[Federal Register Volume 59, Number 38 (Friday, February 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4333]
[[Page Unknown]]
[Federal Register: February 25, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 20082; 812-8788]
Rydex Series Trust, et al.; Notice of Application
February 17, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: Rydex Series Trust (the ``Trust''); PADCO Advisors, Inc.
(the ``Adviser''); and all future registered investment companies and
series thereof for which the Adviser, or any entity controlled by,
controlling, or under common control with the Adviser serves as
investment adviser (collectively with the Trust, the ``Funds'').
RELEVANT ACT SECTIONS: Exemption requested under sections 6(c) and
17(d) and rule 17d-1.
SUMMARY OF APPLICATION: Applicants seek a conditional order permitting
the Funds to deposit their daily uninvested cash balances into a single
joint account to be used to enter into repurchase agreements.
FILING DATE: The application was filed on January 24, 1994, and amended
on February 9, 1994. By letters dated February 15, 1994, and February
16, 1994, applicants have agreed to make certain technical changes to
the application, and to file an amendment prior to the issuance of any
order granting the requested relief. This notice reflects the changes
to be made to the application by such further amendment.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on March 14, 1994
and should be accompanied by proof of service on applicants, in the
form of an affidavit or, for lawyers, a certificate of service. Hearing
requests should state the nature of the writer's interest, the reason
for the request, and the issues contested. Persons who wish to be
notified of a hearing may request such notification by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, 4641 Montgomery Avenue, suite 400, Bethesda, Maryland
20814.
FOR FURTHER INFORMATION CONTACT:
James J. Dwyer, Staff Attorney, at (202) 504-2920, or C. David Messman,
Branch Chief, at (202) 272-3018 (Division of Investment Management,
Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch.
Applicants' Representations
1. The Trust is a registered management investment company that
offers, or in the near future expects to offer, six series: the Nova
Fund, the Rydex U.S. Government Money Market Fund, the Rydex Precious
Metals Fund, the Ursa Fund, the Rydex U.S. Government Bond Fund, and
the Rydex OTC Fund. The Adviser, a registered investment adviser,
serves as investment adviser to the Trust. The series of the Trust are
authorized, and the future Funds will be authorized, by their
investment policies to invest in repurchase agreements.
2. Each Fund has or may be expected to have uninvested cash
balances with its custodian bank which otherwise would not be invested
in portfolio securities by the Adviser at the end of each trading day.
In the normal course of business, such assets are or would be invested
in overnight repurchase agreements with a bank or major brokerage house
collateralized by U.S. Government securities in order to earn
additional income. Each morning the Adviser on behalf of the Funds
begins negotiating the interest rate for repurchase agreements for that
day and lining up the U.S. Government obligations required as
collateral. Generally, some portion of the assets in the respective
account of each Fund is received too late, or is too small, to be
invested effectively in a separate transaction. Further, because each
Fund must separately pursue, secure, and implement such investments,
there is a duplication of effort that results in certain inefficiencies
and may limit the return which some or all Funds can achieve.
3. Applicants seek a conditional order permitting the Funds to
deposit their daily uninvested cash balances into a single joint
account, the daily balance of which would be used to enter into one or
more overnight (or over-the-weekend or over-a-holiday) repurchase
agreements. The requested order will maximize the return by minimizing
economic and administrative efficiencies by allowing the Funds to enter
into large repurchase agreements.
4. Each repurchase agreement will be made by calling a government
securities dealer and indicating the rate of interest and size of the
desired repurchase agreement. Particular U.S. Government obligations to
be held as collateral will then be identified and the Funds' custodian
bank will be notified. The securities will be wired to the account of
the custodian bank at the proper Federal Reserve Bank, transferred to a
sub-custodian account of the Funds at another qualified bank, or
redesignated and segregated on the records of the custodian bank if the
custodian bank is already the record holder of the collateral for the
repurchase agreement. The Funds will not enter into repurchase
agreements with the custodian bank, except where cash is received very
late in the business day and otherwise would be unavailable for
investment at all.
5. Each of the Funds has established the same systems and
standards, including quality standards for issuers of repurchase
agreements and for collateral, and requirements that the repurchase
agreements will be ``collateralized fully,'' as that term is defined in
rule 2a-7 under the Act. Identical systems and standards will be
adopted by any future funds which invest in the proposed joint account.
Applicant's Legal Conclusions
1. Section 17(d) makes it unlawful for any affiliated person of a
registered investment company, or any affiliated person of such person,
acting as principal, to effect any transaction in which such registered
investment company is a joint or a joint and several participant with
such person in contravention of rules and regulations which the SEC
prescribes for the purpose of preventing participation by such company
on a basis different from or less advantageous than that of other
participants
2. Rule 17d-1 provides that no affiliated person of a registered
investment company, or any affiliated person of such person, acting as
principal, shall participate in, or effect any transaction in
connection with, any joint enterprise or other joint arrangement in
which such registered investment company is a participant unless an
application regarding such joint arrangement has been filed with the
SEC and granted an order. In passing upon such applications, the SEC
will consider whether the investment company's participation in the
proposed joint enterprise or arrangement is consistent with the
provisions, policies, and purposes of the Act, and the extent to which
such participation is on a basis different from or less advantageous
than that of other participants.
3. Each Fund might be deemed an affiliated person of each other
Fund under section 2(a)(3) of the Act. Each Fund, by participating in
the proposed account, and the Adviser, by managing the proposed
account, could be deemed to be a ``joint participant'' in a
``transaction'' within the meaning of section 17(d), and the proposed
account could be deemed to be a ``joint enterprise or other joint
series issue arrangement'' within the meaning of rule 17d-1.
4. The proposed account will not be distinguishable from any other
account maintained by the Fund with its custodian bank except that
monies from the Fund could be deposited in it on a commingled basis.
The sole function of this account will be to provide a convenient way
of aggregating what otherwise would be the individual daily
transactions for each Fund necessary to manage the daily uninvested
cash balances of each Fund. Each Fund will participate in the account
on the same basis as every other Fund. The Adviser will have no
monetary participation in the account, but will be responsible for
investing amounts in the account, establishing control procedures, and
ensuring the equal treatment of each Fund. The proposed method of
operating the account will not result in any conflicts of interest
between any of the Funds, or between a Fund and the Adviser.
5. The Funds will benefit from the proposed arrangement because, on
any given day and under most market conditions, it is possible to
negotiate a rate of return on large repurchase agreements which is
greater than the rate of return available for smaller repurchase
agreements. In addition, by reducing the number of trade tickets,
repurchase transactions will be simplified and the opportunity for
errors will be reduced. Each Fund will also benefit from the fact that
an institution entering into a very large repurchase agreement is
almost always able and willing to increase the amount covered by such
agreement near the end of the day, which possibility may not exist with
smaller repurchase agreements. Moreover, without a joint account, some
Funds may find that they will be unable to invest in repurchase
agreements because their respective daily cash balances would not meet
the minimum investment requirement for a repurchase agreement.
6. Applicants believe that granting the requested relief would be
necessary or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the
policies and provisions of the Act. Applicants further believe that
participation in the proposed joint account by each Fund would not be
on a basis different from or less advantageous than that of any other
participant. Applicants thus believe that the criteria of sections 6(c)
and 17(d) and rule 17d-1 for issuance of the requested order have been
satisfied.
Applicant's Conditions
As express conditions to obtaining an order granting the requested
relief, applicants agree that the joint repurchase account will operate
as follows:
1. A separate custodian cash account will be established into which
each Fund will cause its uninvested net cash balances to be deposited
daily. The joint account will not be distinguishable from any other
accounts maintained by a Fund with its custodian bank except that
monies from a Fund will be deposited on a commingled basis. The account
will not have any separate existence which will have indicia of a
separate legal entity. The sole function of the account will be to
provide a convenient way of aggregating individual transactions which
will otherwise require daily management by each Fund of its uninvested
cash balances.
2. Cash in the account will be invested solely in repurchase
agreements with a duration not to exceed one business day and
collateralized by suitable U.S. Government obligations, i.e.,
obligations issued or guaranteed as to principal and interest by the
government of the United States or by any of its agencies or
instrumentalities, and satisfying the uniform standards set by the
Funds for such investments.
3. All securities held by the joint account will be valued on an
amortized cost basis.
4. Each Fund relying upon rule 2a-7 under the Act for valuation of
its net assets on the basis of amortized cost will use the average
maturity of the repurchase agreements purchased by the Funds
participating in the account for the purpose of computing the Fund's
average portfolio maturity with respect to the portion of its assets
held in such account on that day.
5. In order to assure that there will be no opportunity for one
Fund to use any part of a balance of the account credited to another
Fund, no Fund will be allowed to create a negative balance in the
account for any reason, although a Fund will be permitted to draw down
its entire balance at any time; each Fund shall retain the sole rights
of ownership of any of its assets, including interest payable on the
assets invested in the account.
6. Each Fund will participate in the net income earned or accrued
in the account on the basis of the percentage of the total amount in
the account on any day represented by its share of the account.
7. The Adviser will administer the investment of the cash balance
in and the operation of the account as part of the Adviser's duties
under its existing or any future investment advisory contract with each
Fund and will not collect any additional fees for management of the
account. The Adviser will collect its fees based upon the assets of
each separate Fund as provided in each respective investment advisory
agreement.
8. Each Fund's decision to invest in the account shall be solely at
the Fund's option and no Fund shall be obligated to invest or to
maintain any minimum amount in the account.
9. Each Fund's investment in the account shall be documented daily
on the books of each Fund as well as on the books of the Fund's
custodian bank.
10. All repurchase agreements will have an overnight, over-the-
weekend, or over-a-holiday duration, and in no event will have a
duration of more than seven days.
11. The Funds will enter into an agreement with each other to
govern the arrangements in accordance with the foregoing principles.
12. The administration of the account will be within the fidelity
bond coverage required by section 17(g) of the Act and rule 17g-1
thereunder.
13. The trustees of the Trust and the boards of directors of any
future Funds participating in the joint account shall evaluate the
joint account arrangement annually, and shall continue the account only
if they determine that there is a reasonable likelihood that the
account will benefit the funds and their shareholders.
14. All joint repurchase agreement transactions will be effected in
accordance with Investment Company Act Release No. 13005 (Feb. 2, 1983)
and with other existing and future positions taken by the SEC or its
staff by rule, interpretive release, no-action letter, any release
adopting any new rule, or any release adopting any amendments to any
existing rule.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4333 Filed 2-24-94; 8:45 am]
BILLING CODE 8010-01-M