear Mr. Brigagliano:
SUMMARY OF REQUEST FOR RELIEF
We are writing on behalf of ProShares Trust et al. ("Trust"). The Trust, on behalf of itself,
the Anierican Stock Exchange LLC ("Amex") or any other national securities exchange
("Exchange") or national securities association on or through which the exchange traded shares of
the Trust ', may subsequently trade (Gth each such market referred to herein as a "Markety')* and
SEI Investments Distribution Co. ('Distributor") and persons or entities engaging in transactions .
--
r'
-
On June 19,2006, the Trust listed the individual shares of its twelve (12) investment portfolios (each, a
Fund", and collectively, the Funds") on the Amex; such shares are the subject of the relief requested herein ("Shares",
formerly "Exchange Traded Shares" or "ETS"). The Amex has received Commission approval pursuant to Section
19(b) of the Exchauge Act of rules applicable to the trading of Shares of the Leveraged Funds and the Shares of the
Inverse Funds (as defined in Part A I of this letter, see Rel. No 34-52553, October 3,2005) and has filed amendments
thereto on April 28,2006 and May 5,2006 with respect to the Ultra Inverse Funds ( also defmed in Part I A hereto)
(see Re!. No 34-53784, May 10,2006). In addition, the Commission granted the requested relief to the Trust fiom the
application of certain sections of the Investment Company Act of 1940 ("1940 Act") and the rules promulgated
thereunder (see the last paragraph of Part LA hereto).
In the future, the Trust may determine to list Shares on a Market other than the ~rnhx. If the Trust lists
Shares on a Market other than the Amex, Shares will be listed in accordance with Market listing standards that are, or
will become, effective pursuant to Section 19@) of the Exchange Act. If the Shares also trade on a Market pursuant
to unlisted trading privileges, such trading will be conducted pursuant to self-regulatory organization rules that have
become effective pursuant to Exchange Act Section 19(b).
6086166.3
Page 1 of 42
(
in Shares, including "Authorized Participants (as defined below), hereby requests, as appropriate,
fkom the staff of the Division of Market Regulation ("Staff") of the Securities and Exchange
Commission ("Commissionyy),or fiom the Commission, exemptions from, or interpretive or noaction advice regarding, Section 1l(d)(l) of the Securities Exchange Act of 1934 as amended
("Exchange Act"), Rules 10a-1, lob-10, lob-17, 1ldl-2, 14e-5, 15cl-5 and 15cl-6 under the
Exchange Act, and Rules 101 and 102 of Regulation M and Rule 200(g) of Regulation SHO
Promulgated under the Exchange Act.
Except for the relief requested herein with respect to Rule 200(g) of Regulation SHO, the
relief requested in this letter ("Letter") is substantially similar to the exemptive, interpretive or
no-action relief granted by the Commission to the open-end management investment companies3
and to unit investment trusts4(registered as such with the Commission) that have been listed and
3
i
The Commission has previously granted exemptive, interpretive or no-action relief fiom Section I I(d)(l)
of the Exchange Act, and fkom Rules 10a-1;lob-10; lob- 17; 11dl-2; 14e-5; 15c1-6; Rules 101 and 102 of Regulation
M to investment companies holding domestic and international securities similar to that requested in this Letter. See
e-g., PowerShares Lux NanoTech Portfolio, letter from James A.Brigagliano, Assistant Director, Division of Market
Regulation, to Stuart Strauss, Clifford Chance, US LLP, dated October 25, 2005 as well as letter fiom James A.
Brigagliano, Assistant Director, Division of Market Regulation, to Stuart M. Strauss, Clifford Chance, dated March 2,
2005 with respect to PowerShares Exchange-Traded Fund Trust and its PowerShares WilderHill Clean Energy
Portfolio ( collectively, "PowerShares Letters7,);Vanguard Emerging Markets Stock Index Fund, et al. (with respect
to the trading of VIPERS to be issued by the three named investment portfolios of the International Index Trust
("VIPERS International Letter"); letter from James A. Brigagliano, Assistant Director, Division of Market
Regulation to Kathleen H. Moriarty, Carter, Ledyard & Milburn, dated March 9,2005; PowerShares WilderHill Clean
Energy Portfolio, letter from James A. Brigagliano, Assistant Director, Division of Market Regulation to Stuart
Strauss, Clifford Chance, dated March 2,2005; ishares MSCI EAFE Growth Index Fund and ishares MSCI EAFE
Value Index, letter fiom James A Brigagliano, Assistant Director, Division of Market Regulation, to Jack P. Drogin of
Morgan Lewis & Bockius, LLP, dated August 4,2005; ishares FTSEKinhua China 25 Index Fund, letter fiom James
Brigagliano, Assistant Director, Division of Market Regulation to Jack P. Drogin, Morgan, Lewis & Bockius LLP,
dated October 14,2004; ishares Lehman U.S. Treasury Inflation Protected Securities Fund and the ishares Lehman
U.S .Aggregate Bond Fund (each a series of the ishares Trust), letter from James A. Brigagliano, Assistant Director,
Division of Market Regulation to Jack P. Drogin, Morgan, Lewis & Bockius, LLP, dated September 25, 2003; ETF
Advisors Trust (with respect to the trading of FIT&), letter from James A. Brigagliano, Associate Director, Division
of Market Regulation, to Kathleen H. Moriarty of Carter, Ledyard & Milburn, dated November 1,2002; Fresco Index
Shares Fund, letter fiom James A. Brigagliano, Assistant Director, Division of Market Regulation, to Stuart Strauss,
s Brigagliano, Assistant
Mayer, Brown Rowe & Maw, dated October 21, 2002; ishares Trust, letters fiom ~ a m e A.
Director, Division of Market Regulation to W. John McGuire, Morgan, Lewis & Bockius LLP, dated July 25, 2002,
to Mary Joan Hoene, Carter, Ledyard & Milburn, dated December 1,2000, and September 5,2000, and to Kathleen
'.H. Moriarty, Carter, Ledyard & Milburn, dated May 16, 2000; streetTRACKS Series Trust, letter fiom James A.
Brigagliano, Assistant Director, Division of Market Regulation, to Stuart Strauss, Mayer, Brown & Platt, dated
September 26, 2000; Select Sector SPDR Trust, letters fiom Lany E. Bergman, Senior Associate Director, Division
of Market Regulation to Stuart M. Strauss, Gordon Altman Butowsky, dated December 14, 1998 and December 22,
1998; Foreign Fund, Inca( with respect to the trading of World Equity Benchmark SharesTM), letter from Nancy J.
Sanow, Assistant Director, Division of Market Regulation, to Donald R. Crawshaw, Sullivan & Cromwell, dated
April 17, 1996; The CountrySaskets Index Fund, Inc., letter fiom Nancy J. Sanow, Assistant Director, Division of
Market Regulation, to Michael Simon, Milbank, Tweed, Hadley & McCloy, dated March 22, 1996; and letter fiom
Nancy J. Sanow, Assistant Director, Division of Market Regulation, to Tuuli-Ann Ristkok, Donovan Leisure Newton
& Irvine and Stephen K. West, Sullivan & Cromwell, dated March 22, 1996. (All open-end management investment
companies identified in this footnote are collectively referred to herein as the "Open-End ETFs73.
4
I
t
See ,e.g., BLDRS Trust, letter fiom James Brigagliano, Assistant Director, Division of Market Regulation
to Edward S. Knight, Executive President and general counsel, NASDAQ, dated November 13, 2002, (regarding an
extension to NASDAQ of the application of "generic relief' previously granted to the AMEX with respect to certain
exchange traded A d s occasioned by the listing of BLDRS for trading on the NASDAQ ( "BLDRS Letter"); Nasdaq
6086166.3
Page 2 of 42
traded on a Market as "exchange traded funds" ("EFTS"), as well as to certain exchange traded
financial products that are not registered investment companies5. In addition, the no-action relief
requested for Rule 200(g) of Regulation SHO is identical to that granted in the VIPERS
International Letter6(" International Index Trust Letter") as discussed in Part V of this letter.
This request letter differs fkom those submitted by the Prior ETFs, as well as that submitted by
the Derivatives Products Committee of the Securities Industry Association dated August 26,2005
100 Trust (with respect to trading of QQQ), Letter fiom James A. Brigagliano, Assistant Director, Division of Market
Regulation to James D u r n Senior Vice President and General Counsel, AMEX, dated March 3,1999 ("Nasdaq-100
Letter"); DIAMONDS Trust, letter fiom Lany E. Bergman, Senior Associate Director, Division of Market
Regulation to James F. Duffy, Executive Vice President and Counsel, Arnex, dated January 9, 1998 ("DIAMONDS
Letter") MidCap SPDR Trust, letter fiom Nancy Sanow, Assistant Director, Division of Market Regulation to James
Duffy, Senior Vice President and General Counsel, AMEX, dated April 21, 1995 ("MidCap SPDR Letter");SPDR
Trust, Series 1, letter from Nancy Sanow, Assistant Director, Division of Market Regulation to James Durn, Senior
Vice President and General Counsel, AMEX, dated January 22, 1993("SPDR Letter"); and The SuperTrust Trust,
Letter from Nancy J. Sanow, Assistant Director, Division of Market Regulation, to James E. Durn, Esq. of the
AMEX, dated June 24, 1992. (collectively, the "UIT ETFs"). (Open-End ETFs and UIT ETFs are collectively
referred to herein as the as "Prior ETFs").
5
See, letter from James A. Brigagliano, Assistant Director, Division of ~ a r k e t ' ~ e ~ u l a t i o
ton Michael
,
Schmidtberger, Esq., Sidley Austin Brown & Wood LLP dated January 19, 2006 with respect to DB Commodity
Index Tracking Fund and DB Commodity Services LLC; letter from Brian A. Bussey, Assistant Chief Counsel,
Division of Market Regulation, to Kathleen H. Moriarty, Carter, Ledyard & Milbum, dated December 12,2005, with
respect to StreetTRACKS Gold Trust and letter from James A. Brigagliano, Assistant Director, Division of Market
Regulation to Kathleen H. Moriarty of Carter, Ledyard & Milburn LLP, dated November 17,2004, with respect to the
streetTRACKS Gold Trust; letter fiom Brian A. Bussey, Assistant Chief Counsel, Division of Market Regulation, to
David Yeres, Clifford Chance, dated December 12,2004, with respect to ishares COMEX Gold Trust and letter from
James A. Brigagliano, Assistant Director, Division of Market Regulation to David Yeres, Clifford Chance US LLP,
dated January 27,2005, with respect to the ishares COMEX Gold Trust; letter from James A. Brigagliano, Assistant
Director, Division of Market Regulation to George T. Simon, Foley & Lardner, LLP, dated December 5, 2005, with
respect to the Euro Currency Trust; and letter fiom James A. Brigagliano, Assistant Director, Division of Market
Regulation, to Claire P. McGrath of the AMEX, dated November 3,1999, regarding the trading of HOLaRs.
See, letter from James A. Brigagliano, Assistant Director, Division of Market Regulation to Kathleen H.
Moriarty, Carter Ledyard & Milbum LLP, dated March 9,2005 with respect to the trading of VIPERS to be issued
by the three named investment portfolios of the International Index Trust. See also letter from James A. Brigagliano,
Assistant Director, Division of Market Regulation dated August 4,2005 to Jack P. Drogin with respect to the ishares
MSCI EAFE Growth Index Fund and the ishares MSCI EAFE Value Index Fund; letter fiom James A. Brigagliano,
Assistant Director, Division of Market Regulation, to Stuart M. Strauss, Clifford Chance, dated March 2, 2005
("Powershares Lettefy); and letter fkom James A. Brigagliano, Assistant Director, Division of Market Regulation,
dated January 27, 2005 to David Yeres, Clifford Chance US LLP with respect to ishares COMEX Gold Trust
("ishares COMEX Lettery'). See also the response letter fram James A. Brigagliano, Assistant Director, Division of
Market Regulation, dated January 3,2005 ("SIA Response Letter") to the request letter from Ira Hammerman, Senior
Vice President and General Counsel, Securities Industry Association, dated January 3, 2005 ("SIA Request Letter")
for a recital of the conditions for the ETF "class exemption" in the "Letter re ETFs7'dated August 17,2001.
Page 3 of 42
'
*II).
.
( *
("Class Request Letter")7, only with respect to the leverage and inverse aspects of the Funds
described below.
i/
This letter is divided into six parts. Part I is a description of the Trust, and certain of'its
investment portfolios that would be listed for trading on a Market, Part I1 is a description of the
Trust's disclosure documents with respect to its Shares, Part 111 is a comparison of the Trust
against Prior ETFs, Part N contains a discussion of the dissemination of information regarding
Shares, Part V contains the requests for relief and Part VI is the conclusion. Appendix A attached
to this letter contains a list of the names of the Funds and a brief description of the investment
objective of each of the Funds defined below and identified herein. Appendix B attached to this
letter describes the underlying securities index for each of the Funds (each, an "Underlying Index"
and collectively, "Underlying Indices").
PART I
A.
(
THE TRUST AND ITS FUNDS
The Trust was organized on May 29,2002 as a Delaware statutory trust and is authorized
to have multiple series or portfolios. The Trust is registered with the Commission under the
Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management
investment company. The Trust currently consists of twelve (12) separate investment portfolios,
the Ultra500 Fund, the Ultra100 Fund, the Ultra30 Fund, the UltraMid-Cap400 Fund, the
Short500 Fund, the ShortlOO Fund, the Short30 Fund, the ShortMid-Cap400 Fund, the Ultra
Short500 Fund, the Ultra ShortlOO Fund, the Ultra Short30 Fund, and the Ultra ShortMid-Cap400
Fund, the Shares of each of which are the subject of this request for relief. The Trust also plans to
issue additional investment portfolios in the future, each of which will operate in the manner, and
use a particular Underlying Index identified, as described in Appendix B and Appendix C to the
Trust Application (defined at the end of this section).
The Trust offers and sells its Shares pursuant to a "Registration Statement7'(Registration
Nos. 81 1-21114 and 333-89822 on Form N-1A under the 1940 Act and the Securities Act of 1933
("1933 Act") respectively), which was declared effective on June 19, 2006. Each Fund has a
distinct investment objective which is different than that of the other Funds. Each of the Funds
See. letter from the Derivatives Products Committee of the Securities Industry Association dated August
26,2005 and the response letter fiom Catherine McGuire, Chief Counsel, Division of Market Regulation, to Georgia
Bullitt, et al., dated November 21,2005, (the "Class Relief Letter") with respect to an extension of relief granted in
prior letters to ETFs and certain broker-dealers from Section 1l(d)(l) and Rules lob-10, 1Idl-2, 15c-5 and 15c-6;
letter fiom James A. Brigagliano, Assistant Director, Division of Market Regulation, to Ira Hammerman, Senior Vice
President and General Counsel to the Securities Industries Association dated July 18,2005 granting relief with respect
to Rule 10a-1 in riskless principal transactions; and letter f?om James A. Brigagliano, Assistant Director, Division of
Market Regulation to Ira Hammeman, Senior Vice President and General Counsel to the Securities Industry
Association, dated January 3,2005 (collectively, the "SIA Relief Letters") and the letter fiom James A. Brigagliano,
Assistant Director, Division of Market Regulation, dated August 17, 2001 to Claire P. McGrath of the Amex for a
recital of the conditions for the ETF "class exemption" ("Arnex Class Relief Letter"), together with the Class Relief
Letter and the SIA Relief Letters, referred to herein as the "1934 Act Class Relief Letters").
6086166.3
Page 4 of 42
,
,
attempts to achieve its investment objective (as stated in the Registration Statement and
summarized briefly in Appendix A) by corresponding to a specified multiple of the daily
performance, or the inverse daily performance, of a particular Underlying Index as described in
Appendix B. In addition, Appendix B identifies the Underlying Indices as well as the creator,
,
provider or compiler of each Underlying.Index ("Underlying Index Provider").
Each Fund is "indexed" and its portfolio is managed based upon the same strategies as
those employed by conventional index funds as well as other leveraged and inverse index funds
currently sold to retail investors. The portfolio investments held by any Fund may include (i)
futures contracts, (ii) options on securities, indices and futures, (iii) equity caps, collars and floors,
(iv) swap agreements, (v) forward contracts, (vi) repurchase agreements and reverse repurchase
agreements, as described briefly below ("Financial Instruments7')and money market instruments
CCMoneyhiarket Instruments"). As used in this letter, the term Money Market Instruments means
short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high
quality credit profiles and includes U.S. government securities and repurchase agreements.
!'
Leveraged Funds
Each of the Funds seeking daily investment results corresponding, before fees and
expenses, to twice (200%) the daily performance of an Underlying Index: the Ultra500 Fund, the
Ultra100 Fund, the Ultra30 Fund and the UltraMid-Cap400 Fund ("Leveraged Funds", formerly
"Bullish Funds"), invests its assets based upon the same strategies as conventional index funds as
well as other leveraged and inverse index funds currently sold to retail investors. Rather than
holding positions intended to create exposure to 100% of the daily performance of an Underlying
Index, the Leveraged Funds hold positions designed to create exposure equal to twice (200%),
before fees and expenses, the daily performance of an Underlying Index. To accomplish this goal,
each Leveraged Fund holds 85% to 100% of its total assets in the component equity securities of
its Underlying Index ("Component Securities") and the remainder of its assets is devoted to
Financial Instruments and Money Market Instruments that are intended to create the additional
exposure needed to such Underlying Index necessary to pursue their investment objectives.
Inverse Funds
Each of the Funds seeking daily investment results corresponding, before fees and
expenses, to the inverse (opposite) of the daily performance of an Underlying Index: the Short500
Fund, the Short100 Fund, the Short30 Fund, and the ShortMid-Cap400 Fund ("Inverse Funds",
formerly "Bearish Funds"), do not invest in equity securities but rather create short exposure to
the relevant Underlying Index. If an Inverse Fund is successful in meeting its objective, its net
asset value should gain approximately as much, on a percentage basis, as any decrease in the
relevant Underlying index when the prices of the Component Securities in such Index decline on
any given day and should lose approximately as much; on a percentage basis, as any increase in
the relevant Underlying Index when the prices of such Component Securities increase on a given
day. The Inverse Funds will rely on establishing positions in Financial Instruments and Money
Market Instruments. Normally, 100% of the value of the portfolios of the Inverse Funds will be
devoted to such Financial Instruments and Money Market Instruments.
60861663
Page 5 of 42
,
n
Ultra Inverse Funds
Like the Inverse Funds, the "Ultra Inverse Funds" which are: the UltraShort S&P500
Fund, the Ultrashort QQQ Fund, the Ultrashort Dow30 Fund and the Ultrashort Midcap400
Fund, will not invest in equity securities, but will create short exposure to the relevant Underlying
Index utilizing Financial Instruments. In other words, rather than creating short positions in the
Component Securities of the relevant Underlying Index, each Ultra Inverse Fund will rely on
establishing positions in Financial Instruments. If an Ultra Inverse Fund is successful in meeting
its objective, its net asset value should gain approximately twice (200%) as much, on a percentage
basis, as any decrease in the relevant Underlying Index when the prices of Component Securities
in such Index decline on any given day and should lose approximately twice (200%) as much, on
a percentage basis, as any increase in the relevant Underlying Index when the prices of such
Component Securities increase on a given day. The Ultra Inverse Funds will rely on establishing
positions in Financial Instruments and Money Market Instruments. Normally, 100% of the value
of the portfolios of the Ultra Inverse Funds will be devoted to such Financial Instruments and
Money Market Instruments.
i',
Additional information (not contained herein) relating to the Trust, its Funds, its Shares
and their Underlying Indices may be found in: (1) the Regi~tration~statement
(which contains the
statutory prospectus and statement of additional information (collectively, the "Prospectus"); and
(2) the Trust's request for relief from the 1940 Act for the Funds, contained in the application filed
with the Commission on December 5,2000, as amended on January 6,2005, June 22,2005, July
5,2005 and March 29,2006 ("Trust Application7'), the notice contained in Release No. IC-27323
dated May 18, 2006 ("Notice") and the order granting relief contained in Release Number IC27394 dated June 13, 2006 ("Order") (collectively referred to herein as the "Trust Order"). Once
the Trust has received all necessary regulatory relief, it andlor the Market on which the Shares are
primarily listed (the "Primary Listing Market") will host a public website which will contain
additional information and data with respect to the Shares as described in Part IV of this letter.
B.
. OTHER PARTIES
1.
Advisor
ProFund Advisors LLC ("ProFund Advisors") is a Maryland limited liability company
formed on May 8, 1997, with its principal office located in Bethesda, Maryland. Each Fund is
advised by ProShare Advisors LLC, ("'Advisor"), an entity under common control with ProFund
Advisors. The Advisor is registered as an "investment adviser" under Section 203 of the
Investment Advisers Act of 1940 (''Advisers Act"). The Advisor may enter into sub-advisory
agreements with additional investment advisors to act as sub-advisors with respect to the Trust
and any of its series, if warranted. The Advisor is not afiYiated (within the meaning of Section
2(a)(3$ of the 1940 Act) with the h e x , any other Market nor any Underlying Index Provider.
Page 6 of42
2.
i
Distributor and Authorized Participants
SEI Investments Distribution Co., a broker-dealer registered under the Exchange Act and a
number of the National Association of Securities Dealers, Inc. ("NASD) will act as the
Distributor and principal underwriter of the Creation Units of Shares ("Distributor"). The
Distributor will distribute Shares on an agency basis. The Distributor is not affiliated (within the
meaning of Section 2(a)(3) of the 1940 Act) with the Advisor, Amex, any other Market, nor any
Underlying Index Provider.
Entities that have entered into an agreement with the Distributor to become "Authorized
Participants" may place orders with the Distributor to purchase or redeem Creation Units, as
described in Part I1 D. below. The Authorized Participants are not affiliated (within the meaning
of Section 2(a)(3) of the 1940 Act) with the Advisor, Amex, any other Market nor any Underlying
Index Provider.
3.
I
Adrninistrator/Custodian/TransferAgent,
Securities Lending Agent/Fund Accounting Agent
The Trust may appoint the Advisor or other service providers to act as administrator
("Administrator"), custodian ("Custodian"), transfer agent ("Transfer Agent"), index receipt agent
("Index Receipt Agent") and Securities Lending Agent ("Securities Lending Agent") of the
portfolio securities for the Trust. JP Morgan Chase Bank ("Chase") will provide operations,
compliance and administrative services. Chase will act as Transfer Agent, Custodian,
Administrator, Fund Accounting Agent ("Fund Accounting Agent7'), Index Receipt Agent and
Securities Lending Agent for the Trust, for which it will receive fees. Chase is not affiliated
(within the meaning of Section 2(a)(3) of the 1940 Act) with the Arnex or any Underlying Index
provider. The identity of the Securities Lending Agent, if any, and the Administrator, Custodian,
Transfer Agent, Index Receipt Agent and Fund Accounting Agent will be disclosed in the
Prospectus. If any such persons are "affiliated" within the meaning of Section 2(a)(3) of the 1940
Act with the Trust, the Advisor or the Distributor, such affiliation will also be disclosed and the
performance of their duties and obligations will be conducted within the provisions of the 1940
Act and the rules thereunder. The Trust and the Securities Lending Agent will comply with a noaction letter given to Chases or other similar relief and with the Commission s t a s guidelines
regarding the lending of portfolio securities of an open-end investment company and the
investment of collateral held therefor.
C.
SHARES
As described in subparts I.D. through I.H. below, each Fund will issue and redeem its
Shares only in aggregations of 75,000 Shares or multiples thereof ("Creation unit^")^. Shares will
&,Chase Manhattan Bank, File No. 132-3 (publicly available July 24,2001).
For any particular Fund, the number of Shares in a Creation Unit will not change, except in event of a
share split, reverse split or similar revaluation.
Page 7 of 42
i
not be individually redeemable; only Shares combined into Creation Units will be redeemable.
The Trust intends that the initial NAV of Shares will be established at a level convenient for
trading purposesI0. Purchasers of Creation Units will be able to unbundle the Creation Units into
the individual Shares comprising such Creation Unit.
1.
It is not expected that the Funds7 Distributor will maintain a secondary market in
individual Shares. The Amex will designate one or more m b e r fms to act as a market
specialist ("Specialist") and maintain a market for the Shares that trade on the Arnex. The Shares
will trade on the Amex in a manner similar to the units and shares of the Prior ETFs that are listed
on the Arnex (e.g., SPDRs, MidCap SPDRs, DLAMONDS, ishares and VIPERS)."
Shares will be registered in book-entry form only; the Funds will not issue individual
certificates for Shares. The Depository Trust Company ("DTC") will serve as securities
depository for Shares and 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 a
broker-dealer that is a participant in DTC (a "DTC Participant"). Beneficial owners of Shares
("Beneficial Owners7') will receive, at the relevant Fund's expense, all of the statements, notices,
and reports required under the 1940Act and other applicable laws ("'Required Materials").
The Trust understands that under existing industry practice, in the event the Trust requests
any action of Beneficial Owners of Shares, or a Beneficial Owner desires to take any action that
DTC, as the record owner of all outstanding Shares, is entitled to take, DTC would authorize the
DTC Participants to take such action and that the DTC Participants would authorize,the indirect
participants and Beneficial Owners acting through such DTC Participants to take such action and
would otherwise act upon the instructions of Beneficial Owners owning Shares through them. As
described above, the Trust will recognize DTC or its nominee as the record owner of Shares for all
purposes.
Accordingly, to exercise any rights of a holder of Shares, each Beneficial Owner must rely
upon the procedures of (1) DTC, (2) DTC Participants and (3) brokers, dealers, banks and trust
companies that clear through or maintain a custodial relationship with a DTC Participant, either
directly or indirectly, through which such Beneficial Owner holds its interest. Moreover, because
the Trust's records will reflect ownership of Shares by DTC only, the Trust will furnish the
Required Materials to the DTC Participants who, in tum, will be responsible for distributing them
to the Beneficial Owners. This arrangement is identical to that of all Prior ETFs.
lo The Trust believes that a convenient trading range will be between $50 - $250 per Shares and the Trust
reserves the right to declare a share split, or a reverse share split, if the trading price over time deviates significantly
from such price range. Each shareholder will have one vote per Share.
" The Trust expects that the trading of Shares on any other Market would be conducted in a similar manner.
6086166.3
Page 8 of 42
-
D.
PURCHASING SHGRES - General
The Trust will offer, issue and sell Shares of each Fund in Creation Units through the
Distributor on a continuous basis at the net asset value (sometimes referred to herein as 'NAV')
per Share next determined after receipt of an order in proper form. The NAV of each Fund is
expected to be determined as of the close of the regular trading session on the New York Stock
Exchange ("NYSE") (ordinarily 4:00 p.m. Eastern Time "ET"), on each day that the NYSE is
open for business (each such day a "Business Day"). The Trust will sell and redeem Creation
Units of each Fund on every Business Day, and will not suspend the right of redemption or
postpone the date of payment or satisfaction upon redemption for more than seven days, other
than (a) any period during which the NYSE is closed other than customary weekend and holiday
closings, (b) any period during which trading on the NYSE is restricted, (c) any period during
which an emergency exists as a result of which disposal by the Trust of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Trust to determine the value
of its net assets, and (d) for such other periods as the Commission may by order permit for the
protection of holders of Shares. Each Fund will always have a fixed number (initially 75,000) of
Shares in a Creation Unit as specified in the Prospectus for such Fund12.
As discussed above, individual Shares will be listed on the Amex (or another Market) and
traded in the secondary market in the same manner as other equity securities and the units or
shares (as the case may be) of Prior ETFs currently listed and trading thereon. The price of Shares
trading in the secondary market will be based on a current bid/offer market. No secondary sales
will be made to brokers or dealers at a concession by the Distributor or by any Fund. Transactions
involving the sale of Shares in the secondary market -- which will be between purchasers and
sellers and will not involve a Fund -- will be subject to customary brokerage commissions and
charges. This also is the method employed by SPDRs, MidCap SPDRs, DIAMONDS,
streetTRACKS, iShares, VIPERS, Select Sector SPDRs and the individual securities of other Prior
ETFs. Like those products, the price at which Shares trade will be disciplined by arbitrage
opportunities created by the ability to purchase or redeem Creation Units at NAV, which should
ensure that Shares do not trade at a material premium or discount in relation to NAV.
Sales of Shares of the Leveraged Funds generally will be purchased in Creation Units in
exihange for the purchaser's deposit of an "In-Kind Deposit," largely comprised of equity
securities ("Equity Securities") as described below under Part I E. Likewise, redemptions of
Shares of each Leveraged Fund in Creation Units generally will be made by the Trust largely in an
In-Kind Payment as described below under Part I.G. The Inverse Funds and the Ultra Inverse
Funds will generally be purchased and redeemed entirely for cash ("All-Cash Payments"). Shares
of each Fund may only be directly purchased, or redeemed, by or through an entity which is an
"Authorized Participant" (i.e. (i) a broker-dealer or other participant in the clearing process
through the Continuous Net Settlement System of the NSCC ,a clearing agency that is registered
with the SEC; or a DTC Participant, and (ii) which has executed an agreement with the Distributor
with respect to creations and redemptions of Creation Unit Aggregations" with the Distributor.
Authorized Participants may be, but are not required to be, members of the Primary Listing
Market. Authorized Participants are generally broker-dealers and are not compensated by the
Trust or any Fund in connection with the issuance or redemption of Shares.
l2 Assuming a Creation Unit of 75,000 Shares and $70 Shares price for a Fund as of the f ~ sday
t of trading
on the Amex, the Creation Unit value on such day would be $5,200,000.
6086166.3
Page 9 of 42
E.
(
\,.
\
PROCEDURES APPLICABLE TO PURCHASES OF LEVERAGED FUNDS
In-Kind Deposits. To purchase Shares directly from a Leveraged Fund, an Authorized
Participant must deposit with the Leveraged Fund a specified basket of Equity Securities
("Deposit Securities7').Each Business Day, prior to the opening of trading on the NYSE (currently
9:30 a.m. ET), the Index Receipt Agent will make available through the National Securities
Clearing Corporation ('WSCC") a list of the names and required number of shares of each Deposit
Security to be included in that day's creation basket ("Deposit Basket")l3. Each Leveraged Fund
reserves the right to permit or require the substiktion of an amount of cash - i.e., a "cash in lieu"
amount - to be added to the Balancing Amount (as defined below) to replace any Deposit Security
that may not be available in sufficient quantity for delivery or that may not be eligible for transfer
through the Automated Clearing Process (as defined below), or that may not be eligible for
trading by an Authorized Participant or the investor for which it is acting.
Balancing Amount. In addition to the In-Kind Deposit, Authorized Participants generally
will be required to make a cash payment referred to as the "Balancing Amount" to the issuing
Leveraged Fund. The Balancing Amount is the amount equal to the differential, if any, between
the market value of the Deposit Securities contained in the In-Kind Deposit and the NAV of the
Shares being purchased. If the NAV of a Creation Unit is higher than the value of the Deposit
Securities, an Authorized Participant will be required to pay the issuing Leveraged Fund a
Balancing Amount in cash. Computation of the Balancing Amount excludes any stamp duty or
other similar fees and expenses payable upon transfer of beneficial ownership of the Deposit
Securities, which shall be the sole responsibility of the Authorized Participant (see "Transaction
Fee on Purchases of Creation Units" and "Transaction Fee on Redemptions of Creation Units"
below"). If the NAV of a Creation Unit is lower than the value of the Deposit Securities, the
Authorized Participant will receive fiom the issuing Leveraged Fund a Balancing Amount in cash.
Each Leveraged Fund will publish, on a daily basis, idormation about the previous day's
Balancing Amount. 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 is because
the mark-to-market value of the Financial Instruments held by the Leveraged Funds will be
included in the Balancing Amount (not in the Deposit Basket or Redemption Basket (as defined
below)). Therefore, the Balancing Amount may fluctuate significantly from day to day due to the
leveraged nature of the Leveraged Funds. In addition, an Authorized Participant also must pay a
Transaction Fee, defined below, in cash. For custom orders, "cash in lieu" may be added to the
Balancing Amount to replace any Deposit Security that may not be available in sufficient quantity
for delivery or that may not be eligible for transfer through the Automated Clearing Process
(discussed below), or that may not be eligible for trading by an Authorized Participant or the
investor for which it is acting. The Balancing Amount must be paid to the Trust on the (3'd) third
Business Day following the Transmittal ate.'^
l3 A Deposit Basket will, on any given day, be comprised of a basket of some or all of the Component
Securities of the relevant Underlying Index or the equivalent equity securities selected by the Advisor to correspond
to the performance of such Index for each Leveraged Fund.
l4 For an order to be accepted on a particular Business Day, the order must be received by the Distributor
either by U.S. mail or by other permitted means on or before a Fund's NAV calculation time (normally 4:00 pm ET)
("Transmittal Date") and must conform to all the terms, conditions and times established in the Participant
Placement of Purchase Orders. As mentioned above, all purchase orders for Shares in
Creation Units must be placed by or through an Authorized Participant. Purchase orders will be
processed either through a manual clearing process using the facilities of DTC7s book-entry
system15 ("Non-Automated Clearing Process") or through an enhanced, automated clearing
process ("Automated Clearing Process") that is available only to those DTC participants that also
are participants in the Continuous Net Settlement System of NSCC. Authorized Participants that
do not use the Automated Clearing Process will be charged a higher Transaction Fee (as defined
below). A purchase order must be received by the Distributor by 4:00 p.m. New York time, if
transmitted by mail,I6 or by 3:00 p.m. New York time if transmitted by telephone, facsimile or
other electronic means permitted under the Participant Agreement on or prior to a Fund's NAV
calculation time normally 4:00 p.m. ET, (as described in the Prospectus), in order to receive that
day's NAV per Shares. All other procedures set forth in the Participant Agreement must be
followed in order for an Authorized Participant to receive the NAV determined on that day.
Purchases of Creation Units of Shares of a Leveraged Fund by an Authorized Participant
through either the Automated Clearing Process or the Non-Automated Clearing Process will settle
according to a "regular way" delivery and settlement process which is currently no later than the
third (3rd) Business Day following the Transmittal Date (generally expressed as 'T+3'3.17
!>
Transaction Fee on Purchases of Creation Units of Leveraged Funds. The Trust may
impose transaction fees ("Transaction Fees") in connection with the purchase of Creation Units.
The exact amount of any such Transaction Fees will be determined by the Leveraged Fund. The
purpose of this fee is to protect the continuing shareholders of the Trust against the possible
dilutive transactional expenses including operational processing and brokerage costs associated
with establishing and liquidating portfolio positions in connection with the purchase of Creation
Units.
The maximum Transaction Fee, and any variations or waivers thereof, will be filly
disclosed in the current Prospectus. From time to time and for such periods as the Leveraged
Fund in its sole discretion may determine, the Transaction Fees for purchase or redemption of
Creation Units of a Fund may be increased, decreased or otherwise modified. Such changes and
variations will be effected by an amendment or supplement to the then current Registration
Statement for the Fund. Such Transaction Fees will be limited to amounts that will have been
Agreement.
Is It is our understanding that a purchase or redemption order may be entered at a PTS terminal whereby the
purchaser or redeemer would initiate appropriate delivery order instructions.
l6 Mail is received periodically throughout the day. When mail is received, it is opened and time stamped. If
an order to create a Creation Unit is received by U.S. mail by on or before 4:00 p.m. ET it will be processed that day.
l7 To the extent that the standard for the delivery and settlement of equity securities traded on a Market is
shortened iiom T+3 to T+2, T+1 or even T, the time for the delivery and settlement of purchases or redemptions o f
Creation Units of Shares of a Leveraged Fund by an Authorized Participant through either the Automatic Clearing
Process or the Non-Automatic Clearing Process will be similarly shortened.
6086166.3
Page 11 of 42
1
determined by the Advisor to be appropriate and will take into account transaction and operational
processing costs associated with the recent purchases and sales of the equity securities, Financial
Instruments and Money Market Instruments held by the Trust. In all cases such Transaction Fees
will be limited in accordance with requirements of the Commission applicable to management
investment companies offering redeemable securities.
An additional fee will be imposed on transactions effected through the Non-Automated
Clearing Process described above. Investors that elect to substitute cash in lieu of one or more
Deposit Securities are subject to an additional charge determined at the discretion of the
Leveraged Fund. Shares of a Leveraged Fund may be issued in advance of receipt of Deposit
Securities subject to various conditions including a requirement to maintain on deposit with the
Trust cash at least equal to 115% of the market value of the missing Deposit Securities. Any such
transaction effected with the Trust must be effected using the Non-Automated Clearing Process.
F.
,
i
PROCEDURES APPLICABLE TO P ~ C H A S EOF INVERSE FUNDS AND
ULTRA MVERSE FUNDS
Although the organizational documents of the Trust and the Leveraged Funds permit
Leveraged Funds to accept In-Kind Deposits, all Inverse Funds and Ultra Inverse Funds, which
invest primarily in Financial Instruments, intend to only accept cash to purchase Creation Units.
All purchase orders for Inverse and Ultra Inverse Funds must be placed by or through an
Authorized Participant. Purchase orders for all Inverse and Ultra Inverse Funds will be processed
through the Non-Automated Clearing Process. To purchase Shares directly from an Inverse or
Ultra Inverse Fund, an Authorized Participant must transfer cash to such Inverse or Ultra Lnverse
Fund on the third (31d) Business Day following the Transmittal Date in an amount equal to (a) the
immediately preceding NAV of a Creation Unit; and (b) the appropriate Transaction Fee. A
purchase order must be received by the Distributor by 4:00 p.m. New York time, if transmitted by
mail, or by 3:00 p.m. New York time if transmitted by telephone, facsimile or other electronic
means permitted under the Participant Agreement, as described in the Prospectus, in order to
' receive that day's NAV per Shares.
The final purchase price of the Creation Unit will be
determined when the NAV for the Inverse Fund or Ultra Inverse Fund is calculated at the end of
such day.
Purchases of Creation Units of Shares of any Inverse Fund and Ultra Inverse Fund by an
Authorized Participant through the Non-Automated Clearing Process will settle according to a
"regular way" settlement process which is currently no later than the third (3rd) Business Day
following the Transmittal Date (generally expressed as " ~ + 3 ' 3 ' ~ .
To the extent that the standard for the delivery and settlement of equity securities traded on a Market is
shortened fiom T+3 to T+2, T+l or even T, the time for the delivery and settlement of purchases or redemptions of
Creation Units of Shares of an Inverse Fund by an Authorized Participant through the Non-Automatic Clearing
Process will be similarly shortened.
/'
Page 12 of 42
G.
REDEMPTION PROCEDURES APPLICABLE TO LEVERAGED FUNDS
'I
,[
Redemption Proceeds. Redemption proceeds of each Leveraged Fund will be paid in-kind
with a basket of specified Equity Securities ("Redemption Basket"). The composition of the
Redemption Basket will be available through NSCC. In most cases, the basket of securities an
Authorized Participant will receive will be the same as the Deposit Basket required of investors
purchasing Creation Units on the same day. There will be times, however, when the Deposit
Basket and Redemption Basket differ. Each Leveraged Fund reserves the right to honor a
redemption request with a non-conforming Redemption Basket, with the consent of the redeeming
investor.
Balancing Amount. If the NAV of a Creation Unit is higher than the value of the Equity
Securities comprising a Redemption Basket, an Authorized Participant will receive from the
redeeming Leveraged Fund a Balancing Amount in cash. If the NAV of a Creation Unit is lower
than the value of the securities comprising a Redemption Basket, the Authorized Participant will
be required to pay to the redeeming Leveraged Fund a Balancing h o u n t in cash. If an
Authorized Participant is to receive a ~alancin&ount, the amount due will be reduced by the
amount of the applicable Transaction Fee.
i
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Placement of Redemption Orders. As with purchases, redemptions of Creation Units may
be processed either through the Non-Automated Clearing Process or the Automated Clearing
Process. A redemption order must be received by the Distributor prior to 4:00 p.m. New York
time if transmitted by mail, or by 3:00 p.m. New York time if transmitted by telephone, facsimile
or other electronic means permitted under the Participant Agreement, as described in the
Prospectus, in order to receive that day's NAV per Shares. All other procedures set forth in the
Participation Agreement must be followed in order for an Authorized Participant to receive the
NAV determined on that day.
Transaction Fee on Redemption of Creation Units. The Trust may impose Transaction
Fees in connection with the redemption of Creation Units. The exact amount of any Transaction
Fee will be determined by the Leveraged Fund. The purpose of this fee is to protect the
continuing shareholders of the Trust against the possible dilutive transactional expenses including
operational processing and brokerage costs associated with establishing and liquidating portfolio
positions in connection with the redemption of Creation Units.
An Authorized Participant may request a redemption in cash which a Leveraged Fund
may, in its sole discretion, permit. Authorized Participants that elect to receive cash in lieu of one
or more securities in the redemption basket are subject to an additional charge determined at the
discretion of a Leveraged Fund. The Transaction Fee is paid to a Leveraged Fund, and it protects
existing shareholders of a Leveraged Fund from the expenses associated with the redemption of
Creation Units.
H.
{
REDEMPTION PROCEDURES APPLICABLE TO ALL INVERSE FUNDS AND
ULTRA INVERSE FUNDS
\
6086166.3
Page 13 of 42
i
Redemption Proceeds. Redemption proceeds of each Inverse and Ultra Inverse Fund will
be paid in cash only. The redemption proceeds will be reduced by the amount of the applicable
Transaction Fee.
Placement of Redemption Orders. As with purchases, redemptions of each Inverse and
Ultra Inverse Fund will be processed through the Non-Automated Clearing Process. A redemption
order must be received by the Distributor prior to 4:00p.m. New York time if transmitted by mail
or by 3:00 p.m. New York time if transmitted by telephone, facsimile or other electronic means
permitted under the Participant Agreement, as described in the Prospectus, in order to receive that
day's NAV per Shares. All other procedures set forth in the Participation Agreement must be
followed in order for an Authorized Participant to receive the NAV determined on that day.
I.
DIVIDEND REINVESTMENT SERVICE
The Trust will not make the DTC book-entry 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 their clients. The Prospectus 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 Prospectus 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 fiom 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 for original ownership of Shares. Brokerage commissions charges and
other costs, if any, incurred in purchasing Shares in the secondary market with the cash fiom the
distributions generally will be an expense borne by the individual Beneficial Owners participating
in reinvestment through such service.
J
POTENTIAL INVESTORS AND USERS OF SHARES
Shares will offer investors and financial professionals the opportunity to experience
"leveraged" investment results as well as the ability to manage their exposure to market risk on a
low-cost basis and with risk of loss limited to the amount of the initial investment. For example,
investors may seek to double the daily performance of one or more Underlying Indices through
investment in Shares of certain Leveraged Funds. Other investors interested in obtaining gains or
hedging a portfolio in anticipation of a declining market, may do so by investing in Shares of one
or more Inverse Funds or Ultra Inverse Funds which seek to increase in value when the market
measured by their relevant Underlying Indices declines. Still other investors may be interested in
managing their market risk by developing a strategy of targeting their exposure to a specified
Underlying Index somewhere along the spectrum between 100% of its inverse daily performance
and 200% of its daily performance, by investing in Shares of a combination of Funds.
6086166.3
Page 14 of 42
A
DISCLOSURE DOCUMENTS
The primary disclosure documents with respect to the Shares will be the Prospectus and
the Product Description, described below.
As with all investment company securities, the purchase of Shares in Creation Units fiom
any Fund will be accompanied or preceded by a Prospectus. A statutory prospectus may not
accompany secondary market trades of Shares, however, because the Commission has granted the
Trust an exemption fkom Section 24(d) of the 1940 Act @ the Trust Order). This exemption is
conditioned on an undertaking that investors purchasing fiom or through dealers in the secondary
market will receive a short "Product Description." The Product Description, if employed by the
Trust, will provide a plain English description of the relevant Fund and the Shares it issues.
Because the Prospectus will be delivered to investors dealing directly with the Trust, while
the Product Description may be delivered to investors purchasing' on the secondary market, the
two documents will be tailored to meet the information needs of their particular audiences.
With respect to disclosure in the Prospectus concerning the non-redeemability of Shares,
the Trust and the Funds will observe the following policies: (1) the term "mutual fund" will not be
used except to compare and contrast the Trust or a Fund with conventional mutual funds; (2) the
term "open-end management investment company" will be used in the Prospectus only to the
extent required by Form N-1A or other securities law requirements and this phrase will not be
included on the prospectus cover page or summary; (3) the fiont cover page of the Prospectus and
the prospectus summary will include a distinct paragraph or paragraphs setting forth the fact that
Shares will be listed on a Market (which will be identified) and will be individually nonredeemable; (4) the Prospectus will disclose that the owners of Shares may acquire those Shares
fiom a Fund, and tender those Shares for redemption to the Fund, only in Creation Units; and (5)
the Prospectus will clearly disclose that individual Shares prices may be below, above, or at the
most recently calculated NAV.
The Prospectus will also indicate that the proposed method by which Shares will be
purchased and traded may raise certain issues under applicable securities laws. Similar disclosure
is made in the prospectuses for the Prior ETFs currently trading on a Market. As described
above, Shares in Creation Units will be offered continuously to the public. Because new Shares
may be created and issued on an ongoing basis, at any point during the life of the relevant Fund, a
"distribution," as such term is used in the 1933 Act, may be occurring. {Broker-dealersand other
persons will be cautioned in the Prospectus that some activities on their part may, depending on
the circumstances, result in their being deemed participants in a distribution in a manner which
could render them statutory underwriters and subject them to the prospectus delivery and liability
provisions of the 1933 Act. The Prospectus will also stafe that a determination of whether one is
an underwriter must take into account all the facts and circumstances pertaining to the activities of
the broker-dealer or its client in the particular cases, and may provide examples of activities that
could lead to categorization as an underwriter. The Prospectus will also state that dealers who are.
not "underwriters," but are participating in a distribution (as contrasted to ordinary secondary
trading transactions), and thus dealing with Shares that are part of an "unsold allotment" within
t
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60861663
Page I5 of 42
the meaning of Section 4(3)(c) of the 1933 Act, would be unable to take advantage of the
prospectus-delivery exemption provided by Section 4(3) of the I933 Act.19
i
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In contrast, the Product Description will not mention such legal risks, since these are not
issues relevant to investors purchasing Shares on the secondary market. The Product Description
will provide a plain English overview of the Trust and the Fund including its investment objective
and investment strategies and the material risks and potential rewards of owning Shares. It also
will provide a brief, plain English description of the salient aspects of Shares, including: the
manner in which the Fund's Underlying Index value is reported; the manner in which Creation
Units are purchased and redeemed; the manner in which Shares will be traded on the Market,
including application of tradiig halt procedures; the identity of the Advisor; the composition and
frequency of dividend and capital gains distributions; and the actions, if any, that would be taken
by the Fund if its Shares are delisted or if its license with the compiler or sponsor of the
Underlying Index is terminated. It also will clearly disclose, among other things, that Shares are
not redeemable individually and that an investor selling Shares on the secondary market may incur
brokerage commissions when selling such shares and may receive less than the NAV of such
shares. Finally, the Product Description will provide a website address (in most cases the address
of the Underlying Index's compiler or sponsor) where investors can obtain information about the
composition and compilation methodology of a Fund's Underlying Index (see Part 1I.B below).
The Product Description is not intended to substitute for a full statutory prospectus, and
other than as described above, will not contain information that is not also contained in the
Prospectus. The Product Description will indicate that a Prospectus and SAI about the Trust may
be obtained, without charge, from the investor's broker or from the Distributor.
The Distributor will coordinate the production and distribution of Prospectus or Product
Descriptions to broker-dealers. It will be the responsibility of the broker-dealers to ensure that a
Prospectus or Product Description is provided to each secondary market purchaser of Shares.
B
PUBLIC WEBSITE
As discussed more fully in Part IV below, the portfolio holdings of each Fund will be
disclosed on the public website of the Primary Listing Market and/or the Trust ("Web~ite").~~
The
l9 The Trust notes that prospectus delivery is not required in certain instances, including purchases of Shares
by an investor who has previously been delivered a prospectus (until such prospectus is supplemented or otherwise
updated) and unsolicited brokers' transactions in Shares (pursuant to Section 4(4) of the 1933 Act). Also, f i s that
do incur a prospectus-delivery obligation with respect to Shares will be reminded that under Securities Act Rule 153,
a prospectus-delivery obligation under Section 5@)(2) of the Securities Act owed to a member of the Market in
connection with a sale on such Market, is satisfied by the fact that the Prospectus is available at such Market upon
request. The Prospectus also will note that the prospectus delivery mechanism provided in Rule 153 is only available
with respect to transactions on the Market.
20
The Trust will comply with its obligations, imposed by recent amendments to F o m N-lA, to disclose in
its SAI its policies and procedures with respect to the disclosure of its portfolio securities and to state in its prospectus
that a description of each Fund's policies and procedures is available in the Prospectus. See Release No. IC-26418.
/
6086166.3
Page 16 of 42
(
Trust or the Primary Listing Market will also calculate and publish the ''Indicative Intraday
Value7' or "IN" (discussed in Part IV below) for each Fund, as well as the current updated value
of the relevant Underlying Index every 15 seconds throughout the trading day, if such information
about the Underlying Index is not already available from another organization authorized by the
relevant Underlying Index Provider.
PART n I
COMPARISON OF THE FUNDS TO THE PRIOR ETPS THAT HAVE SOUGHT
SIMILAR COMMISSION ACTION AND RECEIVED SIMILAR RELIEE".
The relief requested in this letter is substantially similar to the relief granted by the
Commission to the Prior ETFs cited in footnotes 3 through 8 above, and is identical to the relief
granted to certain Prior ETFs discussed in Part V.A. 1.ii. below.
PART N
A.
AVAILABILITY OF MFORMATION REGARDING FUNDS, UNDERLYING
INDEXES AND SHARES
General
1.
The daily NAV for each Fund will be calculated and disseminated each Business Day.
(a)
Information Provided to Authorized Participants
All Authorized Participants, regardless of whether they transact outside the Shares
Clearing Process, may access the information described below. Applicants note that Authorized
Participants that are not also NSCC members may have to either join NSCC or obtain the portfolio
composition file ("PCF") from a third-party data vendor.
At the end of each Business Day, the Trust will prepare the next day's Deposit List and the
Redemption List (if different from the Deposit List) for Leveraged, Inverse and Ultra Inverse
Funds and send this information to the Index Receipt Agent. The same evening, the Index
Receipt Agent will add to this the cash information effective as of the close of business on that
Business Day and create a PCF for each Fund, which it will transmit to NSCC before the open of
business the next Business Day. The information in the PCF will be available to all NSCC
members and sufficient for them to calculate the I N for Leveraged Funds during such next
Business Day and will be the basis for the next day's NAV ~alculation.~'
The NSCC7ssystem for the receipt and dissemination to its participants of the PCF
was designed for portfolios consisting entirely of Equity Securities (or debt securities) and cash
-
-
-
2' Leveraged Funds may also invest up to 5% of their assets in Financial Instruments.
See Section IIl.l(a),
sur>ra. To the extent that a Leveraged Fund does hold Financial Instruments, information regarding these instruments
wiB be disclosed in an IIV File (described below), if necessary, for such Fund.
fage I7 of 42
and money market instruments. As a result, it is not currently capable of processing information
with respect to Financial Instruments, although Applicants expect that it may become so in the
future. Therefore, the Advisor has developed what it calls an "IIV File", which it will use to
disclose Funds' holdings of Financial Instruments until such time (or perhaps longer, if the Trust
deems it advisable) as the NSCC's PCF system can process such information regarding such
instruments. The Trust, or the Advisor or Index Receipt Agent on the Trust's behalf, will post the
IIV File to a password-protected website before the opening of business on each Business Day,
and all Authorized Participants will have access to the password and the website containing the
IIV FileeZ2The IIV File will contain, for each Fund (to the extent that it holds Financial
Instruments), information sufficient by itself or in connection with the PCF for market participants
to calculate a Fund's IIV and effectively arbitrage the Fund. For example, the following
information would be provided in the IIV File for a Leveraged Fund holding swaps, futures
contracts and Equity Securities: (A) the total value of the Equity Securities held by such Fund, (B)
the notional value of the swaps held by such Fund (together with an indication of the index on
which such swap is based and whether the Fund's position is long or short), (C) the most recent
valuation of the swaps held by the Fund, (D) the notional value of any futures contracts (together
with an indication of the index on which such contract is based, whether the Fund's position is
long or short and the contract's expiration date), (E) the number of futures contracts held by the
Fund (together with an indication of the index on which such contract is based, whether the
Fund's position is long or short and the contract's expiration date), (F) the most recent valuation
of the futures contracts held by the Fund, (G) the Fund's total assets and total shares outstanding,
and (H) a "net other assets" figure reflecting expenses and income of the Fund to be a~crued
during and through the following Business Day and accumulated gains or losses on the Fund's
Financial Instruments through the end of the Business Day immediately preceding the publication
of the IIV File. The IIV File for a Fund holding collars, caps, reverse repurchase agreements or
other Financial Instruments would contain analogous information for such instruments. To the
i
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I
'\
extent that any Fund holds cash or Money Market Instruments about which information is not
available in a PCF, information regarding such Fund's cash and Money Market Instnunent
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 Inverse and Ultra Inverse Funds (and, together with the information
on Equity Securities contained in the PCF, will be sufficient for calculation of IIV for 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, there will be no Deposit List or Redemption List for
Inverse Funds, which will ordinarily 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 Fund for that Business Day.
22 AS noted above, Authorized Participants that are not also NSCC members may have to either join NSCC
or pay a third-party data vendor to obtain PCF information made available through the facilities of NSCC. Applicants
understand that the Amex receives PCF files fiom NSCC and expect other Primary Listing Exchanges would as well.
I'
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6086-166.3
Page 18 of 42
(bj
iI
',
Information Provided to General Public
In addition, the Trust (or the Advisor or Index Receipt Agent on the Trust's behalf)
will make publicly available the portfolio holdings of each Fund.= The full portfolio holdings of
each Fund will be disclosed on the website of the Trust andlor the Primary Listing Exchange.
This website disclosure of portfolio holdings will be made and updated 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 instruments, money market instruments,
and amount of cash held in the portfolio of each Fund.24The portfolio holdings information made
available on the public website on any Business Day will form the basis for a Fund's NAV
calculation as of 4:00 pm ET on that Business Day and will reflect portfolio trades made on the
immediately preceding Business Day. The Trust or the Primary Listing Exchange will also
calculate and publish the IIV and the current updated value of the relevant Underlying Index every
15 seconds throughout the trading day, if such infonnation about the Underlying Index is riot
already available from another organization authorized by the relevant Underlying Index Provider.
Applicants expect the following to be disclosed on the website of the Trust andlor
the Primary Listing Exchange with respect to each type of Financial Instrument held by a Fund: a
description of the Financial Instrument, a statement as to whether the Fund's position in the
Financial Instrument is long or short, the most recent closing or other value of the Financial
Instrument, the number of such Financial Instruments held, and the aggregate notional value of
such Financial Instrument.
\
The Trust has been advised that the Amex intends to disseminate, every 15 seconds, during
regular Amex trading hours, through the facilities of the Consolidated Tape Association, the IIV
for each Fund, on a per Shares basis.25The Amex will calculate an IIV for each Fund, including
those Inverse Funds and Ultra Inverse Funds that do not hold Equity Securities, in the manner
discussed below. The IIV is designed to provide investors with a reference value which can be
23
The Trust will comply with its obligations, imposed by recent amendments to Form N-IA, to disclose in
its Prospectus its policies and procedures with respect to the disclosure of its portfolio securities and to state in its
prospectus that a description of each Fund's policies and procedures is available in the Prospectus. See Release No.
IC-264 18.
24
This information will be the same as that disclosed to Authorized Participants in the PCF and I N File,
except that (i) the information provided on the public website will be formatted to be reader-friendly and (ii) the PCF
and IIV File data are different from the portfolio holdings data on the publicly available website in that the former
will be calculated and displayed on a per Creation Unit basis while the latter will be on a per Fund basis. Both the
IIVPCF File and the public website will reflect dividends paid to date and accruals for expenses incurred to date as
well as the next Business Day's estimated dividend and expense accrual information. While Applicants intend to
make the public website disclosure reader-friendly, the PCF and I N File will be formatted so that it is compatible
with the systems that the Primary Listing Exchange and Authorized Participants use to retrieve and process such data.
For this reason, the PCF and IIV File will be posted on a separate, password protected site.
''
This value is variously referred to as an "Underlying Trading Value," "Indicative Optimized Portfolio
Value" ("IOPV"), and "Intraday Value," in the prospectus, marketing materials and other written materials
disseminated in connection with Prior ETFs.
6086166.3
Page 19 of 42
used in connection with other related market information. The Amex will not guarantee the
accuracy or completeness of the IIV.
i
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Neither the Trust, the Trustees nor the Advisor are responsible for the calculation or
dissemination of the I N and make no warranty as to its accuracy, or its usefulness to traders of
Shares. It is expected that the Primary Listing Market for the Shares of each Fund will calculate
and disseminate the same data in a similar manner as discussed below.
(a)
I N Calculation for Leveraged Funds.
The Arnex will calculate the I N throughout the trading day for each Leveraged
Fund by (i) calculating the current value of all Equity Securities held by a Fund, (ii) calculating
the Estimated Cash, (iii) calculating the marked-to-market gains or losses fiom the Fund's total
return equity swap exposure based on the Underlying Index percentage change, the swap costs
determined by the daily imbedded weighted interest rate and the notional value of the swap
contracts, if any, (iv) calculating the marked-to-market gains or losses of the futures contracts and
other Financial Instruments held by the Fund, if any, (v) adding the current value of Equity
Securities, the Estimated Cash, the marked-to-market gains/losses from swaps and the futures
contracts and other Financial Instruments, to arrive at a value and (vi) dividing that value by the
total Shares outstanding to obtain current IIV.
(b)
i*
IIV Calculation for Inverse and Ultra Inverse Funds.
The Arnex will calculate the IIV throughout the trading day for each Inverse and
Ultra Inverse Fund by (i) calculating the Estimated Cash, (ii) calculating the marked-to-market
gains/losses of swaps, futures and other Financial Instruments held by such Fund in the manner
described above, (iii) adding the Estimated Cash and the marked-to-market gains or losses of the
Financial Instruments to arrive at a value and (iv) dividing that value by the total Shares
outstanding to obtain current IIV.
3.
Underlying Index Value
Applicants understand that 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 every 15 seconds throughout the trading day by the
Primary Listing Exchange or another organization authorized by the relevant Underlying Index
Provider.
4.
Additional Information and Data
In addition, for all Funds, the Trust expects to maintain the Website that will display the
Prospectus and additional quantitative information that is updated on a daily basis, including daily
trading volume, closing price, and closing NAV. Also, the Amex intends to disseminate a variety
i
60861 66.3
Page 20 of 42
(
of data with respect to Shares on a daily basis by means of CTA and CQ High Speed Lines
including: information as of the previous day's close with respect to NAV and the number of
Shares outstanding. The Trust has been advised that similar information will be provided in
connection with Shares of each Fund primarily listed on a Market other than the Amex.
The closing prices of the Equity Securities of each Deposit Basket will be readily available
fiom, as applicable, the relevant Exchange, automated quotation systems, published or other
public sources or on-line information services such as Quotron, Bloomberg or Reuters. Similarly,
information regarding market prices and volume of Shares will be broadly available on a real time
basis throughout the trading day. Applicants expect that the previous day's closing price and
volume information will be published daily in the financial sections of many newspapers. In
addition, Applicants expect, given the past history of SPDRs and shares of other Prior ETFs, that
Shares will be followed by stock market and mutual fund professionals as well as investment
advisors who will offer their analysis of why investors should purchase, hold, sell or avoid Shares.
Exchange listing of Shares should help ensure that there is a substantial amount of raw data
available, and that such data is packaged, analyzed and widely disseminated to the investing
public.
PART V
A.
REQUESTS FOR RELIEF - INTRODUCTION
The Trust, on behalf of itself, the Amex, other Markets, the Distributor, Authorized
Participants and persons or entities engaging in transactions in the Shares, requests that the
Commission grant exemptive, interpretive or no-action relief fiom Rules 10a-1, lob-10, lob-17,
11dl -2,14e-5, 15cl-5, and 15cl-6 under the Exchange Act, Rules 101 and 102 of Regulation M
and Section 1l(d)(l) of the Exchange Act and Rule 200 (g) of Regulation SHO in connection
with secondary market transactions in Shares, and the creation or redemption of Shares, as
discussed below. As noted above, this requested relief is substantially similar to relief granted to
the Prior ETFs currently trading on a Market.
In the alternative, the Trust seeks confirmation that the phrase "managed to track a
particular indexy7in condition 3 of the Class Relief Letter includes funds such as the Leveraged
Funds, the Inverse Funds, and the Ultra Inverse Funds that are managed to track a multiple of a
particular index or managed to track the inverse, or a multiple of the inverse, of a particular index
all of the components of which are publicly available. Further, because the Inverse Funds and
Ultra Inverse Funds do not hold Equity Securities, the Trust believes that such Funds do not
satisfl condition 3 of the Class Relief Letter. Given the nature of the assets held by the Inverse
Funds and the Ultra Inverse Funds, however, the Trust requests the Staff confirm that it will not
recommend enforcement action to the Commission if a broker-dealer treats Shares of the Inverse
Funds and the Ultra Inverse Funds, for purposes of the relief from Section 11(d)(l) of the
Exchange Act, and Rule 1ldl-2 thereunder, in the Class Relief Letter, as shares of a Qualifying
ETF (as defined in the Class Relief Letter).
6086166.3
Page 21 of 42
1.
Rule 10a-1 and Rule 200(~)of Repulation SHO
a. Rule 10a-1
For the reasons set forth below, the Trust respectfully requests that the Commission grant
an exemption fiom Rule 1Oa-1 to permit sales of Shares without regard to the "tick" requirements
of Rule 10a-1. The Trust also requests that the Staff confirm that it will not recommend
enforcement action to the Commission under Rule 200(g) of Regulation SH026 against any
broker-dealer that marks "short" rather than "short exempt", a short sale effected in Shares.
Rule 10a-l(a)(l)(i) provides that a short sale of an exchange-traded security may not be
effected below the last regular-way sale price, or at such price unless such price is above the next
preceding price at which a sale was reported. The Trust believes that relief fiom the application of
Rule 10a-1 to secondary market transactions in Shares of each Fund is appropriate insofar as the
value of such Shares is based on the value of the Component Securities underlying its Index.
Application of Rule 10a-1 to Shares transactions would not further the Rule's purposes, and
exempting such transactions fiom the Rule would not be inconsistent with such Rule.
A primary purpose of Rule 10a-1 is to prevent the market price of a stock fiom being
manipulated downward by unrestricted short selling. The Trust expects that the market price of
,-
I
Shares of any each Leveraged Fund will be based primarily upon the current value of the
Component Securities comprising such Fund's Underlying Index. Although the forces of supply
and demand will have an effect on market prices for Shares, the Trust anticipates that the market
price of Shares of each Leveraged Fund will rise or fall primarily in accordance with the changes
in the value of the Component Securities of the relevant Underlying Index and therefore expects
that such Shares should not experience a significant decline in market value unless the value of
such Component Securities had similarly declined. This has been the consistent experience of the
Prior ETFs that currently trade on a Market.
As discussed above, certain Funds intend to use Financial Instruments and investment
techniques to help achieve their required exposure to their relevant Underlying Index (e.g. 200%
of the S&P 500 Index). The Trust believes that the use of such Financial Instruments and
investment techniques will neither alter the arbitrage opportunities nor inhibit arbitrage activity.
As noted above, the Advisor expects to make extensive use of Financial Instruments and
investment techniques which are correlated with all or a portion of the Component Securities
included in each Fund's Underlying Index. The arguments for the pricing benefits of arbitrage
transactions and the tendency of Prior ETF shares' NAV to converge to the IW apply equally to
any Fund portfolio. The Advisor expects that the arbitrageurs and other institutional investors will
take advantage of premiums or discounts in the market price of Shares of a particular Fund, just as
such entities now do in connection with the shares of Prior ETFs.
26 Regulation SHO, adopted by the Commission with a compliance date of January 3,2005, provided a new
regulatory framework governing short sales of securities @el. No. 34- 50103, July 28,2004,,69 FR 48008 (August 6,
2004) (the "SHO Release")). Among other things, Rule 200(g) of Regulation SHO requires broker-dealers to mark all
sell orders of any equity security as "long", "short" or "short exempt". Rule 200(g)(2) requires that a short sale order
is to be marked "short exempt" if the seller is relying on an exception from a price test.
I
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6086166.3
Page 22 of 42
With respect to each Inverse and Ultra Inverse Fund, the Trust expects that the price
m~vementof Shares of any Inverse and Ultra Inverse Fund will be based primarily upon the
inverse of the price movement of the Component Securities comprising such Fund's Underlying
Index. Although the forces of supply and demand will have an effect on market prices for Shares,
the Trust anticipates that the market price of Shares of any Inverse and Ultra Inverse Fund will
rise or fall primarily in accordance with the inverse chagges in the value of the Component
Securities of the relevant Underlying Index and therefore expects that such Shares should not
experience a significant decline in market value unless the value df such Component Securities
had similarly increased. Although no comparisons can be made to the experience of other
"inverse" Prior ETFs (as none exist ), the Trust has every reason to expect that market prices of
Inverse and Ultra Inverse Fund Shares should behave similarly to the NAV of shares of Inverse
and Ultra Inverse ProFunds which are structured as conventional mutual funds and are based upon
some of the same Underlying Indices as those of the Inverse and Ultra Inverse Funds. Indeed,
selling Shares of an Inverse or Ultra Inverse Fund short, if anything, should place upward pressure
on the market price of such Shares.
As noted above, the Trust believes that the use of Financial Instruments will neither alter
the arbitrage opportunities nor inhibit arbitrage activity with respect to Shares. This is true with
respect to Shares issued by both the Leveraged Funds as well as the Inverse and Ultra Inverse
Funds. In order to conduct arbitrage activity, market participants compare the recently quoted
secondary market price of Shares of a given Fund to, among other things, the most recent IIV,
recently quoted secondary market prices of Component Securities in the applicable Underlying
Index, the price of futures and other contracts on such securities As with the Prior ETFs, this
information will be readily available for Shares. Market participants can use this information to
assess arbitrage opportunities for Shares in the same way that they do for the Prior ETFs.
The Trust believes that any temporary disparities in market value between Shares of any
Leveraged, Inverse or Ultra Inverse Fund and the relevant Equity Securities andlor Financial
Instruments and/or Money Market Instruments held by such Fundz7would tend to be corrected
immediately by arbitrage activity. Moreover, Creation Units may be redeemed with the Trust on
any Business Day. Under these circumstances, it would appear to be economically futile for short
sales in Shares to be utilized to depress Shares prices of any Fund. Moreover, it would similarly
be economically futile for short sales in Shares to be utilized to depress particular Component
Securities comprising any relevant Underlying Index. Each Fund's Underlying Index will be
comprised of at least twenty (20) Component Securities. Except for the Dow Jones Industrial
Average ("DJIA") (which is comprised of 30 Component Securities), each such index is
As of March 31,2005, no .
comprised of approximately 100 or more Component Se~urities.~~
single stock comprised more than 7% of any Underlying Index, and only a handful of stocks
comprised more than 4% of any Underlying Index; therefore, a short seller with manipulative
intent would have to spend at least $1 6 for every $1 of market impact, and in most cases
" The relevant Equity Securities andor Financial Instruments andor Money Market Instruments held by a
Fund are collectively referred to as "Portfolio Securities."
.
28 The four Underlying Indices of the Funds are the same as those used by the SPDR, MidCap SPDR,
DLAMONDS and Nasdaq-100 Trusts, each of which received identical relief under Rule 10a-1 in the SPDR Letter,
the MidCap SPDR Letter, the DIAMONDS Letter and the Nasdaq-100 Letter, respectively (see footnote 5 above).
i
\
6085166.3
Page 23 of 42
i
substantially more. This is clearly an economically impractical stiategy for a manipulative short
seller to utilize. Furthermore, fhe Trust is unaware that any of the ETFs currently trading on a
Market have experienced incidents where the market price of their shares has been manipulated
downward by unrestricted short selling.
Applicants note that, because each Fund's Underlying Index will be comprised of at least
twenty (20) Component Securities, each Leveraged Fund will hold at least twenty (20) different
Equity Securities in the normal course of operation. This is not true of the Inverse and Ultra
Inverse Funds, which will hold Financial Instruments and will not ordinarily hold any Equity
Se~urities.'~However, as noted above, selling Shares of an Inverse or Ultra Inverse Fund short, if
anything, should place upward pressure on the prices of the Component Securities comprising the
relevant Underlying Index. The Inverse and Ultra Inverse Funds are based on Underlying Indices
comprised of at least twenty (20) Component Securities and the economic exposure of selling an
Inverse or Ultra Inverse Fund short is equivalent to purchasing these underlying securities
outright. Unrestricted short selling of Inverse and Ultra Inverse Funds therefore does not
implicate the concerns that Rule 10a-1 seeks to address and is not inconsistent with the rule itself.
Moreover, the Financial Instruments to be held by the Inverse and Ultra Inverse Funds are
generally not themselves subject to Rule 10a-1's "tick test."
In addition, the Trust believes that the trading market for Shares would be adversely
affected if Rule 10a-1 operated to prevent dealers or any exchange specialist or market maker
fiom making short sales of Shares to satisfy customer demand in the absence of an uptick.
Requiring an investor to utilize another means to achieve such investor's investment goals would
(
be detrimental to the market for Shares and contrary to the public interest in liquid, efficient
securities markets.
The Trust notes that it is not requesting relief fiom Rule 10a-1 for secondary market
portfolio sales which may be made in connection with redemptions of Shares. The short sale rule
will apply (or not apply) to such transactions as to any other portfolio trade.
For the reasons set forth above, the Trust respectfully requests that the Commission grant
an exemption fiom Rule 10a-1 to permit sales of Shares without regard to the "tick" requirements
of Rule 10a- 1.
b. Rule 200(a) of Regulation SHO
Rule 200(g) of Regulation SHO ("Rule 200(g)") provides that a broker-dealer must mark
all sell orders of any equity security as "long," "short," or "short exempt." Rule 200(g)(2) requires
that a short sale order must be marked "short exempt" if the seller is relying on an exception from
the tick test of Rule 10a-1 of the Exchange Act or any short sale price test of any exchange or
national securities association.
''Appendix A,includes information on anticipated portfolio hoIdings of the Funds.
6086166.3
Page 24 of 42
I'
!'
The Prior ETFs, along with certain other financial products3', have received various
exemptions from the Commission from short sale price test restrictions. In granting these
exemptions to Prior ETFs, the Commission noted that its decision was generally based on the fact
that the market value of ETF shares would rise or fall primarily based on changes in the net asset
value of the Component Securities in the indices related to such ETFs. As stated in the Class
Relief Lette?', this relief was conditioned on the Prior ETFs meeting certain hated conditions,
either specific to identified products or included as part of a broader "class exemption7'. Various
market centers that execute short sales in the Prior ETFs (such as exchanges, executing brokers
and!ECNs ) have made programming changes to "mask" (i.e., remove) the price test restriction^.^^
These market centers also monitor on a regular basis to confirm that any such product continues to
meet the conditions for the exemptive relief, and make programming changes to re-institute the
price test for any product that fails to satisfy such condition^.^^ Based on the fact that the market
centers have automatic programming procedures for these broad classes of securities, the SIA
argued that it is not necessary for market participants submitting orders in Prior ETFs to
distinguish between "short" and "short exempt" orders, and the market centers generally allow
orders marked "short" in these products to be executed without regard to a price test.34
The requested relief is subject to the four conditions stated as follows:
1. For each exempt short sale, the various market centers that execute such sales have
instituted procedures to "mask" the short sale character of the transaction so that they are executed
as shorf exempt;
2. Such market centers monitor on a regular basis to confirm that any such product or
transaction continues to meet the conditions for the exemptive relief and re-institute the price test
for any product or transaction that fails to satisfy such conditions;
3. A broker-dealer executing exempt short sales will mark such sales as "short," and in no
event will such sales be marked "long;" and
4. The market centers will maintain an audit trail of all such trade executions, which is
capable of being produced and subject to review upon request by the Commission and other
appropriate regulatory authorities.
Appendix A to the SIA Request Letter listed all the Prior ETFs which had received relief
fiom Rule 200(g) of Regulation SHO; however it did not name the Trust, which had yet to issue
its Shares for trading as of the date of the SIA Request Letter. The Trust believes that the Shares
30
See. for example, those mentioned in footnote 5, sur>ra.
31 See. the fmt sentence of footnote 7, supra. which sets forth the defmition of "Qualifying ETFs" and
footnote 10 of the SIA Request Letter which recites the conditions for the ETF "class exemption" in the "Letter re
ETFs" dated August 17,2001.
32 See, footnote 11 of the SIA Request Letter.
33 See, footnote 1 1 of the
3
4
S U Request Letter.
footnote
~
1 1 of the SIA Request Letter.
i
6086166.3
Page 25 of 42
(',
issued by each Fund will be traded in the secondary market in the same manner as the VIPERS in
the International Index Trust Letter, as we1 as the shares of other Prior ETFs identified in
Appendix A to the SIA Request Letter.35 Therefore, the Trust respecmly requests that the Staff
not recommend to the Commission enforcement action under Rule 200(g) if a broker-dealer marks
"short," rather than "short exempt," a short sale that is effected in its Shares or in the crossing
sessions in the same manner and to the same extent as the shares of the Prior ETFs named in
Appendix A to the SIA Request Letter and those named in the Powershares Letter.
2.
Rule lob-1 0
Rule lob-1 0 requires a broker or dealer effecting a transaction in a security for a customer
to give or send written notification to such customer disclosing the information specified in
paragraph (a) of Rule lob-10, including the identity, price and number of shares or units (or
principal amount) of the security purchased or sold. The Trust requests that the Commission grai~t
an exemption from Rule lob- 10, as discussed below, with respect to the creation (i.e., issuance) or
redemption of Shares of each Leveraged Fund (all of which are in Creation Units)36. The Trust is
not requesting exemptive or interpretive relief from Rule lob-10 in connection with purchases and
sales of Shares of Leveraged Funds in the secondary market, nor is it requesting relief from the
provisions of Rule lob-10 with respect to purchases and sales of Shares of the Inverse Funds or
Ultra Inverse Funds.
The Trust proposes that broker-dealers or other persons either creating or redeeming
Shares of each Leveraged Fund in Creation Units for their customers be permitted to provide such
customers with a statement of the number of such Creation Units created or redeemed without
providing a statement of the identity, number, price of shares of individual Deposit Securities
included in the Deposit Basket tendered to the Trust for purposes of creation of Creation Units, or
the identity, number and price of shares of individual Equity Securities held by a Leveraged Fund
to be delivered by the Trust to the redeeming holder. The composition of the Deposit Basket
required for tender and the Redemption Basket required for delivery will be disseminated by the
Trust on each Business Day prior to the opening of trading on the NYSE (currently 9:30 a.m. ET)
and will be applicable to requests for creations or redemption, as the case may be, on that day.
Moreover, institutions and market professionals will be readily able to calculate independently
such information based on publicly availqble information. The Trust anticipates that any
institution or broker-dealer engaging in creation or redemption transactions would have done so
m.
35 The Trust also notes that the Staff granted the identical no-action relief in the Letters cited
36
in footnote 3,
As Leveraged Funds are managed to track a multiple of a particular index and Inverse Funds hold no
securities while trying to track a multiple of a particular index, the Trust believes that the Leveraged Funds may not,
and the Inverse Funds do not, satisfy condition 3 of the Class Relief Letter which states "The ETF (a) consists of a
basket of twenty or more Component Securities, with no one Component Security constituting more than 25% of the
total value of the ETF, and is managed to track a particular index all of the components of which are publicly
available; or (b) solely for purposes of the exemptive relief for Broker-Dealer APs f?om Section 1l(d)(l) of the
Exchange Act, is an ETF with respect to which the staff of the Division of Market Regulation ("Staff") has granted
Non-AP Broker-Dealers (as defined below) relief from the requirements of Section 1I (d)(l) in a letter dated prior to
the date of this letter, provided that the ETF has not changed in such a way as to materially affect any of the facts or
representations in such prior letter."
6086166.3
Page 26 of 42
only with knowledge of the composition of the applicable Deposit or Redemption Basket, as the
case may be, so that specific information in the Rule lob- 10 notification wodd be redundant.
The requested relief under Rule lob-10 with respect to creations and redemptions of each
Fund be subject to the following conditions:
Confirmations to customers engaging in creations or redemptions must state that all
information required by Rule 10b-10 will be provided upon request;
Any such request by a customer for information required by Rule lob-10 will be filled in a
timely manner, in accordance with Rule lob- 1O(c); and
Except for the identity, number and price of shares of individual equity securities held by a
Fund, confirmations to customers must disclose all other information required by Rule lob-10(a).
3.
Rule lob-17
Rule lob-17 requires an issuer of a class of publicly traded securities to give notice of
certain specified actions (e.g., dividends, stock splits, rights offerings) relating to such class of
securities in accordance with Rule lob-17(b). The Trust respectfully requests the Commission,
pursuant to paragraph (b)(2), unconditionally exempt the Trust and its Leveraged Funds fiom the
application of Rule lob- 17. The Trust is not requesting relief fiom the provisions of Rule lob-17
with respect to its Inverse Funds or Ultra Inverse Funds.
Application of the Rule to the Trust and its Leveraged Funds would be impra~ticaland
unnecessarily burdensome, in view of the fact that holders of Shares are not holders of the
Portfolio Securities held by a Leveraged Fund. In addition, because each of the Equity Securities
held by a Leveraged Fund accounts for only a comparatively small portion of total holdings of the
relevant issuer, no meaningful purpose would be served by applying Rule lob-17 to the operation
of the Trust or its Leveraged Funds.
Moreover, in light of the nature of the Trust, compliance with Rule lob-17 would be
impractical. As an investment company, the Trust is required by the'hternal Revenue Code to
distribute at least 98% of its ordinary income and capital gains during the calendar year. If the
Trust declares too small a dividend, it will be charged an excise tax. If it declares too large a
dividend, the excess could be considered a return of capital to investors.
To avoid an over- or underdistribution of ordinary income, mutual finds, including the
Trust must estimate: (i) the amount of ordinary income to be earned during the period from the
!
6086166.3
Page 27 of 42
(,
date the dividend is declared to December 31; and (ii) the number of shares that will be
outstanding as of the record date. Requiring the Trust to declare its dividend ten days in advance
of the record date would increase the period for estimating ordinary income and the number of
outstanding shares, and thus increase the risk of an over- or underdistribution.
Requiring the Trust to declare its dividend ten days in advance of record date also would
increase the chance that the Trust would over- or underdistribute capital gains. Unlike ordinary
income, the Trust does not have the problem of estimating the aggregate amount of capitd gains it
will earn between declaration date and yew-end because it is required to distribute only such
capital gains as have been realized through October 31 of the year. However, as noted above,
requiring the Trust to declare its dividend ten days in advance of the record date would increase
the chance that the Trust would mis-estimate the number af outstanding shares. This, in turn,
would increase the chance that the Trust would mis-estimate the per share amount of capital gains
it must distribute. In view of the foregoing, the Trust requests that the Commission, pursuant to
paragraph (b)(2), exempt the Trust, its Leveraged Funds and the Shares fiom the application of
Rule 10b-17.
In the alternative, the Trust seeks clarification that the exemption contained in paragraph
(c) of Rule 1Ob-17 is applicable to the Shares of each Fund of the Trust. Paragraph (c) of Rule
10b-17 states that the Rule shall not apply to redeemable securities issued by open-end investment
companies and unit investment trusts registered under the 1940 Act. Except for the fact that
Shares must be redeemed only in Creation Units, Shares are redeemable securities issued by the
Trust which is an open-end investment company.37 It is in recognition of the foregoing that the
Commission has issued prior orders to the Index Funds permitting them to issue shares with
i
limited redeemability while still treating them like any other open-end investment company or
unit investment trusts, respectively. Therefore, the exemption under paragraph (c) of Rule lob-17,
which covers open-end investment companies with fully redeemable shares, should be applicable
to the Shares of each of the Funds.
4.
Rule 14e-5
Rule 14e-5 prohibits a "covered person" fiom directly or indirectly purchasing or
arranging to purchase any subject securities of a tender offer (or related security) except as part of
such tender offer. The dealer-manager of a tender offer is included in a "covered person" subject
to the Rule.
The Trust respectfully requests that the Commission grant an exemption fiom Rule 14e-5
to permit any person (including a member or member organization of the Amex or another
Market) acting as a dealer-manager of a tender offer for a security contained in a Deposit Basket
or Redemption Basket, during the existence of such offer, to: (1) redeem Shares of a Leveraged
Fund in Creation Units to the Trust for a Redemption Basket that may include a security subject to
the tender offer, and (2) engage in secondary market transactions in Shares of a Leveraged Fund
37
On June 13, 2006, pursuant to the Trust Order, the Commission granted the Tmst and its co-applicants an
exemption fiom Section 2(a)(32) of the 1940 Act to permit it, as an open-end investment company, to issue Shares in
Creation Units.
i
6086166.3
Page 28 of42
(~
'\
during such tender offer, if such bids or purchases are not effected for the purposes of facilitating
a tender offer. Applicants believe that redemptions of Shares would not result in the abuses that
Rule 14e-5 was designed to prevent. The acquisition of individual Equity Securities held by a
Leveraged Fund by means of redemptions of Shares of such Fund would be impractical and
extremely inefficient in view of the relatively small number of shares of any one security included
in a Redemption Basket and the requirement that a minimum of 75,000 Shares of a Leveraged
Fund (i.e., a Creation Unit), or multiples thereof, be redeemed. In addition, as discussed below in
the request for relief under Regulation M, application of the Rule's prohibition would impede the
valid and useful market and arbitrage activity which would assist secondary market trading and
improve Shares pricing efficiency.
The Trust similarly believes that it would be equally inefficient to facilitate a tender offer
in a particular security included in a Deposit Basket by means of purchasing all of the specific
Equity Securities comprising such Deposit Basket. Therefore, the Trust also respectfully requests
that the Commission take a no-action position under Rule 14e-5 if a broker-dealer (including a
member or member organization of the Amex or another Market) acting as a dealer-manager of a
tender offer for an Equity Security held by a Leveraged Fund purchases or arranges to purchase
shares of such Equity Security in the secondary market for the purpose of tendering them to
purchase one or more Creation Units of Shares of a Leveraged Fund, if such transactions are not
effected for the purposes of facilitating a tender offer. An example of such transactions includes
making an adjustment to a Fund's Deposit Basket in the ordinary course of business as a result of
a change in the composition of its Underlying Index. Applicants also believe that the purchases of
a Portfolio Security during the existence of a tender offer would not result in the abuses that Rule
14e-5 was designed to prevent. This requested relief is substantially similar to that afforded to the
ishares Trust, the WEBS Index Fund, Select Sector Trust, VIPERS and the Nasdaq-100 Trust (see
footnotes 3 and 4, &.
The Trust is not requesting relief from the provisions of Rule 14e-5 with respect to the
Inverse Funds or Ultra Inverse Funds.
5.
Rule 15cl-5 and 15cl-6
Rule 15cl-5 requires a broker or dealer controlled by, controlling, or under common
control with, the issuer of a security who induces the purchase or sale by a customer of a security,
to disclose the existence of such control before entering into a contract with or for such customer
for the purchase or sale of such security. Rule 15cl-6 requires a broker or dealer to send a
customer written notification of its participation in the primary or secondary distribution of any
security in which it effects any transaction in or for such customer's account or induces the
purchase or sale of such security by such customer.
i
For the reasons discussed above, the Trust believes that disclosure by a broker-dealer of a
control relationship with the issuer of a Component Security in the relevant Underlying Index of
any Fund, or of a participation in the distribution of one of the Equity Securities held by a
Page 29 of 42
Leveraged Fund would impose an unnecessary and unjustifiable burden on broker-dealers
engaging in transactions in Shares for their customers. There is no realistic potential for
manipulating the market price of an Equity Security held by a Leveraged Fund or the market 'price
of a Component Security in the relevant Underlying Index of a Fund by transactions in Shares.
Such a strategy would be both expensive and inefficient. Application of the Rules could adversely
affect the attractiveness of Shares to broker-dealers and thereby affect market liquidity, pricing
efficiency and the utility of Shares as a form of basket trading. The Trust, therefore, requests the
Commission to grant no-action relief from application of the Rules 15cl-5 and 15cl-6 with
respect to creations and redemptions of Shares of Leveraged Funds and secondary market
transactions therein3'.
6.
Rule 101 of Regulation M
The Trust respectfully requests that the Commission grant an exemption fi-om Rule 101, as
discussed below, to permit persons participating in a distribution of Shares of a Leveraged Fund to
bid for or purchase, redeem or engage in other secondary market transactions in such Shares.
Generally, Rule 101 of Regulation M is an anti-manipulation regulation that, subject to
certain exemptions, prohibits any "distribution participant" and "its affiliated purchasers" from
bidding for, purchasing fi-om, or attempting to induce any person to bid for or purchase, any
security which is the subject of a distribution until after the applicable restricted period, except as
specifically permitted in Regulation M. The provisions of Rule 101 apply to underwriters and
prospective underwriters, brokers, dealers, and other persons who have agreed to participate or are
participating in such distribution.
The Trust understands that while broker-dealers that: (i) tender Deposit Securities to the
Trust through the Distributor in return for Shares of a Leveraged Fund in Creation Units; or (ii)
redeem Shares of a Leveraged Fund in Creation Units for receipt of Redemption Securities held
by a Leveraged Fund generally will not be part of a syndicate or selling group, and while no
broker-dealer will receive fees, commissions or other remuneration from the Trust or the
Distributor for the sale of Shares of a Leveraged Fund in Creation Units, under certain
circumstances such broker-dealers could be deemed to be ''underwriters" or "distribution
participants" as such terms are defined in Rule loo@).
Paragraph (c)(4) of Rule 101 exempts fi-om its application, inter alia, redeemable
securities issued by an open-end management investment company (as such terms are used in the
1940 Act). The Trust is registered as an open-end management investment company under the
1940 Act. However, as discussed above, individual Shares are not redeemable except in Creation
Units. Due to the redeemability of the Shares in Creation Units, there should be little disparity
between the Shares' market price and their net asset value per Shares. Accordingly, the rationale
for exempting redeemable securities of open-end management investment companies fiom the
application of Rule 101 is equally applicable to the Shares. Although redemption is subject to the
condition of tendering the appropriate number of Shares of Creation Units, the Trust otherwise
38 The Trust submits this request because it believes that the Leveraged Funds may not, and the Inverse
Funds do not, satisfy of the Class Relief Letter, see footnote 36, m.
6086166.3
Page 30 of 42
will continue to function as an open-end fund continuously offering its Shares. It is in recognition
of the special nature of such offerings that open-end management investment company and unit
investment trust securities are exempted under paragraph (c)(4). Without such an exemption, they
could not operate as intended. In view of the foregoing, the Trust requests that the Commission
confirm that as a result of registration of the Trust as an open-end management investment
company and the redeemable nature of the Shares in Creation Units, transactions in the Shares
would be exempted from Rule 101 on the basis of the exception contained in (c)(4) of such Rule.
The purpose of Rule 101 is to prevent persons from conditioning the market to facilitate a
distribution. Creation Units of Shares may be created and redeemed, in kind, (or in cash in certain
cases) at net asset value, on any Business Day. Holders of Shares also have the benefit of intraday secondary market liquidity by virtue of their Market listing. Thus, the secondary market price
of Shares should not vary substantially from the net asset value of such Shares. Because of the
redeemability of Shares in Creation Units, coupled h t h the open-end nature of the Trust, any
significant disparity between the market price of the Shares and their net asset value should be
eliminated by arbitrage activity. Because the net asset value of an Shares is largely based on the
market value of the relevant Fund's Portfolio Securities, transactions involving Shares (creations
fiom and redemptions with the Trust, as well as purchases and sales in the secondary market) will
not affect net asset value. Similarly, such transactions should not have a significant effect on the
market price of Shares.
The Trust also respectfully requests relief fiom the provisions of Rule 101 to the extent
necessary to permit persons or entities that may be deemed to be participating in the distribution
of Shares or shares of any Equity Securities included as Deposit Securities (i) to purchase
Deposit Securities for the purpose of tendering them to a Leveraged Fund as part of a Creation
Deposit, for the purchase of Creation Units of Shares and (ii) to tender Shares for redemption in
Creation Units and to receive Redemption Securities as part of redemption proceeds.
The Trust also respectfhlly requests that the Commission clarifjr that the tender of the
Shares to a Leveraged Fund for redemption and the receipt of Redemption Securities upon
redemption does not constitute a bid for or purchase of any of such securities, or an "attempt to
induce any person to bid for or purchase a covered security, during the applicable restricted
period" for the purposes of Rule 101. Redemption entails no separate bid for any of the
Redemption Securities. As described above, following notice of redemption, a Leveraged Fund
will deliver the specified Redemption Securities after the redemption request is received in proper
form, except in those cases where redemption proceeds are paid in cash. Absent unusual
circumstances, the Trust will not purchase Redemption Securities in the secondary market to
fulfill a redemption request. Therefore, redemptions of Shares cannot be expected to affect the
market price of the ~ e d e m ~ t i oSecurities.
n
As indicated above, the ~istributorwill not engage in
any secondary market transactions in Shares, either for its own account or for investors. In
addition, the Trust believes that the purchase of Deposit Securities, while engaged in a distribution
with respect to such stock, for the purpose of acquiring a Creation Unit of Shares should be
exempted fiom Rule 101. The purpose of Rule 101 is to prevent persons from conditioning the
market to facilitate a distribution. The Trust believes there would be little financial incentive to
engage in transactions in stock baskets valued at approximately $5,000,000 in order to manipulate
the price of a single stock in the applicable Underying Index. Furthermore, as discussed above,
6086166.3
Page 3 1 of 42
aberrations in the price should be readily detected by the marketplace and corrected by arbitrage
activity when detected, thus eliminating the need for the limitations contained in Rule 101.
Application of Rule 101 in this context would not further the anti-m&ipulative purposes
underlying the Rule.
In view of the lack of any special financial incentive to create Creation Units of Shares,
combined with a predictable lack of any meaningful potential for the issuance and the secondary
market trading of Shares to affect significantly Shares pricing, application of Rule 101 to a brokerdealer or other person who may be participating in a distribution of Shares or Equity Securities
held by a Leveraged Fund is unnecessary and inappropriate, and could unnecessarily hinder
broker-dealers or other persons in their creation and redemption activities, in their day-to-day
ordinary business of buying and selling Shares and thus undermine the potential beneficial market
effects of Shares trading discussed throughout this letter.
The Trust is not requesting relief from the provisions of Rule 101 of Regulation M with
respect to the Inverse or Ultra Inverse Funds.
7.
Rule 102 of Regulation M
The Trust also respectfully requests that the Commission confirm that, as a result of
registration of the Trust as an open-end management investment company and the redeemable
nature of the Shares in Creation Units, for the reasons previously stated under the request for relief
under Rule 10 1(c)(4), transactions in Shares of Leveraged Funds would be exempted from Rule
102 on the basis of the exception contained in paragraph (d)(4) of such Rule. Application of Rule
102 in this context would not further the anti-manipulative purposes underlying the Rule.
I
1
The purpose of Rule 102 is to prevent persons from manipulating the price of a security
during a distribution and to protect the integrity of the offering process by prohibiting activities
that could artificially influence the market for that p&icular security. The Trust respectfully
requests that the Commission grant an exemption under paragraph (e) of Rule 102 to allow the
Trust to redeem Shares in Creation Units of Leveraged Funds during the continuous offering of
such Shares. The Trust respectfully submits that the redemptions described in this letter do not
constitute a manipulative or deceptive practice within the purpose of Rule 102 and are eligible for
an exemption from the provisions of Rule 102 to allow each of the Leveraged Funds to redeem
their Shares in Creation Units during the continuous offering of such Shares.
For the reasons described in connection with the requested Rule 101 relief, redemption
transactions and secondary market transactions in the Shares are not viable means to manipulate
the price of an Equity Security held by a Leveraged Fund during a distribution of such security. .
The Trust will redeem the Creation Units of Shares at the NAV of the Shares. Although Shares
are traded on the secondary market, Shares may only be redeemed in Creation Units. Thus, the
Trust believes that the redemption by the Trust of the Shares of each of the Leveraged Funds at
NAV in consideration principally for Equity Securities held by a Leveraged Fund does not involve
the abuses that Rule 102 was intended to prevent.
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6086166.3
Page 32 of 42
The Trust is not requesting relief fiom the provisions of Rule 102 of Regulation M with
respect to the Inverse or Ultra Inverse Funds.
8.
Section 11(d)(l): Rules 11d l - 1 and 11d 1-2
Section 1l(d)(l) of the Exchange Act generally prohibits a person who is both a broker
and a dealer fiom effecting any transaction in which the broker-dealer extends credit to a customer
on any security which was part of a new issue in the distribution of which he participated as a
member of a selling syndicate or group within thirty days prior to such transaction. Rule 11d l - 1
provides an exemption fiom Section 1l(d)(l) with respect to any transaction by a broker-dealer
who extends credit to a customer under the circumstances provided in paragraphs (a) through (e)
of the Rule. Rule 11dl -2 provides an exemption from Section 11(d)(l) for securities issued by a
registered open-end investment company or unit investment trust with respect to transactions by a
broker-dealer who extends credit on such security, provided the person to whom credit has been
extended has owned the security for more than thirty days.
The Trust hereby requests clarification that Section 1l(d)(l) does not apply to brokerdealers that engage in both proprietary and customer transactions in Shares of each Fund in the
secondary market but do not create Creation Units of such Shares3'. The Trust believes that
application of the thirty-day restriction in Rule 1ldl-2 to broker-dealers engaging exclusively in
secondary market transactions in Shares of each Fund does not further the purposes of Section
11(d)(l) or Rule 11d 1-2.40 The only compensation a broker-dealer will receive for representing a
I
customer in purchasing Shares is the commission charged to that customer, which in all
likelihood is the same compensation the broker-dealer would receive in connection with any stock
purchase by a customer. There is no special financial incentive to a broker-dealer, other than the
broker-dealer's regular commission, to engage in secondary market transactions in Shares, either
as principal or agent.
The Trust also requests that the Division of Market Regulation not recommend any
enforcement action to the Commission under Section 1l(d)(l) of the Exchange Act if brokerdealers treat Shares, for purposes of Rule 1ldl-2, as "securities issued by a registered open-end
investment company . . . as defined in the Investment Company Act" and thereby extend credit or
maintain or arrange for the extension or maintenance of credit on Shares that have been owned by
he persons to whom credit is provided for more than thirty days, in reliance on the exemption
contained in the Rule.
39
The Trust submits this request because it believes that the Leveraged Funds may not, and the Inverse and
Ultra Inverse Funds do not, satisfy condition 3 of the SIA Class Letter, see footnote 36, ~
~
E
J
IJ
.
40
The Trust notes that broker-dealers that engage in both creation of Creation Units of Shares and
secondary market transactions in Shares and that meet the requirements of Rule I ldl-1 may be covered by the
exemptions provided in such rule.
!
Page 33 of 42
PART VI
A.
/
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CONCLUSION
Based on the foregoing and on our conversations with Staff, the Trust respectfully requests
that the Commission and the division of Market Regulation grant the relief requested herein. The
forms of relief requested are virtually identical to those actions which the Commission and the
Division of Market Regulation have taken in similar circumstances.
Thank you for your consideration of this request. The Trust intends to launch the trading
of the Shares of each of the Funds on the morning of Wednesday, June 21,2006. In light of this
schedule and given the ample precedent for the requested relief, the Trust is hopeful that the
requests contained herein will be handled expeditiously. Should you have any questions or
require additional information, please do not hesitate to call the undersigned at (212) 238-8665.
Kathleen H. Moriarty
1
CC :
Mr. Brian Bussey
Mr. Matthew Daigler
Page 34 of 42
\
Ms. Raquel Russell
Division of Market Regulation
Mr. Michael Mundt
Division of Investment Management
Steven M. Brancato, Esq.
Mr. Michael L. Sapir
ProFund Advisors LLC
Page 35 of 42
('
APPENDIX A - BRIEF OVERVIEW OF THE FUNDS
%'
Set forth below is a brief description of each Fund's investment objectives and a list of
the anticipated top holdings of each Fund and the percentages of the Fund's total assets that such
holdings comprise. The percentages given &e based on the composition of the Underlying
Indices as of October 13, 2005 and on the expected asset mix of each Fund and are subject to
change. For all Funds, Money Market Instruments such as repurchase agreements are used for
cash management purposes.
In the case of the Leveraged Funds, the top ten holdings are provided. In the case of the
Inverse Funds, only two holdings are provided, since in excess of 95% of each Inverse Fund's
assets is expected to be comprised of Money Market Instruments. Inverse Funds will not hold
Equity Securities.
ULTRA500 FUND
Ultra500 Fund seeks daily investment results, before fees and expenses, that correspond
to twice (200%) the daily performance of the S&P 500@ Index. If Ultra500 Fund is successful
in meeting its objective, its net asset value should gain approximately twice as much, on a
percentage basis, as the S&P 500 Index when the prices of the securities in the S&P 500 Index
rise on a given day and should lose approximately twice as much, on a percentage basis, when
such prices decline on a given day.
i
i
Anticipated top ten holdings:
Money Market Instruments
Exxon Mobil Corp
General Electric
Citigroup Inc
Microsoft Corp
Procter & Gamble Co
Johnson and Johnson
Pfizer Inc
Bank of America Corp
American International Group Inc
ULTRA100 FUND
i\
UltralOO Fund seeks daily investment results, before fees and expenses, that correspond
to twice (200%) the daily performance of the NASDAQ-100 Index@. If UltralOO Fund is
successll in meeting its objective, its net asset value should gain approximately twice as much,
on a percentage basis, as the NASDAQ-100 Index when the prices of the securities in the
NASDAQ-100 Index rise on a given day and should lose approximately twice as much, on a
percentage basis, when such prices decline on a given day.
Anticipated top ten holdings:
i
.
Money Market Instruments
7.7%
Microsoft Corp
6.6%
QUALCOMM Inc.
6.0%
Apple Computer Inc
4.5%
Intel Corp
3.6%
Amgen Inc
3-2%
eBay Inc
2.9%
Cisco Systems Inc
2.9%
Net Other Assets
2.3%
Dell Inc
2.1%
Ultra30 Fund seeks daily investment results, before fees and expenses, that correspond to
twice (200%) the daily performance of the Dow Jones Industrial ~ v e r a ~ Pe A
' ~) . If Ultra30
Fund is successful in meeting its objective, its net asset value should gain approximately twice as
much, on a percentage basis, as the DJIA on a given day when the index increases and should
lose approximately twice as much, on a percentage basis, as the DJIA on a given day when the
index decreases.
Anticipated top ten holdings:
Money Market Instruments
9.1%
International Business Machines
5.8%
3M Company
4.9%
Altria Group Inc
4.9%
Boeing Co
4.7%
\
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6086166.3
Page 37 of 42
Johnson and Johnson
4.5%
.
American International Group Inc
4.4%
Exxon Mobil Corp
4.1%
Procter & Gamble Co
4.0%
Caterpillar Inc
3.8%
ULTRAMID-CAP400 FUND
UltraMid-Cap400 Fund seeks daily investment results, before fees and ex enses, that
correspond to twice (200%) the daily performance of the S&P MidCap 400" Index. If
UltraMid-Cap400 Fund is successful in meeting its objective, its net asset value should gain
approximately twice as much, on a percentage basis, as the S&P MidCap 400 Index when the
prices of the securities in the S&P MidCap 400 Index rise on a given day and should lose
approximately twice as much, on a percentage basis, when such prices decline on a given day.
Anticipated top ten holdings:
Money Market Instruments
Noble Energy Inc
Legg Mason Inc
1.O%
Net Other Assets
Peabody Energy Corp
SanDisk Corp
Whole Foods Market Inc
Pioneer Natural Resources Co
Fidelity National Title Group Inc
Pacificare Health Systems Inc
0.6%
SHORT500 FUND
Short500 F w d seeks daily investment results, before fees and expenses, that correspond
to the inverse (opposite) of the daily performance of the S&P 500@ Index. If Short500 Fund is
successful in meeting its objective, its net asset value should gain approximately as much, on a
percentage basis, as any decrease in the S&P 500 Index when the prices of the securities in the
S&P 500 Index decline on any given day and should lose approximately as much, on a
percentage basis, as any increase in the S&P 500 Index when the prices of the securities in the
S&P 500 Index increase on a given day.
Page 38 of 42
Anticipated top holdings:
Money Market Instruments
Net Other Assets
SHORT100 FUND
Short100 Fund seeks daily investment results that correspond to the inverse (opposite) of
the daily performance of the NASDAQ-100 Index@. If Short100 Fund is successll in meeting
its objective, its net asset value should gain approximately as much, on a percentage basis, as any
decrease in the- NASDAQ-100 Index when the prices of the securities in the NASDAQ-100
Index decline on any given day and should lose approximately as much, on a percentage basis, as
any increase in the NASDAQ-100 Index when the prices of the securities in the NASDAQ-100
Index increase on a given day.
Anticipated top holdings:
Money Market Instruments
Net Other Assets
SHORT30 FUND
Short30 Fund seeks daily investment results, before fees and expenses, that correspond to
the inverse (opposite) of the daily performance of the DJIA. If Short30 Fund is successful in
meeting its objective, its net asset value should gain approximately as much, on a percentage
basis, as any decrease in the DJIA when the prices of the securities in the DJIA decline on any
given day and should lose approximately as much, on a percentage basis, as any increase in the
DJIA when the prices of the securities in the DJIA increase on a given day.
Anticipated top holdings:
Money Market Instruments
Net Other Assets .
SHORTMID-CAP 400 FUND
ShortMid-Cap400 Fund seeks daily investment results, before fees and expenses, that
correspond to the inverse (opposite) of the daily performance of the S&P MidCap 4 0 0 Index.
~
If ShortMid-Cap 400 Fund is successful in meeting its objective, its net asset value should gain
6086166.3
Page 39 of 42
i
.
approximately as much, on a percentage basis, as any decrease in the S&P Mid-Cap 400 Index
when the prices of the securities in the Index decline on any given day and should lose
approximately as much, on a percentage basis, as any increase in the Index when the prices of
the securities in the Index increase on a given day.
Anticipated top holdings:
Money Market Instruments
Net Other Assets
ULTRA SHORT 500 FUND
Ultra Short 5OOFund seeks daily investment results, before fees and expenses, that
correspond to twice (200%) the inverse (opposite) of the daily performance of the S&P 500@
Index. If the Ultra Short 500 Fund is successful in meeting its objective, its net asset value
should gain approximately twice (200%) as much, on a percentage basis, as any decrease in the
S&P 500 Index when the prices of the securities in the S&P 500 Index decline on any given day
and should lose approximately twice (200%) as much, on a percentage basis, as any increase in
the S&P 500 Index when the prices of the securities in the S&P 500 Index increase on a given
day.
Anticipated top holdings:
Money Market Instruments
Net Other Assets
ULTRA SHORT 100 FUND
The Ultra Short100 Fund seeks daily investment results that correspond to twice (200%)
the inverse (opposite) of the daily performance of the NASDAQ-100 Index@. If the Ultra Short
100 Fund is successful in meeting its objective, its net asset value shouId gain approximately
twice (200%) as much, on a percentage basis, as any decrease in the NASDAQ-100 Index when
the prices of the securities in the NASDAQ-100 Index decline on any given day and should lose
approximately twice (200%) as much, on a percentage basis, as any increase in the NASDAQ100 Index when the prices of the securities in the NASDAQ-1 00 Index increase on a given day.
I
6086166.3
Page 40 of 42
Anticipated top holdings:
Money Market Instruments
Net Other Assets
ULTRA SHORT 30 FUND
The Ultra Short 30 Fund seeks daily investment results, before fees and expenses, that
correspond to twice (200%) the inverse (opposite) of the daily performance of the DJIA. If the
Ultra Short 30 Fund is successful in meeting its objective, its net asset value should gain
approximately twice (200%) as much, on a percentage basis, as any decrease in the DJIA when
the prices of the securities in the DJIA decline on any given day and should lose approximately
twice (200%) as much, on a percentage basis, as any increase in the DJIA when the prices of the
securities in the DJIA increase on a given day.
Anticipated top holdings:
Money Market Instruments
Net Other Assets
ULTRA SHORTMID-CAP400 FUND
'
The Ultra ShortMid-Cap400 Fund seeks daily investment results, before fees and
expenses, that corres ond to twice (200%) the inverse (opposite) of the daily perfonnance of the
S&P MidCap 400ThPIndex. If the Ultra ShortMid-Cap400 Fund is successful in meeting its
objective, its net asset value should gain approximately twice (200%) as much, on a percentage
basis, as any decrease in the S&P Mid-Cap 400 Index when the prices of the securities in the
Index decline on any given day and should lose approximately twice (200%) as much, on a
percentage basis, as any increase in the Index when the prices of the securities in the Index
increase on a given day.
Anticipated top holdings:
Money Market Instruments
Net Other Assets
Page 4 1 of42
i
APPENDIX B - DESCRIPTION OF THE UNDERLYING INDICES
DOW JONES INDUSTRIAL AVERAGE
The Dow Jones Industrial Average is a price-weighted index consisting of 30 widely held and
traded stocks listed on U.S. stock markets selected by Dow Jones & Company based upon size,
reputation, growth, transaction volume and sector coverage. Excluded £tom the average are
transportation and utility stocks.
The Nasdaq-100 Index contains 100 of the largest and most active non-financial domestic and
international issuers listed on the Nasdaq Stock Market based on market capitalization.
Eligibility criteria for the Nasdaq-100 Index include a minimum average daily trading volume of
100,000 shares. If the security is a foreign security, the company must have a world wide market
value of at least $10 billion, a U.S. market value of at least $4 billion, and average trading
volume of at least 200,000 shares per day.
S&P 500@ INDEX
The S&P 500 Index is a widely used measure of large-capitalization U.S. company stock
performance. It consists of the common stocks of 500 major corporations selected by Standard &
Poor's for their market size, liquidity and industry group representation. Standard & Poor's also
attempts to assure that the Index reflects the full range and diversity of the U.S. economy.
S&P MIDCAP 400TMINDEX
The S&P MidCap 400 Index is a widely used measure of medium capitalized U.S. company
stock performance. It consists of the common stocks of 400 major corporations selected by
Standard & Poor's for their market size, industry group representation, and the frequency and
ease with which their stocks trade.
Page 42 of42
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.