SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN A PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 14a-12
RYDEX SERIES FUNDS
RYDEX DYNAMIC FUNDS
RYDEX VARIABLE TRUST
RYDEX ETF TRUST
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
RYDEX SERIES FUNDS
RYDEX DYNAMIC FUNDS
RYDEX VARIABLE TRUST
RYDEX ETF TRUST
Dear Shareholder:
On June 28, 2007, Security Benefit Corporation and Security Benefit Life
Insurance Company (together, "Security Benefit") entered into a Purchase and
Sale Agreement with Rydex NV, Inc., ICT Holdings, LLC, Rydex Holdings,
Inc.("Rydex Holdings"), and Investment Capital Technologies, LLC ("ICT" and
together with Rydex Holdings, "Rydex") pursuant to which PADCO Advisors, Inc.
and PADCO Advisors II, Inc., d/b/a Rydex Investments, (the "Advisor"), the
investment adviser to the Rydex family of mutual funds (the "Rydex Funds"),
together with several other Rydex entities, will be acquired by Security Benefit
(the "Transaction"). Security Benefit is a financial services firm that provides
a broad variety of retirement plan and other financial products to customers in
the advisor, banking, education, government, institutional, and qualified plan
markets. Upon completion of the Transaction, the Advisor, Rydex Distributors,
Inc., the Rydex Funds' distributor, and Rydex Fund Services, Inc., the
administrator and transfer agent for Rydex Series Funds, Rydex Dynamic Funds and
Rydex Variable Trust, will be wholly-owned subsidiaries of Security Benefit.
Although the Transaction is not expected to have any material impact on the
Rydex Funds or their shareholders, it will result in a change of control of the
Advisor. Under the requirements of the Investment Company Act of 1940, this
change of control will cause the automatic termination of each of the investment
advisory agreements between the Advisor and each of the Rydex Funds, as well as
the investment sub-advisory agreement between the Advisor and CLS Investment
Firm, LLC ("CLS"), which serves as the sub-adviser to three of the Rydex Funds.
Accordingly, by this proxy statement, we are requesting that the shareholders of
the Funds vote on whether to approve new investment advisory agreements to take
the place of those that will be terminated, so that the Advisor may continue to
manage the Rydex Funds.
As a result, a Special Joint Meeting of Shareholders (the "Meeting") of each of
the Rydex Funds, which are listed in the Notice of Special Joint Meeting of
Shareholders on page 1, has been scheduled for Thursday, October 4, 2007. If you
are a shareholder of record of any of the Rydex Funds as of the close of
business on August 6, 2007 you are entitled to vote at the Meeting and any
adjournment of the Meeting.
At the Meeting, you will be asked to approve new investment advisory agreements
with the Advisor, as well as a new investment sub-advisory agreement between the
Advisor and CLS under terms that are the same in all material respects to those
of the previous investment advisory and investment sub-advisory agreements. NO
FEE INCREASE IS EXPECTED TO RESULT FROM APPROVING THE NEW INVESTMENT ADVISORY
AND INVESTMENT SUB-ADVISORY AGREEMENTS.
I'm sure that you, like most people, lead a busy life and are tempted to put
this proxy aside for another day. Please don't. The failure to return proxies
could delay the Meeting and the approval of new investment advisory and
sub-advisory agreements. YOUR VOTE IS IMPORTANT TO US. PLEASE TAKE A FEW MINUTES
TO REVIEW THIS PROXY STATEMENT AND VOTE YOUR SHARES TODAY.
While you are, of course, welcome to join us at the Meeting and vote in person,
it is not necessary to do so. As a convenience, we have created three other
options by which to vote your shares:
o THE INTERNET: Follow the instructions located on your proxy card and
make sure this option is available at the time you plan to vote.
o TOUCH-TONE PHONE: The phone number is located on your proxy card. Be
sure you have your control number, which is located on your proxy
card, available at the time you call.
o BY MAIL: Simply execute your proxy card and enclose it in the
postage paid envelope found in this proxy package.
i
Whether or not you plan to attend the Meeting, we need your vote. Please do not
hesitate to call 1-XXX-XXXX (1-888-XXX-XXXX) if you have any questions about the
proposals under consideration. Thank you for taking the time to consider these
important proposals and for your investment in the Rydex Funds.
EVERY VOTE IS IMPORTANT NO MATTER HOW MANY SHARES YOU OWN
The Advisor has engaged the services of [Insert Name of Proxy Solicitor], as the
professional proxy solicitation agent, to assist shareholders through the voting
process. As the Meeting approaches, if you have not yet voted, [Insert Name of
Proxy Solicitor] may contact you to remind you to vote your shares in order to
be represented at the Meeting. If you should have any questions about the Proxy
Statement or the execution of your vote, please contact [Insert Name of Proxy
Solicitor] at 1-800-XXX-XXXX. They will be happy to assist you.
We appreciate your time and consideration.
Sincerely,
Carl G. Verboncoeur
President
PROMPT EXECUTION AND RETURN OF THE ENCLOSED PROXY CARD IS REQUESTED. A
SELF-ADDRESSED, POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE, ALONG
WITH INSTRUCTIONS ON HOW TO VOTE OVER THE INTERNET OR BY TELEPHONE SHOULD YOU
PREFER TO VOTE BY ONE OF THOSE METHODS.
ii
VERY IMPORTANT NEWS FOR SHAREHOLDERS
We recommend that you read the complete Proxy Statement. For your convenience,
we have provided a brief overview of the proposals to be voted on at the
Meeting.
QUESTIONS AND ANSWERS
Q. WHY AM I RECEIVING THIS PROXY STATEMENT?
A. You are receiving these proxy materials - a booklet that includes the
Proxy Statement and your proxy card - because you have the right to vote
on these important proposals concerning your investment in the Rydex
Funds. Each of the proposals relates to actions that need to be taken in
response to the impending change in control of Rydex Investments (the
"Advisor"), the investment adviser to the Rydex Funds.
Q. WHY AM I BEING ASKED TO VOTE ON NEW INVESTMENT ADVISORY AGREEMENTS?
A. The Investment Company Act of 1940, as amended (the "1940 Act"), the law
that regulates mutual funds, including the Rydex Funds, requires that an
investment advisory agreement between an investment adviser and a fund
terminate whenever there is a change in control of the investment adviser.
After such investment advisory agreement terminates, a new investment
advisory agreement between the investment adviser and the fund must be
approved by the shareholders of the fund in order for the investment
adviser to continue to manage the fund's investments.
The Advisor is a wholly-owned subsidiary of Rydex Holdings, Inc., which is
a wholly-owned subsidiary of Rydex NV, Inc. Rydex NV, Inc. is owned by
various trusts controlled by the Viragh family (the "Viragh Family
Trust"). On June 28, 2007, Security Benefit Corporation and Security
Benefit Life Insurance Company (together, "Security Benefit") entered into
a Purchase and Sale Agreement with Rydex NV, Inc., ICT Holdings, LLC,
Rydex Holdings, Inc. ("Rydex Holdings") and Investment Capital
Technologies, LLC ("ICT" and together with Rydex Holdings, "Rydex")
pursuant to which Security Benefit will acquire 100% of the outstanding
shares of common stock of Rydex Holdings and 100% of the outstanding
limited liability company interests of ICT (the "Transaction"). Once
completed, the Transaction will result in a change of control of Rydex
Holdings, Inc. and, ultimately, the Advisor. The change of control of the
Advisor, in turn, will result in the termination of each of the investment
advisory agreements between the Advisor and the Trusts, as well as the
investment sub-advisory agreement between the Advisor and CLS Investment
Firm, LLC ("CLS"), the sub-adviser to the CLS AdvisorOne Amerigo Fund, CLS
AdvisorOne Clermont Fund, and CLS AdvisorOne Berolina Fund (the
"Sub-Advised Funds") of the Rydex Variable Trust (each, a "Current
Agreement" and collectively, the "Current Agreements").
At a Special Meeting of the Boards of Trustees of each Trust (the "Board")
held on July 10, 2007, the Board considered and voted in favor of a new
investment advisory agreement for each Trust, and a new investment
sub-advisory agreement between the Advisor and CLS for the Sub-Advised
Funds, (each, a "New Agreement" and collectively, the "New Agreements")
pursuant to which, subject to its approval by each Fund's shareholders,
the Advisor will continue to serve as investment adviser to each Fund, and
CLS will continue to serve as investment sub-adviser to the Sub-Advised
Funds, after the completion of the Transaction. The Advisor's fees for its
services to the Funds under each New Agreement will be the same as its
fees under the corresponding Current Agreement (the Advisor is responsible
for the payment of fees to CLS for services it performs for the
Sub-Advised Funds). The other terms of the New Agreements will also be
the same in all material respects to those of the Current Agreements.
iii
Q. HOW WILL THE CHANGE IN CONTROL OF THE ADVISOR AFFECT ME?
A. Other than the change in the ownership, the operations of the Advisor, the
fees payable to the Advisor and the persons responsible for the day-to-day
investment management of the Rydex Funds are expected to remain unchanged.
Security Benefit and the current management of the Advisor have assured
the Board that there will be no reduction in the nature or quality of the
investment advisory services provided to each Fund as a result of the
change in ownership.
Q. HOW DO THE CURRENT TRUSTEES SUGGEST THAT I VOTE?
A. After careful consideration, the Trustees voted unanimously to recommend
that you vote "FOR" all of the proposals contained in the Proxy Statement.
Please see the section entitled "Board Recommendations" with respect to
each proposal for a discussion of the Board's considerations in making
such recommendations.
Q. WILL MY VOTE MAKE A DIFFERENCE?
A. Yes. Your vote is needed to ensure that the proposals can be acted upon.
We encourage all shareholders to participate in the governance of their
Fund(s). Additionally, your immediate response on the enclosed proxy card
will help save the costs of any further solicitations.
Q. I'M A SMALL INVESTOR. WHY SHOULD I BOTHER TO VOTE?
A. Every vote is important. If numerous shareholders just like you fail to
vote, the Funds may not receive enough votes to go forward with the
Special Joint Meeting of Shareholders (the "Meeting"). If this happens,
the Funds will need to solicit votes again. This may delay the Meeting and
the approval of the New Agreements.
Q. HOW DO I PLACE MY VOTE?
A. You may provide a Fund with your vote via mail, by Internet, by telephone,
or in person. You may use the enclosed postage-paid envelope to mail your
proxy card. Please follow the enclosed instructions to utilize any of
these voting methods. If you need more information on how to vote, or if
you have any questions, please call the Funds' proxy solicitation agent.
Q. WHOM DO I CALL IF I HAVE QUESTIONS?
A. We will be happy to answer your questions about this proxy solicitation.
Please call the Funds' proxy solicitation agent at 1-800-XXX-XXXX between
8:30 a.m. and 5:00 p.m., Eastern Time, Monday through Friday.
PROMPT EXECUTION AND RETURN OF THE ENCLOSED PROXY CARD IS REQUESTED. A
SELF-ADDRESSED, POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE,
ALONG WITH INSTRUCTIONS ON HOW TO VOTE OVER THE INTERNET OR BY TELEPHONE
SHOULD YOU PREFER TO VOTE BY ONE OF THOSE METHODS.
iv
RYDEX SERIES FUNDS
RYDEX DYNAMIC FUNDS
RYDEX VARIABLE TRUST
RYDEX ETF TRUST
9601 Blackwell Road, Suite 500
Rockville, Maryland 20850
NOTICE OF SPECIAL JOINT MEETING OF SHAREHOLDERS
TO BE HELD ON THURSDAY, OCTOBER 4, 2007
Notice is hereby given that a Special Joint Meeting of Shareholders (the
"Meeting") of each of the trusts (each a "Trust" and collectively, the "Trusts")
and their respective series (each a "Fund" and collectively, the "Funds" or
"Rydex Funds") listed below will be held at the offices of Rydex Investments,
9601 Blackwell Road, Suite 500, Rockville, Maryland 20850 on Thursday, October
4, 2007 at 4:30 p.m. Eastern Time.
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RYDEX SERIES FUNDS
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Absolute Return Strategies Fund High Yield Strategy Fund Nova Fund
------------------------------------------------------------------------------------------------------------------------------------
Banking Fund Internet Fund OTC Fund
------------------------------------------------------------------------------------------------------------------------------------
Basic Materials Fund Inverse Government Long Bond Precious Metals Fund
Strategy Fund (Formerly, Inverse
Government Long Bond Fund)
------------------------------------------------------------------------------------------------------------------------------------
Biotechnology Fund Inverse High Yield Strategy Fund Real Estate Fund
------------------------------------------------------------------------------------------------------------------------------------
Commodities Strategy Fund (Formerly, Inverse Mid-Cap Strategy Fund Retailing Fund
Commodities Fund) (Formerly, Inverse Mid-Cap Fund)
------------------------------------------------------------------------------------------------------------------------------------
Consumer Products Fund Inverse OTC Strategy Fund Russell 2000(R) 1.5x Strategy Fund (Formerly,
(Formerly, Inverse OTC Fund) Russell 2000(R) Advantage Fund)
------------------------------------------------------------------------------------------------------------------------------------
Electronics Fund Inverse Russell 2000(R) Strategy Fund Russell 2000(R) Fund
(Formerly, Inverse Russell 2000(R)
Fund)
------------------------------------------------------------------------------------------------------------------------------------
Energy Fund Inverse S&P 500 Strategy Fund S&P 500 Fund
(Formerly, Inverse S&P 500 Fund)
------------------------------------------------------------------------------------------------------------------------------------
Energy Services Fund Japan 1.25x Strategy Fund Sector Rotation Fund
(Formerly, Japan Advantage Fund)
------------------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Aggressive Fund Large-Cap Growth Fund Small-Cap Growth Fund
------------------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Conservative Fund Large-Cap Value Fund Small-Cap Value Fund
------------------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Moderate Fund Leisure Fund Strengthening Dollar 2x Strategy Fund
(Formerly, Dynamic Strengthening Dollar
Fund)
------------------------------------------------------------------------------------------------------------------------------------
Europe 1.25x Strategy Fund (Formerly, Managed Futures Strategy Fund Technology Fund
Europe Advantage Fund)
------------------------------------------------------------------------------------------------------------------------------------
Financial Services Fund Mid-Cap 1.5x Strategy Fund Telecommunications Fund
(Formerly, Mid-Cap Advantage Fund)
------------------------------------------------------------------------------------------------------------------------------------
Government Long Bond 1.25x Strategy Fund Mid-Cap Growth Fund Transportation Fund
(Formerly, Government Long Bond Advantage
Fund)
------------------------------------------------------------------------------------------------------------------------------------
Health Care Fund Mid-Cap Value Fund U.S. Government Money Market Fund
------------------------------------------------------------------------------------------------------------------------------------
Hedged Equity Fund Multi-Cap Core Equity Fund Utilities Fund
------------------------------------------------------------------------------------------------------------------------------------
Weakening Dollar 2x Strategy Fund
(Formerly, Dynamic Weakening Dollar Fund)
------------------------------------------------------------------------------------------------------------------------------------
1
------------------------------------------------------------------------------------------------------------------------------------
RYDEX DYNAMIC FUNDS
------------------------------------------------------------------------------------------------------------------------------------
Dow 2x Strategy Fund (Formerly, Dynamic Inverse Russell 2000(R) 2x Strategy Russell 2000(R) 2x Strategy Fund (Formerly,
Dow Fund) Fund (Formerly, Inverse Dynamic Dynamic Russell 2000(R) Fund)
Russell 2000(R) Fund)
------------------------------------------------------------------------------------------------------------------------------------
Inverse Dow 2x Strategy Fund (Formerly, Inverse S&P 500 2x Strategy Fund S&P 500 2x Strategy Fund (Formerly, Dynamic
Inverse Dynamic Dow Fund) (Formerly, Inverse Dynamic S&P 500 S&P 500 Fund)
Fund)
------------------------------------------------------------------------------------------------------------------------------------
Inverse OTC 2x Strategy Fund (Formerly, OTC 2x Strategy Fund (Formerly,
Inverse Dynamic OTC Fund) Dynamic OTC Fund)
------------------------------------------------------------------------------------------------------------------------------------
RYDEX VARIABLE TRUST
------------------------------------------------------------------------------------------------------------------------------------
Absolute Return Strategies Fund High Yield Strategy Fund OTC 2x Strategy Fund (Formerly, Dynamic OTC
Fund)
------------------------------------------------------------------------------------------------------------------------------------
Banking Fund Internet Fund OTC Fund
------------------------------------------------------------------------------------------------------------------------------------
Basic Materials Fund Inverse Dow 2x Strategy Fund Precious Metals Fund
(Formerly, Inverse Dynamic Dow Fund)
------------------------------------------------------------------------------------------------------------------------------------
Biotechnology Fund Inverse Government Long Bond Real Estate Fund
Strategy Fund (Formerly, Inverse
Government Long Bond Fund)
------------------------------------------------------------------------------------------------------------------------------------
CLS AdvisorOne Amerigo Fund Inverse High Yield Strategy Fund Retailing Fund
------------------------------------------------------------------------------------------------------------------------------------
CLS AdvisorOne Berolina Fund Inverse Mid-Cap Strategy Fund Russell 2000(R) 1.5x Strategy Fund (Formerly,
(Formerly, Inverse Mid-Cap Fund) Russell 2000(R) Advantage Fund)
------------------------------------------------------------------------------------------------------------------------------------
CLS AdvisorOne Clermont Fund Inverse OTC 2x Strategy Fund Russell 2000(R) 2x Strategy Fund (Formerly,
(Formerly, Inverse Dynamic OTC Fund) Dynamic Russell 2000(R) Fund)
------------------------------------------------------------------------------------------------------------------------------------
Commodities Strategy Fund (Formerly, Inverse OTC Strategy Fund Russell 2000(R) Fund
Commodities Fund) (Formerly, Inverse OTC Fund)
------------------------------------------------------------------------------------------------------------------------------------
Consumer Products Fund Inverse Russell 2000(R) 2x Strategy S&P 500 2x Strategy Fund (Formerly, Dynamic
Fund (Formerly, Inverse Dynamic S&P 500 Fund)
Russell 2000(R) Fund)
------------------------------------------------------------------------------------------------------------------------------------
Dow 2x Strategy Fund (Formerly, Dynamic Inverse Russell 2000(R) Strategy S&P 500 Fund
Dow Fund) Fund (Formerly, Inverse Russell
2000(R) Fund)
------------------------------------------------------------------------------------------------------------------------------------
Electronics Fund Inverse S&P 500 2x Strategy Fund Sector Rotation Fund
(Formerly, Inverse Dynamic S&P 500
Fund)
------------------------------------------------------------------------------------------------------------------------------------
Energy Fund Inverse S&P 500 Strategy Fund Small-Cap Growth Fund
(Formerly, Inverse S&P 500 Fund)
------------------------------------------------------------------------------------------------------------------------------------
Energy Services Fund Japan 1.25x Strategy Fund Small-Cap Value Fund
(Formerly, Japan Advantage Fund)
------------------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Aggressive Fund Large-Cap Growth Fund Strengthening Dollar 2x Strategy Fund
(Formerly, Dynamic Strengthening Dollar
Fund)
------------------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Conservative Fund Large-Cap Value Fund Technology Fund
------------------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Moderate Fund Leisure Fund Telecommunications Fund
------------------------------------------------------------------------------------------------------------------------------------
Europe 1.25x Strategy Fund (Formerly, Mid-Cap 1.5x Strategy Fund Transportation Fund
Europe Advantage Fund) (Formerly, Mid-Cap Advantage Fund)
------------------------------------------------------------------------------------------------------------------------------------
Financial Services Fund Mid-Cap Growth Fund U.S. Government Money Market Fund
------------------------------------------------------------------------------------------------------------------------------------
Government Long Bond 1.2x Strategy Fund Mid-Cap Value Fund Utilities Fund
(Formerly, Government Long Bond Advantage
Fund)
------------------------------------------------------------------------------------------------------------------------------------
Health Care Fund Multi-Cap Core Equity Fund Weakening Dollar 2x Strategy Fund
(Formerly, Dynamic Weakening Dollar Fund)
------------------------------------------------------------------------------------------------------------------------------------
Hedged Equity Fund Nova Fund
------------------------------------------------------------------------------------------------------------------------------------
2
RYDEX ETF TRUST
------------------------------------------------------------------------------------------------------------------------------------
Rydex Russell Top 50 ETF Rydex S&P Equal Weight Health Care Rydex S&P 500 Pure Value ETF
Fund
------------------------------------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight ETF Rydex S&P Equal Weight Industrials Rydex S&P MidCap 400 Pure Growth ETF
ETF
------------------------------------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight Consumer Rydex S&P Equal Weight Materials ETF Rydex S&P MidCap 400 Pure Value ETF
Discretionary ETF
------------------------------------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight Consumer Staples Rydex S&P Equal Weight Technology Rydex S&P SmallCap 600 Pure Growth ETF
ETF ETF
------------------------------------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight Energy ETF Rydex S&P Equal Weight Utilities ETF Rydex S&P SmallCap 600 Pure Value ETF
------------------------------------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight Financials ETF Rydex S&P 500 Pure Growth ETF
------------------------------------------------------------------------------------------------------------------------------------
At the Meeting, shareholders of record (the "Shareholders") will be asked to
consider and act on the following proposals (each, a "Proposal"):
---------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF PROPOSAL: TRUST/FUNDS SOLICITED:
---------------------------------------------------------------------------------------------------------------------
1. THE APPROVAL OF A NEW INVESTMENT ADVISORY AGREEMENT RYDEX SERIES FUNDS:
BETWEEN RYDEX SERIES FUNDS AND PADCO ADVISORS, INC.* All Funds (Except the Absolute Return Strategies Fund
and Hedged Equity Fund)
---------------------------------------------------------------------------------------------------------------------
1(a). THE APPROVAL OF A NEW INVESTMENT ADVISORY RYDEX SERIES FUNDS:
AGREEMENT BETWEEN RYDEX SERIES FUNDS AND PADCO Absolute Return Strategies Fund
ADVISORS, INC.* Hedged Equity Fund
---------------------------------------------------------------------------------------------------------------------
2. THE APPROVAL OF A NEW INVESTMENT ADVISORY AGREEMENT RYDEX DYNAMIC FUNDS:
BETWEEN RYDEX DYNAMIC FUNDS AND PADCO ADVISORS, All Funds
INC.*
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3. THE APPROVAL OF A NEW INVESTMENT ADVISORY AGREEMENT RYDEX VARIABLE TRUST:
BETWEEN RYDEX VARIABLE TRUST AND PADCO ADVISORS II, All Funds (Except the Absolute Return Strategies Fund
INC.* and Hedged Equity Fund)
---------------------------------------------------------------------------------------------------------------------
3(a). THE APPROVAL OF A NEW INVESTMENT ADVISORY RYDEX VARIABLE TRUST:
AGREEMENT BETWEEN RYDEX VARIABLE TRUST AND Absolute Return Strategies Fund
PADCO ADVISORS II, INC.* Hedged Equity Fund
---------------------------------------------------------------------------------------------------------------------
3(b). THE APPROVAL OF A NEW INVESTMENT SUB-ADVISORY RYDEX VARIABLE TRUST:
AGREEMENT BETWEEN PADCO ADVISORS II, INC.* CLS AdvisorOne Amerigo Fund
AND CLS INVESTMENT FIRM, LLC. CLS AdvisorOne Clermont Fund
CLS AdvisorOne Berolina Fund
---------------------------------------------------------------------------------------------------------------------
4. THE APPROVAL OF A NEW INVESTMENT ADVISORY AGREEMENT RYDEX ETF TRUST:
BETWEEN RYDEX ETF TRUST AND PADCO ADVISORS II, INC.* All Funds
---------------------------------------------------------------------------------------------------------------------
5. ANY OTHER BUSINESS PROPERLY BROUGHT BEFORE THE
MEETING.
---------------------------------------------------------------------------------------------------------------------
* PADCO Advisors, Inc. and PADCO Advisors II, Inc. collectively do business as
Rydex Investments.
3
Your vote is important no matter how many shares you own, and all Shareholders
are cordially invited to attend the Meeting and vote in person. However, if you
are unable to attend the Meeting, you are requested to mark, sign and date the
enclosed proxy card and return it promptly by mail in the enclosed, postage-paid
envelope so that the Meeting may be held and a maximum number of shares may be
voted. In addition, you can vote easily and quickly by Internet or by telephone.
You may change your vote even though a proxy has already been returned by
written notice to the Trusts, by submitting a subsequent proxy by mail, by
Internet, by telephone, or by voting in person at the Meeting.
Shareholders of record at the close of business on August 6, 2007 are entitled
to notice of and to vote at the Meeting or any adjournment thereof.
FOR A FREE COPY OF THE RYDEX FUNDS' MOST RECENT ANNUAL AND SEMI-ANNUAL REPORTS,
SHAREHOLDERS MAY CALL 1-888-XXX-XXXX (1-888-XXX-XXXX) OR WRITE TO THE FUNDS AT
9601 BLACKWELL ROAD, SUITE 500, ROCKVILLE, MARYLAND 20850. In addition, the
Rydex Funds are required by federal law to file reports, proxy statements and
other information with the U.S. Securities and Exchange Commission (the "SEC").
The SEC maintains a website that contains information about the Funds
(www.sec.gov). You can inspect and copy the proxy material, reports and other
information at the public reference facilities of the SEC located at 100 F
Street, N.E., Room 1580, Washington, D.C. 20549. You can also obtain copies of
these materials from the SEC Office of Freedom of Information and Privacy Act
Operations, Operations Center, 6432 General Green Way, Alexandria, VA
22313-2413, at prescribed rates.
By Order of the Board of Trustees
-------------------------------------
Carl G. Verboncoeur
President
August [17], 2007
4
RYDEX SERIES FUNDS
RYDEX DYNAMIC FUNDS
RYDEX VARIABLE TRUST
RYDEX ETF TRUST
9601 Blackwell Road, Suite 500
Rockville, Maryland 20850
PROXY STATEMENT
SPECIAL JOINT MEETING OF SHAREHOLDERS
TO BE HELD ON THURSDAY, OCTOBER 4, 2007
This Proxy Statement is furnished in connection with the solicitation of proxies
by the Board of Trustees of the following trusts (each a "Trust" and
collectively, the "Trusts") and their respective series (each a "Fund" and
collectively, the "Funds" or "Rydex Funds"):
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RYDEX SERIES FUNDS
------------------------------------------------------------------------------------------------------------------------------------
Absolute Return Strategies Fund High Yield Strategy Fund Nova Fund
------------------------------------------------------------------------------------------------------------------------------------
Banking Fund Internet Fund OTC Fund
------------------------------------------------------------------------------------------------------------------------------------
Basic Materials Fund Inverse Government Long Bond Precious Metals Fund
Strategy Fund (Formerly, Inverse
Government Long Bond Fund)
------------------------------------------------------------------------------------------------------------------------------------
Biotechnology Fund Inverse High Yield Strategy Fund Real Estate Fund
------------------------------------------------------------------------------------------------------------------------------------
Commodities Strategy Fund (Formerly, Inverse Mid-Cap Strategy Fund Retailing Fund
Commodities Fund) (Formerly, Inverse Mid-Cap Fund)
------------------------------------------------------------------------------------------------------------------------------------
Consumer Products Fund Inverse OTC Strategy Fund Russell 2000(R) 1.5x Strategy Fund (Formerly,
(Formerly, Inverse OTC Fund) Russell 2000(R) Advantage Fund)
------------------------------------------------------------------------------------------------------------------------------------
Electronics Fund Inverse Russell 2000(R) Strategy Fund Russell 2000(R) Fund
(Formerly, Inverse Russell 2000(R)
Fund)
------------------------------------------------------------------------------------------------------------------------------------
Energy Fund Inverse S&P 500 Strategy Fund S&P 500 Fund
(Formerly, Inverse S&P 500 Fund)
------------------------------------------------------------------------------------------------------------------------------------
Energy Services Fund Japan 1.25x Strategy Fund Sector Rotation Fund
(Formerly, Japan Advantage Fund)
------------------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Aggressive Fund Large-Cap Growth Fund Small-Cap Growth Fund
------------------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Conservative Fund Large-Cap Value Fund Small-Cap Value Fund
------------------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Moderate Fund Leisure Fund Strengthening Dollar 2x Strategy Fund
(Formerly, Dynamic Strengthening Dollar
Fund)
------------------------------------------------------------------------------------------------------------------------------------
Europe 1.25x Strategy Fund (Formerly, Managed Futures Strategy Fund Technology Fund
Europe Advantage Fund)
------------------------------------------------------------------------------------------------------------------------------------
Financial Services Fund Mid-Cap 1.5x Strategy Fund Telecommunications Fund
(Formerly, Mid-Cap Advantage Fund)
------------------------------------------------------------------------------------------------------------------------------------
Government Long Bond 1.25x Strategy Fund Mid-Cap Growth Fund Transportation Fund
(Formerly, Government Long Bond Advantage
Fund)
------------------------------------------------------------------------------------------------------------------------------------
Health Care Fund Mid-Cap Value Fund U.S. Government Money Market Fund
------------------------------------------------------------------------------------------------------------------------------------
Hedged Equity Fund Multi-Cap Core Equity Fund Utilities Fund
------------------------------------------------------------------------------------------------------------------------------------
Weakening Dollar 2x Strategy Fund
(Formerly, Dynamic Weakening Dollar Fund)
------------------------------------------------------------------------------------------------------------------------------------
1
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RYDEX DYNAMIC FUNDS
------------------------------------------------------------------------------------------------------------------------------------
Dow 2x Strategy Fund (Formerly, Dynamic Inverse Russell 2000(R) 2x Strategy Russell 2000(R) 2x Strategy Fund (Formerly,
Dow Fund) Fund (Formerly, Inverse Dynamic Dynamic Russell 2000(R) Fund)
Russell 2000(R) Fund)
------------------------------------------------------------------------------------------------------------------------------------
Inverse Dow 2x Strategy Fund (Formerly, Inverse S&P 500 2x Strategy Fund S&P 500 2x Strategy Fund (Formerly, Dynamic
Inverse Dynamic Dow Fund) (Formerly, Inverse Dynamic S&P 500 S&P 500 Fund)
Fund)
------------------------------------------------------------------------------------------------------------------------------------
Inverse OTC 2x Strategy Fund (Formerly, OTC 2x Strategy Fund (Formerly,
Inverse Dynamic OTC Fund) Dynamic OTC Fund)
------------------------------------------------------------------------------------------------------------------------------------
RYDEX VARIABLE TRUST
------------------------------------------------------------------------------------------------------------------------------------
Absolute Return Strategies Fund High Yield Strategy Fund OTC 2x Strategy Fund (Formerly, Dynamic OTC
Fund)
------------------------------------------------------------------------------------------------------------------------------------
Banking Fund Internet Fund OTC Fund
------------------------------------------------------------------------------------------------------------------------------------
Basic Materials Fund Inverse Dow 2x Strategy Fund Precious Metals Fund
(Formerly, Inverse Dynamic Dow Fund)
------------------------------------------------------------------------------------------------------------------------------------
Biotechnology Fund Inverse Government Long Bond Real Estate Fund
Strategy Fund (Formerly, Inverse
Government Long Bond Fund)
------------------------------------------------------------------------------------------------------------------------------------
CLS AdvisorOne Amerigo Fund Inverse High Yield Strategy Fund Retailing Fund
------------------------------------------------------------------------------------------------------------------------------------
CLS AdvisorOne Berolina Fund Inverse Mid-Cap Strategy Fund Russell 2000(R) 1.5x Strategy Fund (Formerly,
(Formerly, Inverse Mid-Cap Fund) Russell 2000(R) Advantage Fund)
------------------------------------------------------------------------------------------------------------------------------------
CLS AdvisorOne Clermont Fund Inverse OTC 2x Strategy Fund Russell 2000(R) 2x Strategy Fund (Formerly,
(Formerly, Inverse Dynamic OTC Fund) Dynamic Russell 2000(R) Fund)
------------------------------------------------------------------------------------------------------------------------------------
Commodities Strategy Fund (Formerly, Inverse OTC Strategy Fund Russell 2000(R) Fund
Commodities Fund) (Formerly, Inverse OTC Fund)
------------------------------------------------------------------------------------------------------------------------------------
Consumer Products Fund Inverse Russell 2000(R) 2x Strategy S&P 500 2x Strategy Fund (Formerly, Dynamic
Fund (Formerly, Inverse Dynamic S&P 500 Fund)
Russell 2000(R) Fund)
------------------------------------------------------------------------------------------------------------------------------------
Dow 2x Strategy Fund (Formerly, Dynamic Inverse Russell 2000(R) Strategy S&P 500 Fund
Dow Fund) Fund (Formerly, Inverse Russell
2000(R) Fund)
------------------------------------------------------------------------------------------------------------------------------------
Electronics Fund Inverse S&P 500 2x Strategy Fund Sector Rotation Fund
(Formerly, Inverse Dynamic S&P 500
Fund)
------------------------------------------------------------------------------------------------------------------------------------
Energy Fund Inverse S&P 500 Strategy Fund Small-Cap Growth Fund
(Formerly, Inverse S&P 500 Fund)
------------------------------------------------------------------------------------------------------------------------------------
Energy Services Fund Japan 1.25x Strategy Fund Small-Cap Value Fund
(Formerly, Japan Advantage Fund)
------------------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Aggressive Fund Large-Cap Growth Fund Strengthening Dollar 2x Strategy Fund
(Formerly, Dynamic Strengthening Dollar
Fund)
------------------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Conservative Fund Large-Cap Value Fund Technology Fund
------------------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Moderate Fund Leisure Fund Telecommunications Fund
------------------------------------------------------------------------------------------------------------------------------------
Europe 1.25x Strategy Fund (Formerly, Mid-Cap 1.5x Strategy Fund Transportation Fund
Europe Advantage Fund) (Formerly, Mid-Cap Advantage Fund)
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Financial Services Fund Mid-Cap Growth Fund U.S. Government Money Market Fund
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Government Long Bond 1.2x Strategy Fund Mid-Cap Value Fund Utilities Fund
(Formerly, Government Long Bond Advantage
Fund)
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Health Care Fund Multi-Cap Core Equity Fund Weakening Dollar 2x Strategy Fund
(Formerly, Dynamic Weakening Dollar Fund)
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Hedged Equity Fund Nova Fund
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2
RYDEX ETF TRUST
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Rydex Russell Top 50 ETF Rydex S&P Equal Weight Health Care Rydex S&P 500 Pure Value ETF
Fund
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Rydex S&P Equal Weight ETF Rydex S&P Equal Weight Industrials Rydex S&P MidCap 400 Pure Growth ETF
ETF
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Rydex S&P Equal Weight Consumer Rydex S&P Equal Weight Materials ETF Rydex S&P MidCap 400 Pure Value ETF
Discretionary ETF
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Rydex S&P Equal Weight Consumer Staples Rydex S&P Equal Weight Technology Rydex S&P SmallCap 600 Pure Growth ETF
ETF ETF
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Rydex S&P Equal Weight Energy ETF Rydex S&P Equal Weight Utilities ETF Rydex S&P SmallCap 600 Pure Value ETF
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Rydex S&P Equal Weight Financials ETF Rydex S&P 500 Pure Growth ETF
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INTRODUCTION AND GENERAL INFORMATION
GENERAL INFORMATION. As used in this Proxy Statement, the Trusts' Board of
Trustees is referred to as the "Board," and the term "Trustee" includes each
member of the Board. A Trustee that is an interested person of the Trusts is
referred to in this Proxy Statement as an "Interested Trustee." A Trustee may be
an interested person of the Trust because he or she is affiliated with one or
both of the Trusts' investment advisers, PADCO Advisors, Inc., the investment
adviser to the Rydex Series Funds and Rydex Dynamic Funds, and PADCO Advisors
II, Inc., the investment adviser to the Rydex Variable Trust and Rydex ETF
Trust, the Trusts' principal underwriter or any of their affiliates. PADCO
Advisors, Inc. and PADCO Advisors II, Inc. operate as Rydex Investments (the
"Advisor"). Trustees that are not interested persons of the Trust are referred
to in this Proxy Statement as "Independent Trustees."
Each of the Trusts is organized as a Delaware statutory trust and, as such, is
not required to hold annual meetings of Shareholders. The Board has called the
Special Joint Meeting of Shareholders (the "Meeting") in order to permit the
Funds' shareholders of record as of August 6, 2007 (the "Record Date" and the
"Shareholders") to consider and vote on the proposals described in the foregoing
notice.
Your vote is important no matter how many shares you own. If you wish to
participate in the Meeting you may submit the proxy card included with this
Proxy Statement or attend in person. You can vote easily and quickly by mail, by
Internet, by telephone or in person. At any time before the Meeting, you may
change your vote, even though a proxy has already been returned, by written
notice to the Trusts at 9601 Blackwell Road, Suite 500, Rockville, Maryland
20850 or by submitting a subsequent proxy, by mail, by Internet, by telephone or
by voting in person at the Meeting. Should you require additional information
regarding any of the proposals contained in this Proxy Statement, or replacement
proxy cards, you may contact the Funds at 1-800-XXX-XXXX.
In addition to the solicitation of proxies by mail, the Board and officers of
the Trusts, as well as employees of any proxy soliciting firm engaged by the
Board and the officers of the Trusts, may solicit proxies in person or by
telephone. Persons holding shares as nominees will, upon request, be reimbursed
for their reasonable expenses incurred in sending soliciting materials to their
principals. Security Benefit and the Advisor, together with its affiliates, have
agreed to bear the costs of the Meeting and the production and dissemination of
the proxy materials. The proxy card and this Proxy Statement are being mailed to
Shareholders on or about August [17], 2007.
QUORUM AND MEETING ADJOURNMENTS. Each whole share is entitled to one vote, and
each fractional share is entitled to a proportionate fractional vote on each
matter as to which such shares are to be voted at the Meeting. One-third (33
1/3%) of a Fund's shares entitled to vote on a proposal constitutes a quorum.
Abstentions and broker non-votes will not be counted for or against a proposal,
but will be counted for purposes of determining
3
whether a quorum is present. Because the affirmative vote of a majority of the
outstanding voting securities of each Fund, as defined below, is required to
approve a proposal, abstentions and broker non-votes will effectively be a vote
against a proposal.
If a quorum is not present at the Meeting, or if a quorum is present at the
Meeting but sufficient votes to approve one or more of the proposals are not
received, or if other matters arise requiring shareholder attention, the persons
named as proxy agents may propose one or more adjournments of the Meeting to
permit further solicitation of proxies. Any such adjournment will require the
affirmative vote of a majority of those shares present at the Meeting or
represented by proxy. The persons named as proxies will vote those proxies that
they are entitled to vote FOR such proposal in favor of such an adjournment, and
will vote those proxies required to be voted AGAINST such proposal, against such
an adjournment.
VOTE REQUIRED TO APPROVE PROPOSALS. If a quorum is present at the Meeting,
Proposals 1 through 4 require the affirmative vote of a "majority of the
outstanding voting securities" of each Fund to approve the Proposal with respect
to that Fund. Under the Investment Company Act of 1940, as amended (the "1940
Act"), the vote of a "majority of the outstanding voting securities" of a Fund
means the affirmative vote of the lesser of (a) 67% or more of the voting
securities present at the meeting or represented by proxy if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (b) more than 50% of the outstanding voting securities.
VOTING PROCESS. You can vote in any one of the following four ways:
o BY INTERNET: Follow the instructions located on your proxy card and
make sure this option is available at the time you plan to vote.
o BY TELEPHONE: Use a touch-tone telephone to call the toll-free phone
number located on your proxy card. Be sure you have your control
number, which is located on your proxy card, available at the time
of the call.
o BY MAIL: Simply execute your proxy card and enclose it in the
postage paid envelope found in this proxy package.
o IN PERSON: Vote your shares in person at the Meeting.
Shares represented by duly executed proxies will be voted in accordance with the
instructions given. All proxy cards solicited that are properly executed and
received in time to be voted at the Meeting will be voted at the Meeting or any
adjournment thereof according to the instructions on the proxy card. If no
specification is made on a proxy card, it will be voted FOR the matters
specified on the proxy card. At any time before it has been voted, your proxy
may be revoked in one of the following ways: (i) by sending a signed, written
letter of revocation to the Secretary of the Trusts: (ii) by properly executing
a later-dated proxy (by any of the methods of voting described above); or (iii)
by attending the Meeting, requesting return of any previously delivered proxy,
and voting in person.
INTRODUCTION TO PROPOSALS 1-4: APPROVAL OF NEW INVESTMENT ADVISORY
AGREEMENTS
Proposals 1-4 all relate to the approval by Shareholders of new investment
advisory agreements for the Trusts. The 1940 Act, which regulates investment
companies such as the Trusts, requires an investment advisory agreement between
an investment adviser and an investment company to terminate whenever there is a
change in control of the investment company's investment adviser. After such
investment advisory agreement terminates, a new investment advisory agreement
must be approved by shareholders of the investment company in order for the
investment adviser to continue to manage the investment company's investments.
FOR THE
4
REASONS DISCUSSED BELOW, THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
APPROVAL OF EACH OF THE NEW AGREEMENTS.
INFORMATION REGARDING THE CHANGE IN CONTROL OF THE ADVISOR
INFORMATION REGARDING THE TRANSACTION. The Advisor is a wholly-owned subsidiary
of Rydex Holdings, Inc., which is a wholly-owned subsidiary of Rydex NV, Inc.
Rydex NV, Inc. is owned by various trusts controlled by the Viragh family (the
"Viragh Family Trusts"). On June 28, 2007, Security Benefit Corporation and
Security Benefit Life Insurance Company (together, "Security Benefit") entered
into a Purchase and Sale Agreement with Rydex NV, Inc., ICT Holdings, LLC, Rydex
Holdings, Inc. ("Rydex Holdings") and Investment Capital Technologies, LLC
("ICT" and together with Rydex Holdings, "Rydex") pursuant to which Security
Benefit will acquire 100% of the outstanding shares of common stock of Rydex
Holdings and 100% of the outstanding limited liability company interests of ICT
(the "Transaction"). Once completed, the Transaction will result in a change of
control of Rydex Holdings, Inc. and, ultimately, the Advisor. The change of
control of the Advisor, in turn, will result in the termination of each of the
investment advisory agreements between the Advisor and the Trusts, as well as
the investment sub-advisory agreement between the Advisor and CLS Investment
Firm, LLC ("CLS"), the sub-adviser to the CLS AdvisorOne Amerigo Fund, CLS
AdvisorOne Clermont Fund, and CLS AdvisorOne Berolina Fund (the "Sub-Advised
Funds") of Rydex Variable Trust (each, a "Current Agreement" and collectively,
the "Current Agreements"). The Transaction is not expected to result in a change
in the persons responsible for the day-to-day management of the Funds, or in the
operations of the Rydex Funds or in any changes in the investment approach of
the Advisor with respect to the Funds.
INTEREST OF CERTAIN PERSONS IN THE TRANSACTION. Certain executive officers and
both of the Interested Trustees of the Trusts are participants in the Rydex
Holdings, Inc. Amended and Restated Value Participation Plan established to
reward certain key executives of Rydex for the increase in value of Rydex over
time. Upon the Closing of the Transaction and at certain defined times
thereafter certain of these executive officers and Interested Trustees will be
entitled to receive payments thereunder. As a result of this direct and indirect
interest in the Transaction and the Advisor, and any future employment
arrangements with Security Benefit, these executive officers and Interested
Trustees may be deemed to have a substantial interest in shareholder approval of
the new investment advisory agreements.
THE MEETING AND APPROVAL OF NEW AGREEMENTS. At a Special Meeting of the Boards
of Trustees held on July 10, 2007 (the "July Board Meeting"), the Board
considered and voted in favor of a new investment advisory agreement for each
Trust, and a new investment sub-advisory agreement between the Advisor and CLS
for the Sub-Advised Funds, (each, a "New Agreement" and collectively, the "New
Agreements") pursuant to which, subject to its approval by each Fund's
Shareholders, the Advisor will continue to serve as investment adviser to each
Fund, and CLS will continue to serve as investment sub-adviser to the
Sub-Advised Funds, after the completion of the Transaction. The Advisor's fees
for its services to the Funds under each New Agreement will be the same as its
fees under the corresponding Current Agreement (the Advisor is responsible for
the payment of fees to CLS for services it performs for the Sub-Advised Funds).
The other terms of the New Agreements will also be the same in all material
respects to those of the Current Agreements. In reviewing the New Agreements,
the Board considered its review of relevant materials relating to the Current
Agreements at the most recent annual renewal meeting on August 27, 2006 (the
"2006 Renewal Meeting"). The Board also considered the fact that the renewal of
the Current Agreements, as well as the New Agreements, will again be considered
at the next annual renewal meeting in August 2007. The Board determined to
reserve the right to postpone or cancel the Meeting at any time if circumstances
should develop in connection with its reconsideration in August or otherwise,
that, in the opinion of the Board, would make the approval of the New Agreements
by shareholders inadvisable.
While Rydex expects the Transaction to be completed by the end of the fourth
quarter of 2007, it is subject to various conditions, and may be delayed or even
terminated due to unforeseen circumstances. If for some reason the Transaction
does not occur, the Current Agreements will not automatically terminate and will
remain in effect, and the New Agreements will not be entered into, even if they
have been approved by Fund shareholders.
THE CURRENT AGREEMENTS
With the exception of the Rydex Series Funds and Rydex Variable Trust investment
advisory agreements relating to the Absolute Return Strategies Fund and Hedged
Equity Fund, which were formed in 2005, the Current Agreements have been in
place between each Trust and the Advisor since April 30, 2004. On April 30,
2004, a Special Meeting of Shareholders was held to approve the Current
Agreements for each Trust and the Current Agreement between Rydex Variable Trust
and CLS following a change of control of the Advisor resulting from the passing
of Mr. Albert P. "Skip" Viragh, Jr., who was previously the controlling
shareholder of the Advisor (the "2004 Special Meeting"). The Current Agreements
are substantially similar to the investment advisory agreements that were
approved at the time of each Trust's original creation and organization, and
have been revised only to the extent necessary to incorporate non-material
changes required by regulation or new industry standards. Each Current Agreement
had an initial term of two years, after which the continuance of each Current
Agreement must be specifically approved at least annually: (i) by the vote of
the Trustees or by a vote of the shareholders; and (ii) by the vote of a
majority of the Independent Trustees, cast in person at a
5
meeting called for the purpose of voting on such approval. Since the expiration
of the initial term, each year the Board has called and held a meeting to decide
whether to renew each Current Agreement for an additional year.
BOARD CONSIDERATIONS IN APPROVING THE INVESTMENT ADVISORY AGREEMENTS
In preparation for the 2006 Renewal Meeting the Board requested and received
written materials from the Advisor about: (a) the quality of the Advisor's
investment management and other services; (b) the Advisor's investment
management personnel; (c) the Advisor's operations and financial condition; (d)
the Advisor's brokerage practices (including any soft dollar arrangements) and
investment strategies; (e) the level of the advisory fees that the Advisor
charges the Funds compared with the fees it charges to comparable mutual funds
or accounts; (f) each Fund's overall fees and operating expenses compared with
similar mutual funds; (g) the level of the Advisor's profitability from its
Fund-related operations; (h) the Advisor's compliance systems; (i) the Advisor's
policies on and compliance procedures for personal securities transactions; (j)
the Advisor's reputation, expertise and resources in domestic financial markets;
and (k) Fund performance compared with similar mutual funds. Certain of these
considerations are discussed in more detail below.
At the 2006 Renewal Meeting, representatives from the Advisor presented
additional oral and written information to the Board to help the Board evaluate
the Advisor's fees and other aspects of the Current Agreements. Other Fund
service providers also provided the Board with additional information at the
meeting. The Trustees then discussed the written materials that the Board
received before the meeting and the Advisor's oral presentation and any other
information that the Board received at the meeting, and deliberated on the
renewal of each Current Agreement in light of this information. In its
deliberations, the Board did not identify any single piece of information that
was all-important or controlling. Based on the Board's deliberations and its
evaluation of the information described below, the Board, including all of the
Independent Trustees, unanimously: (a) concluded that terms of the Current
Agreements were fair and reasonable; (b) concluded that the Advisor's fees were
reasonable in light of the services that the Advisor provides to the Funds; and
(c) agreed to renew each Current Agreement for an additional one-year term.
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED BY THE ADVISOR. At the 2006
Renewal Meeting, the Board reviewed the scope of services to be provided by the
Advisor under each Current Agreement and noted that there would be no
significant differences between the scope of services required to be provided by
the Advisor for the past year and the scope of services required to be provided
by the Advisor for the upcoming year. In reviewing the scope of services
provided to the Funds by the Advisor, the Board reviewed and discussed the
Advisor's investment experience, noting that the Advisor and its affiliates have
committed significant resources over time to the support of the Funds. The Board
also considered the Advisor's compliance program and its compliance record with
respect to the Funds. In that regard, the Board noted that the Advisor provides
information regarding the portfolio management and compliance to the Board on a
periodic basis in connection with regularly scheduled meetings of the Board. In
addition to the above considerations, the Board reviewed and considered the
Advisor's investment processes and strategies, and matters related to the
Advisor's portfolio transaction policies and procedures. In particular, the
Board noted the substantial volume of portfolio trades and shareholder
transaction activity, in general, processed by the Advisor due to the unlimited
exchange policy of the majority of the Funds. The Board further noted that the
Funds have consistently met their investment objectives since their respective
inception dates. Based on this review, the Board concluded that the nature,
extent, and quality of services to be provided by the Advisor to the Funds under
the Current Agreements were appropriate and continued to support the Board's
original selection of the Advisor as investment adviser to the Funds.
FUND EXPENSES AND PERFORMANCE OF THE FUNDS AND THE ADVISOR. At the 2006 Renewal
Meeting, the Board reviewed statistical information prepared by the Advisor
regarding the expense ratio components, including actual advisory fees,
waivers/reimbursements, and gross and net total expenses of each Fund in
comparison with the same information for other funds registered under the 1940
Act determined by the Advisor to comprise each Fund's applicable peer group.
Because few funds seek to provide unlimited exchange privileges similar to those
6
of the majority of the Funds, each Fund's applicable peer group is generally
limited to the funds of two unaffiliated mutual fund families. In addition, the
Board reviewed statistical information prepared by the Advisor relating to the
performance of each Fund, as well as each Fund's ability to successfully track
its benchmark over time, and a comparison of each Fund's performance to funds
with similar investment objectives for the same periods and to appropriate
indices/benchmarks, in light of total return, yield and market trends. The Board
further noted that despite the unique nature of the Funds, the peer fund
information presented to the Board was meaningful because the peer funds'
investment objectives and strategies were closely aligned with those of the
Funds. The Board noted that most of the Funds either outperformed their peer
funds or performed in line with them over relevant periods. The Board also noted
that the investment advisory fees for the Funds were equivalent to those of
their peers and that the overall expenses for the Funds were only slightly
higher than the total expenses of the peer funds, due in part to differing share
classes and distribution fees. Based on this review, the Board concluded that
the investment advisory fees and expense levels and the historical performance
of the Funds, as managed by the Advisor, as compared to the investment advisory
fees and expense levels and performance of the peer funds, were satisfactory for
the purposes of approving the continuance of the Current Agreements.
COSTS OF SERVICES PROVIDED TO THE FUNDS AND PROFITS REALIZED BY THE ADVISOR AND
ITS AFFILIATES. At the 2006 Renewal Meeting, the Board reviewed information
about the profitability of the Funds to the Advisor based on the advisory fees
payable under the Current Agreements for the last calendar year. The Advisor
also presented the Board with material discussing its methodology for
determining the level of advisory fees assessable to the Funds. The Board
analyzed the Funds' expenses, including the investment advisory fees paid to the
Advisor. The Board also reviewed information regarding direct revenue received
by the Advisor and ancillary revenue received by the Advisor and/or its
affiliates in connection with the services provided to the Funds by the Advisor
(as discussed below) and/or its affiliates. The Board also discussed the
Advisor's profit margin as reflected in the Advisor's profitability analysis and
reviewed information regarding economies of scale (as discussed below). Based on
this review, the Board concluded that the profits to be realized by the Advisor
and its affiliates under the Current Agreements and from other relationships
between the Funds and the Advisor and/or its affiliates, if any, were within the
range the Board considered reasonable and appropriate.
ECONOMIES OF SCALE. In connection with its review of the Funds' profitability
analysis at the 2006 Renewal Meeting, the Board reviewed information regarding
economies of scale or other efficiencies that may result from increases in the
Funds' asset levels. The Board noted that the Current Agreements for the Funds
did not provide for any breakpoints in the investment advisory fees as a result
of increases in the asset levels of such Funds. The Board also noted that though
the Advisor's assets under management were significant, the amount is spread
among more than 100 Funds. Further limiting the realization of economies of
scale, is the ability of shareholders of many of the Funds to engage in
unlimited trading. The Board also reviewed the Advisor's historic profitability
as investment adviser to the Funds and determined that reductions in advisory
fees or additions of breakpoints were not warranted at this juncture. Based on
this review, the Board, recognizing its responsibility to consider this issue at
least annually, determined that the economies of scale, if any, were de minimis.
OTHER BENEFITS TO THE ADVISOR AND/OR ITS AFFILIATES. At the 2006 Renewal
Meeting, in addition to evaluating the services provided by the Advisor, the
Board also considered the nature, extent, quality and cost of the
administrative, distribution, and shareholder services performed by the
Advisor's affiliates under separate agreements. The Board noted that the Advisor
reports its use of soft dollars to the Board on a quarterly basis, as well as
any portfolio transactions on behalf of the Funds placed through an affiliate of
the Funds or the Advisor pursuant to Rule 17e-1 under the 1940 Act. Based on its
review, the Board concluded that the nature and quality of the services provided
by the Advisor's affiliates to each Trust will benefit the Funds' shareholders,
and that any ancillary benefits would not be disadvantageous to the Funds'
shareholders, particularly in light of the Board's view that the Funds'
shareholders benefit from investing in a fund that is part of a large family of
funds offering a variety of investment strategies and services.
7
BOARD CONSIDERATIONS IN APPROVING THE INVESTMENT SUB-ADVISORY AGREEMENT
In preparation for the 2006 Renewal Meeting, the Board requested and received
written materials from the Advisor and Sub-Advisor about: (a) the quality of
CLS's investment management and other services; (b) CLS's investment management
personnel; (c) CLS's operations and financial condition; (d) CLS's investment
strategies; (e) the level of the sub-advisory fees that CLS charges the
Sub-Advised Funds compared with the fees it charges to comparable mutual funds
or accounts; (f) each Sub-Advised Fund's overall fees and operating expenses
compared with similar mutual funds; (g) the level of CLS's profitability from
its Sub-Advised Fund-related operations; (h) CLS's compliance systems; (i) CLS's
policies on and compliance procedures for personal securities transactions; (j)
CLS's reputation, expertise, and resources in domestic financial markets; and
(k) Sub-Advised Fund performance compared with similar mutual funds. Certain of
these considerations are discussed in more detail below.
At the 2006 Renewal Meeting, representatives from CLS presented additional oral
and written information to the Board to help the Board evaluate CLS's fee and
other aspects of the current investment sub-advisory agreement. The Trustees
then discussed the written materials that the Board received before the meeting
and the Advisor's and CLS's oral presentation and any other information that the
Board received at the meeting, and deliberated on the renewal of the investment
sub-advisory agreement in light of this information. In its deliberations, the
Board did not identify any single piece of information that was all-important or
controlling. Based on the Board's deliberations and its evaluation of the
information described below, the Board, including all of the Independent
Trustees, unanimously: (a) concluded that terms of the current investment
sub-advisory agreement were fair and reasonable; (b) concluded that CLS's fees
were reasonable in light of the services that CLS provide to the Sub-Advised
Funds; and (c) agreed to renew the current investment sub-advisory agreement for
an additional one-year term.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY CLS. At the 2006 Renewal
Meeting, the Board reviewed the scope of services to be provided by CLS under
the current investment sub-advisory agreement and noted that there would be no
significant differences between the scope of services required to be provided by
CLS for the past year and the scope of services required to be provided by CLS
for the upcoming year. In reviewing the scope of services provided to the
Sub-Advised Funds by CLS, the Board reviewed and discussed CLS's investment
experience, noting that CLS and its affiliates have committed significant
resources over time to the support of the Sub-Advised Funds. The Board also
considered CLS's compliance program and its compliance record with respect to
the Sub-Advised Funds. In that regard, the Board noted that CLS provides
information regarding the portfolio management and compliance to the Board on a
periodic basis in connection with regularly scheduled meetings of the Board. In
addition to the above considerations, the Board reviewed and considered CLS's
investment processes and strategies, and matters related to CLS's portfolio
transaction policies and procedures. The Board further noted that the
Sub-Advised Funds have met their investment objectives consistently since their
respective inception dates. Based on this review, the Board concluded that the
nature, extent and quality of services to be provided by CLS to the Sub-Advised
Funds under the current investment sub-advisory agreement were appropriate and
continued to support the Board's original selection of CLS as investment
sub-adviser to the Sub-Advised Funds.
FUND EXPENSES AND PERFORMANCE OF THE SUB-ADVISED FUNDS AND CLS. At the 2006
Renewal Meeting, the Board reviewed statistical information prepared by CLS and
the Advisor regarding the expense ratio components, including actual
sub-advisory fees, waivers/reimbursements, and gross and net total expenses of
each Sub-Advised Fund. In addition, the Board reviewed statistical information
prepared by CLS relating to the performance of each Sub-Advised Fund, as well as
each Sub-Advised Fund's ability to successfully track its benchmark over time,
and a comparison of each Sub-Advised Fund's performance to appropriate
indices/benchmarks, in light of total return, yield and market trends. Based on
this review, the Board concluded that the investment sub-advisory fees and
expense levels and the historical performance of the Sub-Advised Funds, as
managed by CLS, were satisfactory for the purposes of approving the continuance
of the current investment sub-advisory agreement.
8
COSTS OF SERVICES PROVIDED TO THE SUB-ADVISED FUNDS AND PROFITS REALIZED BY CLS
AND ITS AFFILIATES. At the 2006 Renewal Meeting, the Board reviewed information
about the profitability of the Sub-Advised Funds to CLS based on the
sub-advisory fees payable under the current investment sub-advisory agreement
for the last calendar year. CLS also presented the Board with material
discussing its methodology for determining the level of its expenses allocable
to the Sub-Advised Funds. The Board analyzed the Sub-Advised Funds' expenses,
including the investment advisory and sub-advisory fees paid to the Advisor and
CLS, respectively. The Board also reviewed information regarding direct revenue
received by CLS and ancillary revenue received by CLS and/or its affiliates in
connection with the services provided to the Sub-Advised Funds by CLS (as
discussed below). The Board also discussed CLS's profit margin as reflected in
CLS's profitability analysis and reviewed information regarding economies of
scale (as discussed below). Based on this review, the Board concluded that the
profits to be realized by CLS under the current investment sub-advisory
agreement and from other relationships between the Sub-Advised Funds and CLS
were within the range the Board considered reasonable and appropriate.
ECONOMIES OF SCALE. At the 2006 Renewal Meeting, in connection with its review
of the Sub-Advised Funds' profitability analysis, the Board reviewed information
regarding economies of scale or other efficiencies that may result from
increases in the Sub-Advised Funds' asset levels. The Board noted that the
Current Agreements for the Funds did not provide for any breakpoints in the
investment advisory fees as a result of increases in the asset levels of the
Funds, including the Sub-Advised Funds. The Board also noted that the
Sub-Advised Funds still had relatively low assets. The Board also reviewed CLS's
historic profitability as investment sub-adviser to the Sub-Advised Funds and
determined that reductions in the sub-advisory fees or additions of breakpoints
were not warranted at this juncture. Based on this review, the Board,
recognizing its responsibility to consider this issue at least annually,
determined that the economies of scale, if any, were de minimis.
OTHER BENEFITS TO CLS AND/OR ITS AFFILIATES. At the 2006 Renewal Meeting, the
Board noted that CLS did not use soft dollars and did not engage in any
portfolio transactions on behalf of the Sub-Advised Funds through an affiliate
of the Sub-Advised Funds, the Advisor or CLS pursuant to Rule 17e-1 under the
1940 Act. The Board concluded there were no ancillary benefits that would be
disadvantageous to the Sub-Advised Funds' shareholders.
THE NEW AGREEMENTS
On June 18, 2007, the Trustees met with representatives of Security Benefit and
the management of the Advisor for the purpose of learning more about Security
Benefit and the proposed Transaction. Immediately following the announcement
that Rydex and Security Benefit entered into a final purchase and sale
agreement, the Trustees requested that the Advisor provide the Board with
additional information pertaining to the effect of the proposed change of
control on the Advisor's personnel and operations and the terms of the New
Agreements. The Advisor presented its response to the Board's request for
additional information prior to and at the July Board Meeting. The Advisor
provided the Board with oral and written information to help the Board evaluate
the impact of the change of control on the Advisor, the Advisor's ability to
continue to provide investment advisory services to the Funds under the New
Agreements, and that the contractual rate of the Advisor's fees will not change
under the New Agreements. In addition, the Advisor affirmed that there were no
material changes to the information that was provided to the Board at the 2006
Renewal Meeting. The Advisor also affirmed that the New Agreements were the same
in all material respects to the Current Agreements. The Trustees deliberated on
the approval of each New Agreement in light of the information provided. The
Board determined that the terms of the New Agreements set forth materially
similar rights, duties and obligations on the Advisor and CLS with regard to the
services to be provided to the Trusts, and provided at least the same level of
protection to each Trust, the Funds and the Funds' shareholders as the Current
Agreements. The Board also noted that the Advisor's and CLS's fees for their
services to the Funds and Sub-Advised Funds under each New Agreement would be
the same as their fees under the corresponding Current Agreement. The Board also
took into account that, as in past years, it would consider the renewal of the
Funds' investment advisory and sub-advisory agreements, including the New
Agreements, at a regular, annual renewal meeting to be held in August 2007.
9
In its deliberations at the July Board Meeting, the Board did not identify any
single piece of information that was all-important or controlling. Based on the
Board's deliberations and its evaluation of the information referenced above and
described in more detail below, the Board, including all of the Independent
Trustees, unanimously: (a) concluded that terms of the New Agreements were fair
and reasonable; (b) concluded that the Advisor's fees were reasonable in light
of the services that the Advisor provides to the Fund; (c) subject to the
Board's reapproval as described in (d) below, agreed to approve each New
Agreement for an initial term of two years, and to recommend the approval of the
New Agreements to Shareholders; and (d) agreed to consider the reapproval of the
New Agreements at the annual renewal meeting to be held in August 2007 in light
of additional information to be provided by Rydex and CLS.
In approving the New Agreements at the July Board Meeting, the Board, including
the Independent Trustees advised by independent counsel, considered its
deliberations at the 2006 Renewal Meeting as described above, along with the
following additional factors relevant to the proposed change of control.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY THE ADVISOR; PERFORMANCE OF
THE FUNDS. The Board noted that the Advisor was taking appropriate steps to
maintain its associates through the closing of the Transaction by, in part,
keeping them informed of the potential Transaction and awarding key personnel
with incentives to emphasize their value to the Advisor. As a result of these
efforts, it is anticipated that the key investment and management personnel
servicing the Funds will remain with the Advisor following the Transaction and
that the investment and management services provided to the Funds by the Advisor
will not change. The Board also considered the Advisor's and Security Benefit's
representations to the Board that Security Benefit intends for the Advisor to
continue to operate following the closing of the Transaction in much the same
manner as it operates today, and that the Transaction should have no impact on
the day-to-day operations of the Advisor, or the persons responsible for the
management of the Rydex Funds. Based on this review, the Board concluded that
the range and quality of services provided by the Adviser to the Funds and by
CLS to the Sub-Advised Funds were appropriate and were expected to continue
under the New Agreements, and that there was no reason to expect the
consummation of the Transaction to have any adverse effect on the future
performance of the Funds.
FUND EXPENSES. The Board considered the fact that the fees payable to the
Advisor and Sub-Advisor and other expenses of the Funds would be the same under
the New Agreements as they are under the current agreements that were approved
at the 2006 Renewal Meeting, and on this basis, and in recognition of the fact
that these fees and expenses would again be considered by the Board at the next
annual renewal meeting in August 2007, the Board concluded that these fees and
expenses continued to be satisfactory for the purposes of approving the New
Agreements. More detailed information regarding the fees under each New
Agreement is contained in the discussion below with respect to each Proposal.
COSTS OF SERVICES PROVIDED TO THE FUNDS AND PROFITS REALIZED BY THE ADVISOR AND
ITS AFFILIATES. Because the Advisor's and CLS's fees under the New Agreements
are the same as those assessed under the Current Agreements, the Board concluded
that the profits to be realized by the Advisor, CLS and their respective
affiliates under the New Agreements and from other relationships between the
Funds and the Advisor, CLS and/or their respective affiliates, if any, should
remain within the range the Board considered reasonable and appropriate at the
2006 Renewal Meeting. The Board noted that, although it is not possible to
predict how the Transaction may affect the Advisor's or CLS's future
profitability from its relationship with the Funds, this will be given further
consideration at the next annual renewal meeting in August 2007.
ECONOMIES OF SCALE. The Board concluded that economies of scale that might be
produced as a result of the Transaction could not be predicted in advance of the
closing of the Transaction. The Board noted that at the 2006 Renewal Meeting it
approved the Current Agreements, notwithstanding that they do not provide for
any breakpoints in the investment advisory or sub-advisory fees as a result of
increases in the asset levels of the Funds due in part, to the fact that the
assets under management were spread among more than 100 Funds, many of which
permitted shareholders to engage in unlimited trading. Based on its review at
the 2006 Renewal Meeting and on the fact that this subject will again be
considered at the next annual renewal meeting in August 2007,
10
the Board determined that the impending change of control did not warrant
reductions in fees or additions of breakpoints at this juncture.
DESCRIPTION OF THE TERMS OF THE NEW AGREEMENTS. A form of each New Agreement is
attached to this proxy statement as Appendices B-H. Each form of New Agreement
provides that the Advisor's and CLS's fees with respect to each Fund and
Sub-Advised Fund will remain unchanged from the fees contained in its
corresponding Current Agreement. Each New Agreement provides that unless
terminated as provided therein, the New Agreement shall continue for an initial
term of two years. Thereafter, the New Agreement shall continue in effect for
successive annual periods provided such continuance is specifically approved at
least annually (i) by the vote of the Trustees or by a vote of the shareholders;
and (ii) by the vote of a majority of the Independent Trustees, cast in person
at a meeting called for the purpose of voting on such approval. Each New
Agreement provides for automatic termination, without the payment of any
penalty, in the event of its assignment (as defined by the 1940 Act).
The New Agreements are substantially similar to each other, with the exception
of the parties to the agreement. Pursuant to each New Agreement, the Advisor
will act as investment adviser to each Fund. Each of the New Agreements will
require the Advisor to:
o provide the Funds with investment research, advice and supervision and
shall furnish continuously an investment program for the Funds, consistent
with the respective investment objectives and policies of each Fund;
o determine, in its discretion and without prior consultation, what
securities shall be purchased for the Funds, what securities shall be held
or sold by the Funds and what portion of the Funds' assets shall be held
uninvested in cash, subject always to the provisions of the Trust's
Agreement and Declaration of Trust, By-Laws and its registration statement
on file with the U.S. Securities and Exchange Commission (the "SEC");
o discharge its responsibilities subject to the control of the officers and
the Board, and in compliance with the objectives, policies, and
limitations set forth in the Funds' prospectus and applicable laws and
regulations;
o vote any proxies for Fund securities;
o provide the Trust, and any other agent designated by the Trust, with
records concerning the Advisor's activities which each Fund is required to
maintain; and
o provide other reports reasonably requested by the Trust's officers and
Board concerning the Advisor's discharge of the foregoing
responsibilities.
Each New Agreement also authorizes the Advisor to select the brokers or dealers
that will execute the purchases and sales of securities of each Fund and directs
the Advisor to use its best efforts to obtain the best available price and most
favorable execution. Subject to policies established by the Board, the Advisor
also may effect individual securities transactions at commission rates in excess
of the minimum commission rates available, if the Advisor determines in good
faith that such amount of commission is reasonable in relation to the value of
11
the brokerage or research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the Advisor's overall
responsibilities with respect to each Fund.
Under the terms of each New Agreement, the Advisor agrees to render its services
and to provide, at its own expense, the office space, furnishings, equipment and
personnel required by it to perform the services on the terms and for the
compensation provided therein, as discussed in further detail below. Each New
Agreement provides that the Adviser shall indemnify and hold harmless the Trust
against losses by reason of or arising out of: (i) the Advisor being in material
violation of (A) any applicable federal or state law, rule, or regulation, (B)
any investment policy or restriction set forth in the Rydex Funds' Registration
Statement, or (C) any written guidelines or instruction provided in writing by
the Board; or (ii) the Advisor's willful misfeasance, bad faith or gross
negligence generally in the performance of its duties under, or its reckless
disregard of, its obligations and duties.
INFORMATION ABOUT THE ADVISOR. PADCO Advisors, Inc. serves as the investment
adviser to the Rydex Series Funds and Rydex Dynamic Funds. PADCO Advisors II,
Inc. serves as the investment adviser to the Rydex Variable Trust and Rydex ETF
Trust. PADCO Advisors, Inc. and PADCO Advisors II, Inc. operate as Rydex
Investments. PADCO Advisors, Inc. and PADCO Advisors II, Inc. are organized as
Maryland corporations with their principal place of business located at 9601
Blackwell Road, Suite 500, Rockville, Maryland 20850. Rydex Holdings, Inc. is
the sole shareholder of PADCO Advisors, Inc. and PADCO Advisors II, Inc. Rydex
Holdings, Inc. is a wholly-owned subsidiary of Rydex NV, Inc. The Viragh Family
Trust currently owns a controlling interest in Rydex NV, Inc. These companies
may, prior to or after consummation of the Transaction, be merged into limited
liability companies. Such merger will not be considered a change in control of
the Advisor.
The name and principal occupation of each director and principal executive
officer of PADCO Advisors, Inc. and PADCO Advisors II, Inc. are listed below.
Unless otherwise noted, the business address of each director and officer is c/o
Rydex Investments, 9601 Blackwell Road, Suite 500, Rockville, Maryland 20850.
Following the closing of the Transaction, Messrs. Viragh and Mses. Dahl and
Viragh will relinquish their positions as directors of the Advisor and may be
replaced by directors elected by the Advisor's shareholders.
-------------------------------------------------------------------------------------------------------------------
NAME TITLE PRINCIPAL OCCUPATION
-------------------------------------------------------------------------------------------------------------------
Jean M. Dahl Director Director of Rydex NV, Inc., Rydex Holdings, Inc., PADCO Advisors,
Inc., PADCO Advisors II, Inc., Rydex Fund Services, Inc., Rydex
Distributors, Inc. and Advisor Research Center, Inc.; Vice
President of Rydex NV, Inc.; Director of Viragh Family
Foundation; and Employee of Dynamic Holdings, Inc.
-------------------------------------------------------------------------------------------------------------------
Katherine A. Viragh Director Director of Rydex NV, Inc., Rydex Holdings, Inc., PADCO Advisors,
Inc., PADCO Advisors II, Inc., Rydex Fund Services, Inc., Rydex
Distributors, Inc. and Advisor Research Center, Inc.; Treasurer
of Rydex NV, Inc.; Manager and Voting Trustee of ICT Holdings,
LLC; Manager, President, Secretary and Treasurer of Investment
Capital Technologies, LLC; Director and Treasurer of Viragh
Family Foundation; Director and Employee of Dynamic Holdings,
Inc.; Trustee of Spring Hill College; Trustee of 2003 Dynamic
Irrevocable Trust, 2003 Irrevocable Trust for Family of Skip
Viragh and other family trusts
-------------------------------------------------------------------------------------------------------------------
Mark S. Viragh Director Director of Rydex NV, Inc., Rydex Holdings, Inc., PADCO Advisors,
Inc., PADCO Advisors II, Inc., Rydex Fund Services, Inc., Rydex
Distributors, Inc. and Advisor Research Center, Inc.; Secretary
of Rydex NV, Inc.; Director and President of Viragh Family
Foundation; Director and President of The Skip Viragh Foundation,
Inc.; Director and President of Nova Foundation, Inc.; Director
and Employee of Dynamic Holdings, Inc.; Trustee of 2003 Dynamic
Irrevocable Trust, 2003 Irrevocable Trust for Family of Skip
Viragh and other family trusts
-------------------------------------------------------------------------------------------------------------------
12
-------------------------------------------------------------------------------------------------------------------
NAME TITLE PRINCIPAL OCCUPATION
-------------------------------------------------------------------------------------------------------------------
Robert J. Viragh Director Director and Chairman of the Board of Rydex NV, Inc., Rydex
Holdings, Inc., PADCO Advisors, Inc., PADCO Advisors II, Inc.,
Rydex Fund Services, Inc., Rydex Distributors, Inc. and Advisor
Research Center, Inc.; President of Rydex NV, Inc.; Director of
Viragh Family Foundation; Employee of Dynamic Holdings, Inc.
-------------------------------------------------------------------------------------------------------------------
Carl G. Verboncoeur* Chief Executive Officer Chief Executive Officer, PADCO Advisors, Inc. and PADCO Advisors
and Treasurer II, Inc.; Chief Executive Officer, President and Treasurer, Rydex
Fund Services, Inc. and Rydex Distributors, Inc.; President and
Treasurer, Rydex Holdings, Inc.
-------------------------------------------------------------------------------------------------------------------
Michael P. Byrum* Chief Investment Chief Investment Officer, President and Secretary, PADCO
Officer, President and Advisors, Inc. and PADCO Advisors II, Inc.; Secretary, Rydex
Secretary Holdings, Inc.
-------------------------------------------------------------------------------------------------------------------
Joanna M. Haigney Chief Compliance Officer Chief Compliance Officer, PADCO Advisors, Inc. and PADCO Advisors
II, Inc.
-------------------------------------------------------------------------------------------------------------------
* Messrs. Verboncoeur and Byrum also serve as Interested Trustees of each of the
Trusts.
PROPOSALS 1 AND 1(a). THE APPROVAL OF NEW INVESTMENT ADVISORY AGREEMENTS
BETWEEN RYDEX SERIES FUNDS AND PADCO ADVISORS, INC.
TRUSTS/FUNDS VOTING ON PROPOSAL 1: RYDEX SERIES FUNDS/ALL FUNDS (EXCEPT FOR
THE ABSOLUTE RETURN STRATEGIES FUND AND
HEDGED EQUITY FUND)
TRUSTS/FUNDS VOTING ON PROPOSAL 1(a): RYDEX SERIES FUNDS/ABSOLUTE RETURN
STRATEGIES FUND AND HEDGED EQUITY FUND
The Current Agreement between the Advisor and the Trust with respect to all of
the Trust's Funds, except for the Absolute Return Strategies Fund and Hedged
Equity Fund, is dated April 30, 2004, and was approved by the shareholders of
the Trust at the 2004 Special Meeting. The Current Agreement between the Advisor
and the Trust for the Absolute Return Strategies Fund and Hedged Equity Fund was
approved by the Board and each Fund's Sole Shareholder on May 23, 2005 following
their formation and registration with the SEC. In accordance with the Board's
best practices, both Current Agreements have been renewed by the Board on an
annual basis following each Current Agreement's initial approval. The Current
Agreements will remain in place until the completion of the Transaction at which
time, as a result of the change in the control of the Advisor, the Current
Agreements will terminate and, subject to shareholder approval, the New
Agreements will go into effect. The terms of the New Agreements, including fees,
are identical, with the exception of the date, to the terms of the Current
Agreements. The other terms of the New Agreements are substantially similar in
all material respects to those of the other New Agreements, and are described in
the section above entitled "Description of the Terms of the New Agreements."
Forms of the New Agreements are included as Appendix B and Appendix C to this
Proxy Statement.
The tables below provide, with respect to each of the Trust's Funds: (i) the
Advisor's annual rate of compensation under the Current and New Agreements,
stated as a percentage of the Fund's assets; (ii) the amount of advisory fees
paid to the Advisor pursuant to the Current Agreements for the Trust's most
recently completed fiscal year ended March 31, 2007; (iii) amounts paid by the
Funds to Rydex Fund Services, Inc. (the "Administrator"), an affiliate of the
Advisor, for administration services for the Trust's most recently completed
fiscal year ended March 31, 2007; (iv) amounts paid by the Funds to the
Administrator for accounting services for the Trust's most recently completed
fiscal year ended March 31, 2007; and (v) amounts paid by the Funds to Rydex
Distributors, Inc. (the "Distributor"), an affiliate of the Advisor, for
services provided pursuant to the Funds' distribution and shareholder services
plans for the Trust's most recently completed fiscal year ended March 31, 2007.
The Funds did not pay any brokerage commissions to the Distributor (or any other
affiliate of the Advisor) during the Trust's most recently completed fiscal year
ended March 31, 2007. The Advisor also serves as adviser to the Rydex Variable
Trust's Funds, certain of which are substantially similar to the Funds
13
below. The Advisor's compensation for the Rydex Variable Trust's Funds is
described in this Proxy Statement under Proposal 3.
------------------------------------------------------------------------------------------------------------------------
ADMINISTRATIVE ACCOUNTING
SERVICE FEES PAID SERVICE FEES PAID
CURRENT AND ADVISORY FEES PAID TO ADMINISTRATOR TO ADMINISTRATOR
ANTICIPATED TO ADVISOR FOR FOR FISCAL YEAR FOR FISCAL YEAR
ADVISORY FEE FISCAL YEAR ENDED ENDED ENDED
FUND RATE 2007 2007 2007
------------------------------------------------------------------------------------------------------------------------
Absolute Return Strategies Fund 1.15% $1,992,108 ++ ++
------------------------------------------------------------------------------------------------------------------------
Banking Fund 0.85% $121,210 $35,650 $14,260
------------------------------------------------------------------------------------------------------------------------
Basic Materials Fund 0.85% $359,658 $105,782 $42,313
------------------------------------------------------------------------------------------------------------------------
Biotechnology Fund 0.85% $840,080 $247,082 $98,833
------------------------------------------------------------------------------------------------------------------------
Commodities Strategy Fund 0.75% $351,996 $117,332 $46,933
------------------------------------------------------------------------------------------------------------------------
Consumer Products Fund 0.85% $378,535 $111,334 $44,534
------------------------------------------------------------------------------------------------------------------------
Electronics Fund 0.85% $275,192 $80,939 $32,375
------------------------------------------------------------------------------------------------------------------------
Energy Fund 0.85% $1,070,459 $314,841 $125,936
------------------------------------------------------------------------------------------------------------------------
Energy Services Fund 0.85% $1,476,202 $434,177 $173,278
------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Aggressive Fund 0.00% **** ++ ++
------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Conservative Fund 0.00% **** ++ ++
------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Moderate Fund 0.00% **** ++ ++
------------------------------------------------------------------------------------------------------------------------
Europe 1.25x Strategy Fund 0.90% $796,962 $221,379 $88,551
------------------------------------------------------------------------------------------------------------------------
Financial Services Fund 0.85% $406,806 $119,649 $47,860
------------------------------------------------------------------------------------------------------------------------
Government Long Bond 1.2x Strategy Fund 0.50% $563,994 $225,598 $112,799
------------------------------------------------------------------------------------------------------------------------
Health Care Fund 0.85% $586,043 $172,365 $68,946
------------------------------------------------------------------------------------------------------------------------
Hedged Equity Fund 1.15% $414,760 ++ ++
------------------------------------------------------------------------------------------------------------------------
High Yield Strategy Fund 0.75% ** + +
------------------------------------------------------------------------------------------------------------------------
Internet Fund 0.85% $155,611 $45,768 $18,307
------------------------------------------------------------------------------------------------------------------------
Inverse Government Long Bond Strategy Fund 0.90% $9,286,719* $2,278,030 $642,519
------------------------------------------------------------------------------------------------------------------------
Inverse High Yield Strategy Fund 0.75% ** + +
------------------------------------------------------------------------------------------------------------------------
Inverse Mid-Cap Strategy Fund 0.90% $268,708 $74,641 $29,856
------------------------------------------------------------------------------------------------------------------------
Inverse OTC Strategy Fund 0.90% $1,603,243* $445,126 $177,663
------------------------------------------------------------------------------------------------------------------------
Inverse Russell 2000(R) Strategy Fund 0.90% $1,033,413 $287,059 $114,824
------------------------------------------------------------------------------------------------------------------------
Inverse S&P 500 Strategy Fund 0.90% $4,211,861* $1,169,307 $403,674
------------------------------------------------------------------------------------------------------------------------
Japan 1.25x Strategy Fund 0.90% $700,396 $194,554 $77,822
------------------------------------------------------------------------------------------------------------------------
Large-Cap Growth Fund 0.75% $282,005 $94,002 $37,601
------------------------------------------------------------------------------------------------------------------------
Large-Cap Value Fund 0.75% $1,298,799 $432,933 $172,985
------------------------------------------------------------------------------------------------------------------------
Leisure Fund 0.85% $270,721 $79,624 $31,850
------------------------------------------------------------------------------------------------------------------------
Managed Futures Strategy Fund 0.90% $39,487 $10,969 $4,387
------------------------------------------------------------------------------------------------------------------------
Mid-Cap 1.5x Strategy Fund 0.90% $525,676 $146,021 $58,408
------------------------------------------------------------------------------------------------------------------------
Mid-Cap Growth Fund 0.75% $201,402 $67,134 $26,854
------------------------------------------------------------------------------------------------------------------------
Mid-Cap Value Fund 0.75% $326,530 $108,843 $43,537
------------------------------------------------------------------------------------------------------------------------
Multi-Cap Core Equity Fund 0.90% $489,471 $196,779 $78,712
------------------------------------------------------------------------------------------------------------------------
Nova Fund 0.75% $1,719,438* $572,813 $227,366
------------------------------------------------------------------------------------------------------------------------
OTC Fund 0.75% $5,348,630 $1,782,877 $541,188
------------------------------------------------------------------------------------------------------------------------
Precious Metals Fund 0.75% $1,641,503 $547,168 $217,752
------------------------------------------------------------------------------------------------------------------------
Real Estate Fund 0.85% $449,638 $132,246 $52,899
------------------------------------------------------------------------------------------------------------------------
Retailing Fund 0.85% $138,347 $40,690 $16,276
------------------------------------------------------------------------------------------------------------------------
Russell 2000(R) 1.5x Strategy Fund 0.90% $960,601 $266,834 $106,733
------------------------------------------------------------------------------------------------------------------------
Russell 2000(R) Fund 0.75% $60,560 $20,187 $8,075
------------------------------------------------------------------------------------------------------------------------
S&P 500 Fund 0.75% $90,508 $30,169 $12,068
------------------------------------------------------------------------------------------------------------------------
Sector Rotation Fund 0.90% $3,152,003 $875,556 $324,995
------------------------------------------------------------------------------------------------------------------------
Small-Cap Growth Fund 0.75% $234,482 $78,161 $31,264
------------------------------------------------------------------------------------------------------------------------
14
------------------------------------------------------------------------------------------------------------------------
ADMINISTRATIVE ACCOUNTING
SERVICE FEES PAID SERVICE FEES PAID
CURRENT AND ADVISORY FEES PAID TO ADMINISTRATOR TO ADMINISTRATOR
ANTICIPATED TO ADVISOR FOR FOR FISCAL YEAR FOR FISCAL YEAR
ADVISORY FEE FISCAL YEAR ENDED ENDED ENDED
FUND RATE 2007 2007 2007
------------------------------------------------------------------------------------------------------------------------
Small-Cap Value Fund 0.75% $288,899 $96,300 $38,520
------------------------------------------------------------------------------------------------------------------------
Strengthening Dollar 2x Strategy Fund 0.90% $197,221 $54,784 $21,913
------------------------------------------------------------------------------------------------------------------------
Technology Fund 0.85% $331,368 $97,461 $38,984
------------------------------------------------------------------------------------------------------------------------
Telecommunications Fund 0.85% $246,756 $72,575 $29,030
------------------------------------------------------------------------------------------------------------------------
Transportation Fund 0.85% $315,775 $92,875 $37,150
------------------------------------------------------------------------------------------------------------------------
U.S. Government Money Market Fund 0.50% $6,601,467 $2,640,587 $732,665
------------------------------------------------------------------------------------------------------------------------
Utilities Fund 0.85% $462,211 $135,944 $54,378
------------------------------------------------------------------------------------------------------------------------
Weakening Dollar 2x Strategy Fund 0.90% $1,300,330 $361,203 $144,481
------------------------------------------------------------------------------------------------------------------------
* Prior to April 1, 2007, the Funds pursued their respective investment
objectives indirectly through a master-feeder arrangement, and the advisory fees
were paid by the corresponding master fund. Effective April 1, 2007, the Funds
discontinued their master-feeder arrangements and now pursue their investment
objectives directly. As a result, the Funds pay all fees and expenses.
** The Multi-Cap Core Equity Fund pays the Advisor a management fee that is
comprised of two components: the first component is an annual basic fee (the
"basic fee") equal to 0.70% of the Multi-Cap Core Equity Fund's average daily
net assets, and the second component is a performance fee adjustment. The
Multi-Cap Core Equity Fund's fee structure is described in more detail in the
Fund's Prospectus.
*** The Advisor has contractually agreed to pay all operating expenses of the
Fund, excluding interest expense and taxes (expected to be de minimis),
brokerage commissions and other expenses connected with the execution of
portfolio transactions, short dividend expenses, and extraordinary expenses.
**** Currently, the Advisor receives an investment advisory fee for managing the
underlying funds in which the Fund invests. The underlying funds pay a monthly
investment advisory fee to the Advisor for its services. The fee is based on the
average daily net assets of each underlying fund and calculated at an annual
rate for each underlying fund. The Fund benefits from the investment advisory
services provided to the underlying funds and, as shareholders of those
underlying funds, indirectly bear a proportionate share of those underlying
funds' advisory fees.
***** The Advisor has contractually agreed to pay all other expenses of the
Fund, excluding Acquired Fund fees and expenses, interest expense and taxes
(expected to be de minimis), brokerage commissions and other expenses connected
with the execution of portfolio transactions and extraordinary expenses.
+ Not in operation for the period indicated.
++ The Advisor has contractually agreed to pay all other expenses of the Fund,
excluding Acquired Fund fees and expenses, interest expense and taxes (expected
to be de minimis), brokerage commissions and other expenses connected with the
execution of portfolio transactions, short dividend expenses, and extraordinary
expenses.
---------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS (0.25% A-CLASS (0.25% C-CLASS (1.00% H-CLASS (0.25%
FUND 12b-1 FEE) 12b-1 FEE) 12b-1 FEE) 12b-1 FEE)
---------------------------------------------------------------------------------------------------------------------
Absolute Return Strategies Fund $0 $58,127 $285,188 $303,643
---------------------------------------------------------------------------------------------------------------------
Banking Fund $16,122 $1,674 $23,741 $0
---------------------------------------------------------------------------------------------------------------------
Basic Materials Fund $41,694 $5,520 $71,259 $0
---------------------------------------------------------------------------------------------------------------------
Biotechnology Fund $56,889 $4,770 $41,643 $0
---------------------------------------------------------------------------------------------------------------------
Commodities Strategy Fund $0 $19,910 $39,089 $87,649
---------------------------------------------------------------------------------------------------------------------
Consumer Products Fund $42,369 $7,309 $51,821 $0
---------------------------------------------------------------------------------------------------------------------
Electronics Fund $22,968 $1,620 $41,888 $0
---------------------------------------------------------------------------------------------------------------------
Energy Fund $79,931 $9,324 $207,274 $0
---------------------------------------------------------------------------------------------------------------------
Energy Services Fund $117,553 $20,589 $262,107 $0
---------------------------------------------------------------------------------------------------------------------
Essential Portfolio Aggressive Fund * * * $0
---------------------------------------------------------------------------------------------------------------------
Essential Portfolio Conservative Fund * * * $0
---------------------------------------------------------------------------------------------------------------------
Essential Portfolio Moderate Fund * * * $0
---------------------------------------------------------------------------------------------------------------------
Europe 1.25x Strategy Fund $0 $13,852 $102,152 $181,989
---------------------------------------------------------------------------------------------------------------------
Financial Services Fund $82,950 $4,419 $34,965 $0
---------------------------------------------------------------------------------------------------------------------
Government Long Bond 1.2x Strategy Fund $149,084 $21,024 $118,464 $0
---------------------------------------------------------------------------------------------------------------------
Health Care Fund $103,705 $2,509 $65,663 $0
---------------------------------------------------------------------------------------------------------------------
Hedged Equity Fund $0 $10,650 $68,716 $62,337
---------------------------------------------------------------------------------------------------------------------
High Yield Strategy Fund * * * *
---------------------------------------------------------------------------------------------------------------------
Internet Fund $22,920 $498 $14,170 $0
---------------------------------------------------------------------------------------------------------------------
Inverse Government Long Bond Strategy Fund $312,661 $246,078 $3,486,307 $0
---------------------------------------------------------------------------------------------------------------------
15
---------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS (0.25% A-CLASS (0.25% C-CLASS (1.00% H-CLASS (0.25%
FUND (0.25% 12b-1 FEE) 12b-1 FEE) 12b-1 FEE) 12b-1 FEE)
---------------------------------------------------------------------------------------------------------------------
Inverse High Yield Strategy Fund * * * *
---------------------------------------------------------------------------------------------------------------------
Inverse Mid-Cap Strategy Fund $0 $2,011 $12,007 $69,629
---------------------------------------------------------------------------------------------------------------------
Inverse OTC Strategy Fund $74,306 $10,396 $177,866 $0
---------------------------------------------------------------------------------------------------------------------
Inverse Russell 2000(R) Strategy Fund N/A $38,847 $115,423 $219,357
---------------------------------------------------------------------------------------------------------------------
Inverse S&P 500 Strategy Fund $193,487 $33,088 $459,255 $0
---------------------------------------------------------------------------------------------------------------------
Japan 1.25x Strategy Fund N/A $16,556 $98,004 $153,498
---------------------------------------------------------------------------------------------------------------------
Large-Cap Growth Fund N/A $3,540 $69,264 $43,145
---------------------------------------------------------------------------------------------------------------------
Large-Cap Value Fund N/A $4,941 $115,503 $399,116
---------------------------------------------------------------------------------------------------------------------
Leisure Fund $51,088 $1,591 $19,657 $0
---------------------------------------------------------------------------------------------------------------------
Managed Futures Strategy Fund N/A $3,691 $1,237 $6,971
---------------------------------------------------------------------------------------------------------------------
Mid-Cap 1.5x Strategy Fund N/A $8,845 $206,504 $85,550
---------------------------------------------------------------------------------------------------------------------
Mid-Cap Growth Fund N/A $4,101 $23,493 $57,160
---------------------------------------------------------------------------------------------------------------------
Mid-Cap Value Fund N/A $4,726 $58,816 $89,413
---------------------------------------------------------------------------------------------------------------------
Multi-Cap Core Equity Fund N/A $11,912 $307,638 $107,957
---------------------------------------------------------------------------------------------------------------------
Nova Fund $219,037 $44,272 $440,615 $0
---------------------------------------------------------------------------------------------------------------------
OTC Fund $99,982 $6,843 $120,998 $0
---------------------------------------------------------------------------------------------------------------------
Precious Metals Fund $47,515 $13,616 $237,719 $0
---------------------------------------------------------------------------------------------------------------------
Real Estate Fund $0 $10,137 $49,235 $109,800
---------------------------------------------------------------------------------------------------------------------
Retailing Fund $22,195 $443 $24,278 $0
---------------------------------------------------------------------------------------------------------------------
Russell 2000(R) 1.5x Strategy Fund N/A $13,730 $243,222 $192,298
---------------------------------------------------------------------------------------------------------------------
Russell 2000(R) Fund N/A $345 $13,784 $16,395
---------------------------------------------------------------------------------------------------------------------
S&P 500 Fund N/A $2,165 $15,891 $24,031
---------------------------------------------------------------------------------------------------------------------
Sector Rotation Fund N/A $105,166 $1,245,924 $458,909
---------------------------------------------------------------------------------------------------------------------
Small-Cap Growth Fund N/A $2,255 $38,252 $66,343
---------------------------------------------------------------------------------------------------------------------
Small-Cap Value Fund N/A $3,993 $89,479 $69,937
---------------------------------------------------------------------------------------------------------------------
Strengthening Dollar 2x Strategy Fund N/A $653 $23,161 $48,340
---------------------------------------------------------------------------------------------------------------------
Technology Fund $58,471 $1,072 $21,306 $0
---------------------------------------------------------------------------------------------------------------------
Telecommunications Fund $25,768 $3,060 $29,707 $0
---------------------------------------------------------------------------------------------------------------------
Transportation Fund $37,309 $4,874 $48,768 $0
---------------------------------------------------------------------------------------------------------------------
U.S. Government Money Market Fund $914,889 $37,781 $1,296,958 $0
---------------------------------------------------------------------------------------------------------------------
Utilities Fund $41,440 $8,039 $76,467 $0
---------------------------------------------------------------------------------------------------------------------
Weakening Dollar 2x Strategy Fund N/A $31,546 $110,290 $302,084
---------------------------------------------------------------------------------------------------------------------
* Not in operation for the period indicated.
BOARD RECOMMENDATION ON PROPOSALS 1 AND 1(a).
At its meeting on July 10, 2007, based on its deliberations on and evaluation of
the information described above, the Board, including all of the Independent
Trustees, unanimously: (a) concluded that the terms of the New Agreements are
fair and reasonable; (b) concluded that the Advisor's fees are reasonable in
light of the services that the Advisor will provide to the Funds; (c) subject to
the Board's reapproval as described in (d) below, agreed to approve the New
Agreements for an initial term of two years and to recommend the approval of the
New Agreements to Shareholders; and (d) agreed to consider the reapproval of the
New Agreements at the annual renewal meeting to be held in August 2007 in light
of additional information to be provided by Rydex.
THE TRUSTEES UNANIMOUSLY RECOMMEND THAT SHAREHOLDERS OF EACH FUND VOTE "FOR"
PROPOSALS 1 AND 1(a).
16
PROPOSAL 2. THE APPROVAL OF A NEW INVESTMENT ADVISORY AGREEMENT BETWEEN RYDEX
DYNAMIC FUNDS AND PADCO ADVISORS, INC.
TRUSTS/FUNDS VOTING ON PROPOSAL 2: RYDEX DYNAMIC FUNDS/ALL FUNDS
The Current Agreement between the Advisor and the Trust is dated April 30, 2004,
and was approved by the shareholders of the Trust at the 2004 Special Meeting.
In accordance with the Board's best practices, the Current Agreement has been
renewed by the Board on an annual basis following its initial approval. The
Current Agreement will remain in place until the completion of the Transaction
at which time, as a result of the change in the control of the Advisor, the
Current Agreement will terminate and, subject to shareholder approval, the New
Agreement will go into effect. The terms of the New Agreement, including fees,
are identical, with the exception of the date, to the terms of the Current
Agreement. The other terms of the New Agreement are substantially similar in all
material respects to those of the other New Agreements, and are described in the
section above entitled "Description of the Terms of the New Agreements." A form
of the New Agreement is included as Appendix D to this Proxy Statement.
The tables below provide, with respect to each of the Trust's Funds: (i) the
Advisor's annual rate of compensation under the Current and New Agreements,
stated as a percentage of the Fund's assets; (ii) the amount of advisory fees
paid to the Advisor pursuant to the Current Agreement for the Trust's most
recently completed fiscal year ended December 31, 2006; (iii) amounts paid by
the Funds to the Administrator for the Trust's most recently completed fiscal
year ended December 31, 2006; (iv) amounts paid by the Funds to the
Administrator for accounting services for the Trust's most recently completed
fiscal year ended December 31, 2006; and (v) amounts paid by the Funds to the
Distributor for services provided pursuant to the Funds' distribution and
shareholder services plans for the Trust's most recently completed fiscal year
ended December 31, 2006. The Funds did not pay any brokerage commissions to the
Distributor (or any other affiliate of the Advisor) during the Trust's most
recently completed fiscal year ended December 31, 2006. The Advisor also serves
as advisor to the Rydex Variable Trust's Funds, certain of which are
substantially similar to the Funds below. The Advisor's compensation for the
Rydex Variable Trust's Funds is described in this Proxy Statement under Proposal
3.
-----------------------------------------------------------------------------------------------------------------------
ADMINISTRATIVE
SERVICE FEES PAID ACCOUNTING SERVICE
CURRENT AND ADVISORY FEES TO ADMINISTRATOR FEES PAID TO
ANTICIPATED PAID TO ADVISOR FOR FISCAL YEAR ADMINISTRATOR FOR
ADVISORY FEE FOR FISCAL YEAR ENDED FISCAL YEAR ENDED
FUND RATE ENDED 2006 2006 2006
-----------------------------------------------------------------------------------------------------------------------
Dow 2x Strategy Fund 0.90% $329,352* $91,444 $54,866
-----------------------------------------------------------------------------------------------------------------------
Inverse Dow 2x Strategy Fund 0.90% $547,920* $152,132 $91,279
-----------------------------------------------------------------------------------------------------------------------
Inverse OTC 2x Strategy Fund 0.90% $4,061,782* $1,127,743 $676,646
-----------------------------------------------------------------------------------------------------------------------
Inverse Russell 2000(R) 2x Strategy Fund 0.90% $250,813** $69,670** $41,802**
-----------------------------------------------------------------------------------------------------------------------
Inverse S&P 500 2x Strategy Fund 0.90% $3,614,232* $1,003,468 $602,081
-----------------------------------------------------------------------------------------------------------------------
OTC 2x Strategy Fund 0.90% $4,221,125* $1,172,105 $703,263
-----------------------------------------------------------------------------------------------------------------------
Russell 2000(R) 2x Strategy Fund 0.90% $165,379** $45,939** $27,563**
-----------------------------------------------------------------------------------------------------------------------
S&P 500 2x Strategy Fund 0.90% $2,764,337* $767,493 $460,496
-----------------------------------------------------------------------------------------------------------------------
* Prior to January 1, 2007, the Funds pursued their respective investment
objectives indirectly through a master-feeder arrangement, and the advisory fees
were paid by the corresponding master fund. Effective January 1, 2007, the Funds
discontinued their master-feeder arrangements and now pursue their investment
objectives directly. As a result, the Funds pay all fees and expenses.
** Since the commencement of operations on May 31, 2006.
17
-----------------------------------------------------------------------------------------------
A-CLASS (0.25% C-CLASS (1.00% H-CLASS (0.25%
FUND 12b-1 FEE) 12b-1 FEE) 12b-1 FEE)
-----------------------------------------------------------------------------------------------
Dow 2x Strategy Fund $5,100 $39,415 $76,490
-----------------------------------------------------------------------------------------------
Inverse Dow 2x Strategy Fund $5,669 $36,398 $137,364
-----------------------------------------------------------------------------------------------
Inverse OTC 2x Strategy Fund $17,062 $349,437 $1,023,321
-----------------------------------------------------------------------------------------------
Inverse Russell 2000(R) 2x Strategy Fund $1,534* $9,939* $65,652*
-----------------------------------------------------------------------------------------------
Inverse S&P 500 2x Strategy Fund $24,088 $352,079 $891,360
-----------------------------------------------------------------------------------------------
OTC 2x Strategy Fund $19,859 $523,520 $1,021,367
-----------------------------------------------------------------------------------------------
Russell 2000(R) 2x Strategy Fund $1,126* $10,352* $42,224*
-----------------------------------------------------------------------------------------------
S&P 500 2x Strategy Fund $18,965 $568,728 $606,345
-----------------------------------------------------------------------------------------------
* Since the commencement of operations on May 31, 2006.
BOARD RECOMMENDATION ON PROPOSAL 2.
At its meeting on July 10, 2007, based on its deliberations on and evaluation of
the information described above, the Board, including all of the Independent
Trustees, unanimously: (a) concluded that the terms of the New Agreement are
fair and reasonable; (b) concluded that the Advisor's fees are reasonable in
light of the services that the Advisor will provide to the Funds; (c) subject to
the Board's reapproval as described in (d) below, agreed to approve the New
Agreement for an initial term of two years and to recommend the approval of the
New Agreement to Shareholders; and (d) agreed to consider the reapproval of the
New Agreement at the annual renewal meeting to be held in August 2007 in light
of additional information to be provided by Rydex.
THE TRUSTEES UNANIMOUSLY RECOMMEND THAT SHAREHOLDERS OF EACH FUND VOTE "FOR"
PROPOSAL 2.
PROPOSALS 3 AND 3(a). THE APPROVAL OF NEW INVESTMENT ADVISORY AGREEMENTS BETWEEN
RYDEX VARIABLE TRUST AND PADCO ADVISORS II, INC.
TRUSTS/FUNDS VOTING ON PROPOSAL 3: RYDEX VARIABLE TRUST/ALL FUNDS (EXCEPT FOR
THE ABSOLUTE RETURN STRATEGIES FUND AND
HEDGED EQUITY FUND)
TRUSTS/FUNDS VOTING ON PROPOSAL 3(a): RYDEX VARIABLE TRUST/ABSOLUTE RETURN
STRATEGIES FUND AND HEDGED EQUITY FUND
The Current Agreement between the Advisor and the Trust with respect to all of
the Trust's Funds, except for the Absolute Return Strategies Fund and Hedged
Equity Fund, is dated April 30, 2004, and was approved by the shareholders of
the Trust at the 2004 Special Meeting. The Current Agreement between the Advisor
and the Trust for the Absolute Return Strategies Fund and Hedged Equity Fund was
approved by the Board and each Fund's Sole Shareholder on May 23, 2005 following
the formation and registration of the Funds with the SEC. In accordance with the
Board's best practices, both Current Agreements have been renewed by the Board
on an annual basis following each Current Agreement's initial approval. The
Current Agreements will remain in place until the completion of the Transaction
at which time, as a result of the change in the control of the Advisor, the
Current Agreements will terminate and, subject to shareholder approval, the New
Agreements will go into effect. The terms of the New Agreements, including fees,
are identical, with the exception of the date, to the terms of the Current
Agreements. The other terms of the New Agreements are substantially similar in
all material respects to those of the other New Agreements, and are described in
the section above entitled "Description of the Terms of the New Agreements."
Forms of the New Agreements are included as Appendix E and Appendix F to this
Proxy Statement.
The tables below provide, with respect to each of the Trust's Funds: (i) the
Advisor's annual rate of compensation under the Current and New Agreements,
stated as a percentage of the Fund's assets; (ii) the amount of advisory fees
paid to the Advisor pursuant to the Current Agreement for the Trust's most
recently
18
completed fiscal year ended December 31, 2006; (iii) amounts paid by the Funds
to the Administrator for the Trust's most recently completed fiscal year ended
December 31, 2006; (iv) amounts paid by the Funds to the Administrator for
accounting services for the Trust's most recently completed fiscal year ended
December 31, 2006; and (v) amounts paid by the Funds to the Distributor for
services provided pursuant to the Funds' investor services plan for the Trust's
most recently completed fiscal year ended December 31, 2006. The Funds did not
pay any brokerage commissions to the Distributor (or any other affiliate of the
Advisor) during the Trust's most recently completed fiscal year ended December
31, 2006. The Advisor also serves as advisor to the Rydex Series Funds' Funds,
certain of which are substantially similar to the Funds below. The Advisor's
compensation for the Rydex Series Funds' Funds is described in this Proxy
Statement under Proposal 1.
--------------------------------------------------------------------------------------------------------------------------
ADMINISTRATIVE
SERVICE FEES PAID ACCOUNTING SERVICE
CURRENT AND ADVISORY FEES PAID TO ADMINISTRATOR FEES PAID TO
ANTICIPATED TO ADVISOR FOR FOR FISCAL YEAR ADMINISTRATOR FOR
ADVISORY FEE FISCAL YEAR ENDED ENDED FISCAL YEAR ENDED
FUND RATE 2006 2006 2006
--------------------------------------------------------------------------------------------------------------------------
Absolute Return Strategies Fund 1.15% $122,492 $0**** $0****
--------------------------------------------------------------------------------------------------------------------------
Banking Fund 0.85% $146,468 $43,079 $17,231
--------------------------------------------------------------------------------------------------------------------------
Basic Materials Fund 0.85% $342,886 $100,849 $40,339
--------------------------------------------------------------------------------------------------------------------------
Biotechnology Fund 0.85% $220,641 $64,894 $25,958
--------------------------------------------------------------------------------------------------------------------------
Commodities Strategy Fund 0.75% $181,709 $60,570 $24,228
--------------------------------------------------------------------------------------------------------------------------
Consumer Products Fund 0.85% $295,176 $86,816 $34,727
--------------------------------------------------------------------------------------------------------------------------
Dow 2x Strategy Fund 0.90% $184,675 $51,298 $20,519
--------------------------------------------------------------------------------------------------------------------------
Electronics Fund 0.85% $184,321 $54,212 $21,685
--------------------------------------------------------------------------------------------------------------------------
Energy Fund 0.85% $671,196 $197,410 $78,964
--------------------------------------------------------------------------------------------------------------------------
Energy Services Fund 0.85% $658,963 $193,813 $77,525
--------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Aggressive Fund 0.00%* $0 $0**** $0****
--------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Conservative Fund 0.00%* $0 $0**** $0****
--------------------------------------------------------------------------------------------------------------------------
Essential Portfolio Moderate Fund 0.00%* $0 $0**** $0****
--------------------------------------------------------------------------------------------------------------------------
Europe 1.25x Strategy Fund 0.90% $480,072 $133,353 $53,342
--------------------------------------------------------------------------------------------------------------------------
Financial Services Fund 0.85% $309,488 $91,026 $36,410
--------------------------------------------------------------------------------------------------------------------------
Government Long Bond 1.2x Strategy Fund 0.50% $319,322 $159,661 $63,864
--------------------------------------------------------------------------------------------------------------------------
Health Care Fund 0.85% $393,117 $115,622 $46,249
--------------------------------------------------------------------------------------------------------------------------
Hedged Equity Fund 1.15% $75,596 $0**** $0****
--------------------------------------------------------------------------------------------------------------------------
High Yield Strategy Fund 0.75% ** ** **
--------------------------------------------------------------------------------------------------------------------------
Internet Fund 0.85% $83,765 $24,637 $9,855
--------------------------------------------------------------------------------------------------------------------------
Inverse Dow 2x Strategy Fund 0.90% $92,982 $25,828 $10,331
--------------------------------------------------------------------------------------------------------------------------
Inverse Government Long Bond Strategy Fund 0.90% $269,763 $74,934 $29,974
--------------------------------------------------------------------------------------------------------------------------
Inverse High Yield Strategy Fund 0.75% ** ** **
--------------------------------------------------------------------------------------------------------------------------
Inverse Mid-Cap Strategy Fund 0.90% $39,155 $10,876 $4,351
--------------------------------------------------------------------------------------------------------------------------
Inverse OTC 2x Strategy Fund 0.90% ** ** **
--------------------------------------------------------------------------------------------------------------------------
Inverse OTC Strategy Fund 0.90% $279,479 $77,633 $31,053
--------------------------------------------------------------------------------------------------------------------------
Inverse Russell 2000(R) 2x Strategy Fund 0.90% ** ** **
--------------------------------------------------------------------------------------------------------------------------
Inverse Russell 2000(R) Strategy Fund 0.90% $142,308 $39,530 $15,812
--------------------------------------------------------------------------------------------------------------------------
Inverse S&P 500 2x Strategy Fund 0.90% ** ** **
--------------------------------------------------------------------------------------------------------------------------
Inverse S&P 500 Strategy Fund 0.90% $311,192 $86,442 $34,577
--------------------------------------------------------------------------------------------------------------------------
Japan 1.25x Strategy Fund 0.90% $314,810 $87,447 $34,979
--------------------------------------------------------------------------------------------------------------------------
Large-Cap Growth Fund 0.75% $134,823 $44,941 $17,976
--------------------------------------------------------------------------------------------------------------------------
Large-Cap Value Fund 0.75% $324,187 $108,062 $43,224
--------------------------------------------------------------------------------------------------------------------------
Leisure Fund 0.85% $175,172 $51,521 $20,608
--------------------------------------------------------------------------------------------------------------------------
Mid-Cap 1.5x Strategy Fund 0.90% $359,173 $99,770 $39,908
--------------------------------------------------------------------------------------------------------------------------
Mid-Cap Growth Fund 0.75% $140,820 $46,940 $18,776
--------------------------------------------------------------------------------------------------------------------------
19
---------------------------------------------------------------------------------------------------------------------------
ADMINISTRATIVE ACCOUNTING
SERVICE FEES PAID SERVICE FEES PAID
CURRENT AND ADVISORY FEES PAID TO ADMINISTRATOR TO ADMINISTRATOR
ANTICIPATED TO ADVISOR FOR FOR FISCAL YEAR FOR FISCAL YEAR
ADVISORY FEE FISCAL YEAR ENDED ENDED ENDED
FUND RATE 2006 2006 2006
---------------------------------------------------------------------------------------------------------------------------
Mid-Cap Value Fund 0.75% $157,298 $52,433 $20,973
---------------------------------------------------------------------------------------------------------------------------
Multi-Cap Core Equity Fund 0.90%*** $36,256 $13,232 $5,293
---------------------------------------------------------------------------------------------------------------------------
Nova Fund 0.75% $631,818 $210,606 $84,243
---------------------------------------------------------------------------------------------------------------------------
OTC 2x Strategy Fund 0.90% $327,744 $91,040 $36,416
---------------------------------------------------------------------------------------------------------------------------
OTC Fund 0.75% $588,233 $196,077 $78,431
---------------------------------------------------------------------------------------------------------------------------
Precious Metals Fund 0.75% $565,415 $188,472 $75,388
---------------------------------------------------------------------------------------------------------------------------
Real Estate Fund 0.85% $473,372 $139,227 $55,691
---------------------------------------------------------------------------------------------------------------------------
Retailing Fund 0.85% $175,095 $51,499 $20,600
---------------------------------------------------------------------------------------------------------------------------
Russell 2000(R) 1.5x Strategy Fund 0.90% $529,924 $147,201 $58,880
---------------------------------------------------------------------------------------------------------------------------
Russell 2000(R) 2x Strategy Fund 0.90% $7,410 $2,058 $824
---------------------------------------------------------------------------------------------------------------------------
Russell 2000(R) Fund 0.75% ** ** **
---------------------------------------------------------------------------------------------------------------------------
S&P 500 2x Strategy Fund 0.90% $248,992 $69,164 $27,666
---------------------------------------------------------------------------------------------------------------------------
S&P 500 Fund 0.75% ** ** **
---------------------------------------------------------------------------------------------------------------------------
Sector Rotation Fund 0.90% $730,431 $202,898 $81,159
---------------------------------------------------------------------------------------------------------------------------
Small-Cap Growth Fund 0.75% $125,195 $41,732 $16,692
---------------------------------------------------------------------------------------------------------------------------
Small-Cap Value Fund 0.75% $204,933 $68,311 $27,324
---------------------------------------------------------------------------------------------------------------------------
Strengthening Dollar 2x Strategy Fund 0.90% $22,043 $6,123 $2,449
---------------------------------------------------------------------------------------------------------------------------
Technology Fund 0.85% $179,474 $52,787 $21,114
---------------------------------------------------------------------------------------------------------------------------
Telecommunications Fund 0.85% $225,010 $66,179 $26,472
---------------------------------------------------------------------------------------------------------------------------
Transportation Fund 0.85% $346,981 $102,053 $40,821
---------------------------------------------------------------------------------------------------------------------------
U.S. Government Money Market Fund 0.50% $1,271,093 $635,547 $247,164
---------------------------------------------------------------------------------------------------------------------------
Utilities Fund 0.85% $392,767 $115,520 $46,208
---------------------------------------------------------------------------------------------------------------------------
Weakening Dollar 2x Strategy Fund 0.90% $70,784 $19,662 $7,865
---------------------------------------------------------------------------------------------------------------------------
* Currently, the Advisor receives an investment advisory fee for managing the
underlying funds in which the Fund invests. The underlying funds pay a monthly
investment advisory fee to the Advisor for its services. The fee is based on the
average daily net assets of each underlying fund and calculated at an annual
rate for each underlying fund. The Fund benefits from the investment advisory
services provided to the underlying funds and, as shareholders of those
underlying funds, indirectly bear a proportionate share of those underlying
funds' advisory fees.
** Not in operation for the period indicated.
*** The Multi-Cap Core Equity Fund pays the Advisor a management fee that is
comprised of two components: the first component is an annual basic fee (the
"basic fee") equal to 0.70% of the Multi-Cap Core Equity Fund's average daily
net assets, and the second component is a performance fee adjustment.
**** The Advisor has contractually agreed to pay all other expenses of the Fund,
excluding the fees and expenses of any underlying fund that the Fund may be
invested in (an "Acquired Fund"), interest expense and taxes (expected to be de
minimis), brokerage commissions and other expenses connected with the execution
of portfolio transactions, short dividend expenses, and extraordinary expenses.
-------------------------------------------------------------------------------------------
INVESTOR SERVICE
INVESTOR SERVICE FEES PAID ($) FOR
FEES PAID (%) FOR FISCAL FISCAL YEAR ENDED
FUND YEAR ENDED 2006 2006
-------------------------------------------------------------------------------------------
Absolute Return Strategies Fund*** 0.25% $0
-------------------------------------------------------------------------------------------
Banking Fund 0.25% $43,079
-------------------------------------------------------------------------------------------
Basic Materials Fund 0.25% $100,849
-------------------------------------------------------------------------------------------
Biotechnology Fund 0.25% $64,894
-------------------------------------------------------------------------------------------
Commodities Strategy Fund 0.25% $60,570
-------------------------------------------------------------------------------------------
Consumer Products Fund 0.25% $86,816
-------------------------------------------------------------------------------------------
Dow 2x Strategy Fund 0.25% $51,298
-------------------------------------------------------------------------------------------
Electronics Fund 0.25% $54,212
-------------------------------------------------------------------------------------------
Energy Fund 0.25% $197,410
-------------------------------------------------------------------------------------------
Energy Services Fund 0.25% $193,813
-------------------------------------------------------------------------------------------
Essential Portfolio Aggressive Fund*** 0.25% $0
-------------------------------------------------------------------------------------------
Essential Portfolio Conservative Fund*** 0.25% $0
-------------------------------------------------------------------------------------------
20
--------------------------------------------------------------------------------------------
INVESTOR SERVICE
INVESTOR SERVICE FEES PAID ($) FOR
FEES PAID (%) FOR FISCAL FISCAL YEAR ENDED
FUND YEAR ENDED 2006 2006
--------------------------------------------------------------------------------------------
Essential Portfolio Moderate Fund*** 0.25% $0
--------------------------------------------------------------------------------------------
Europe 1.25x Strategy Fund 0.25% $133,353
--------------------------------------------------------------------------------------------
Financial Services Fund 0.25% $91,026
--------------------------------------------------------------------------------------------
Government Long Bond Advantage Fund 0.25% $127,729
--------------------------------------------------------------------------------------------
Health Care Fund 0.25% $115,622
--------------------------------------------------------------------------------------------
Hedged Equity Fund*** 0.25% $0
--------------------------------------------------------------------------------------------
High Yield Strategy Fund ** **
--------------------------------------------------------------------------------------------
Internet Fund 0.25% $24,637
--------------------------------------------------------------------------------------------
Inverse Dow 2x Strategy Fund 0.25% $25,828
--------------------------------------------------------------------------------------------
Inverse Government Long Bond Fund 0.25% $74,934
--------------------------------------------------------------------------------------------
Inverse High Yield Strategy Fund ** **
--------------------------------------------------------------------------------------------
Inverse Mid-Cap Strategy Fund 0.25% $10,876
--------------------------------------------------------------------------------------------
Inverse OTC 2x Strategy Fund * *
--------------------------------------------------------------------------------------------
Inverse OTC Strategy Fund 0.25% $77,633
--------------------------------------------------------------------------------------------
Inverse Russell 2000(R) 2x Strategy Fund * *
--------------------------------------------------------------------------------------------
Inverse Russell 2000(R) Strategy Fund 0.25% $39,530
--------------------------------------------------------------------------------------------
Inverse S&P 500 2x Strategy Fund * *
--------------------------------------------------------------------------------------------
Inverse S&P 500 Strategy Fund 0.25% $86,442
--------------------------------------------------------------------------------------------
Japan 1.25x Strategy Fund 0.25% $87,447
--------------------------------------------------------------------------------------------
Large-Cap Growth Fund 0.25% $44,941
--------------------------------------------------------------------------------------------
Large-Cap Value Fund 0.25% $108,062
--------------------------------------------------------------------------------------------
Leisure Fund 0.25% $51,521
--------------------------------------------------------------------------------------------
Mid-Cap 1.5x Strategy Fund 0.25% $99,770
--------------------------------------------------------------------------------------------
Mid-Cap Growth Fund 0.25% $46,940
--------------------------------------------------------------------------------------------
Mid-Cap Value Fund 0.25% $52,433
--------------------------------------------------------------------------------------------
Multi-Cap Core Equity Fund 0.25% $13,232
--------------------------------------------------------------------------------------------
Nova Fund 0.25% $210,606
--------------------------------------------------------------------------------------------
OTC 2x Strategy Fund 0.25% $91,040
--------------------------------------------------------------------------------------------
OTC Fund 0.25% $196,077
--------------------------------------------------------------------------------------------
Precious Metals Fund 0.25% $188,472
--------------------------------------------------------------------------------------------
Real Estate Fund 0.25% $139,227
--------------------------------------------------------------------------------------------
Retailing Fund 0.25% $51,499
--------------------------------------------------------------------------------------------
Russell 2000(R) 1.5x Strategy Fund 0.25% $147,201
--------------------------------------------------------------------------------------------
Russell 2000(R) 2x Strategy Fund 0.25% $2,058
--------------------------------------------------------------------------------------------
Russell 2000(R) Fund * *
--------------------------------------------------------------------------------------------
S&P 500 2x Strategy Fund 0.25% $69,164
--------------------------------------------------------------------------------------------
S&P 500 Fund * *
--------------------------------------------------------------------------------------------
Sector Rotation Fund 0.25% $202,898
--------------------------------------------------------------------------------------------
Small-Cap Growth Fund 0.25% $41,732
--------------------------------------------------------------------------------------------
Small-Cap Value Fund 0.25% $68,311
--------------------------------------------------------------------------------------------
Strengthening Dollar 2x Strategy Fund 0.25% $6,123
--------------------------------------------------------------------------------------------
Technology Fund 0.25% $52,787
--------------------------------------------------------------------------------------------
Telecommunications Fund 0.25% $66,179
--------------------------------------------------------------------------------------------
Transportation Fund 0.25% $102,053
--------------------------------------------------------------------------------------------
U.S. Government Money Market Fund 0.25% $508,437
--------------------------------------------------------------------------------------------
Utilities Fund 0.25% $115,520
--------------------------------------------------------------------------------------------
Weakening Dollar 2x Strategy Fund 0.25% $19,662
--------------------------------------------------------------------------------------------
* The Fund has not yet commenced operations.
** Not in operation for the period indicated.
*** The Advisor has contractually agreed to pay all other expenses of the Fund,
excluding Acquired Fund fees and expenses, interest expense and taxes (expected
to be de minimis), brokerage commissions and other expenses connected with the
execution of portfolio transactions, short dividend expenses, and extraordinary
expenses.
21
BOARD RECOMMENDATION ON PROPOSALS 3 AND 3(a).
At its meeting on July 10, 2007, based on its deliberations on and evaluation of
the information described above, the Board, including all of the Independent
Trustees, unanimously: (a) concluded that the terms of the New Agreements are
fair and reasonable; (b) concluded that the Advisor's fees are reasonable in
light of the services that the Advisor will provide to the Funds; (c) subject to
the Board's reapproval as described in (d) below, agreed to approve the New
Agreements for an initial term of two years and to recommend the approval of the
New Agreements to Shareholders; and (d) agreed to consider the reapproval of the
New Agreements at the annual renewal meeting to be held in August 2007 in light
of additional information to be provided by Rydex.
THE TRUSTEES UNANIMOUSLY RECOMMEND THAT SHAREHOLDERS OF EACH FUND VOTE "FOR"
PROPOSALS 3 AND 3(a).
PROPOSAL 3(b). THE APPROVAL OF A NEW INVESTMENT SUB-ADVISORY AGREEMENT BETWEEN
PADCO ADVISORS II, INC. AND CLS INVESTMENT FIRM, LLC.
TRUSTS/FUNDS VOTING ON PROPOSAL 3(b): RYDEX VARIABLE TRUST/CLS ADVISORONE
AMERIGO FUND, CLS ADVISORONE CLERMONT
FUND AND CLS ADVISORONE BEROLINA FUND
THE APPROVAL OF PROPOSAL 3(b) IS CONTINGENT ON THE APPROVAL OF PROPOSAL 3 BY
SHAREHOLDERS OF THE CLS ADVISORONE AMERIGO FUND, CLS ADVISORONE CLERMONT FUND
AND CLS ADVISORONE BEROLINA FUND.
The Current Agreement between the Advisor and CLS is dated April 30, 2004, and
was approved by the shareholders of the Trust at the 2004 Special Meeting. In
accordance with the Board's best practices, the Current Agreement has been
renewed by the Board on an annual basis following its initial approval. The
Current Agreement will remain in place until the completion of the Transaction
at which time, as a result of the change in the control of the Advisor, the
Current Agreement will terminate and, subject to shareholder approval, the New
Agreement will go into effect. The terms of the New Agreement with respect to
the Sub-Advised Funds, including fees, are identical, with the exception of the
date and term, to the terms of the Current Agreement with respect to the
Sub-Advised Funds. The other terms of the New Agreement with respect to the
Sub-Advised Funds are substantially similar in all material respects to those of
the other New Agreements, and are described in the section above entitled
"Description of the Terms of the New Agreements." A form of the New Agreement is
included as Appendix G to this Proxy Statement.
The tables below provide, with respect to each Sub-Advised Fund: (i) the
Advisor's annual rate of compensation under the Current and New Agreements,
stated as a percentage of the Fund's assets; (ii) the amount of advisory fees
paid to the Advisor pursuant to the Current Agreement for the Trust's most
recently completed fiscal year ended December 31, 2006; (iii) the Sub-Advisor's
anticipated annual rate of compensation under the New Agreement, stated as a
percentage of the Fund's assets; (iv) the amount of sub-advisory fees paid to
the Sub-Advisor by the Advisor pursuant to the Current Agreement for the Trust's
most recently completed fiscal year ended December 31, 2006; (v) amounts paid by
the Funds to the Administrator for the Trust's most recently completed fiscal
year ended December 31, 2006; (vi) amounts paid by the Funds to the
Administrator for accounting services for the Trust's most recently completed
fiscal year ended December 31, 2006; (vii) amounts paid by the Funds to the
Distributor for services provided pursuant to the Funds' distribution and
investor services plans for the Trust's most recently completed fiscal year
ended December 31, 2006; and (viii) aggregate brokerage commissions paid to the
Distributor for the most recently completed fiscal year ended December 31, 2006.
Compensation paid to the Sub-Advisor, under both the Current Agreement and the
New Agreement, is and will continue to be, paid by the Advisor.
22
----------------------------------------------------------------------------------------------------------
ADVISORY FEES PAID
CURRENT AND ADVISORY FEES PAID CURRENT AND TO SUB-ADVISOR BY
ANTICIPATED TO ADVISOR FOR ANTICIPATED THE ADVISOR FOR
ADVISORY FEE FISCAL YEAR ENDED SUB-ADVISORY FEE FISCAL YEAR ENDED
FUND RATE 2007 RATE* 2006
----------------------------------------------------------------------------------------------------------
CLS AdvisorOne Amerigo Fund 0.90% $2,106,722 0.40% $937,554
----------------------------------------------------------------------------------------------------------
CLS AdvisorOne Berolina Fund 0.90% $12,234** 0.40% $5,296**
----------------------------------------------------------------------------------------------------------
CLS AdvisorOne Clermont Fund 0.90% $1,032,384 0.40% $460,120
----------------------------------------------------------------------------------------------------------
* The New Agreement's compensation terms provide that the Advisor will have no
obligation to compensate CLS for its services with respect to a Sub-Advised Fund
for any quarter in which such Fund's assets average less than $10,000,000 during
that quarter.
** Since the commencement of operations on November 10, 2006.
---------------------------------------------------------------------------------------------------------------
ADMINISTRATIVE ACCOUNTING INVESTOR SERVIC
SERVICE FEES PAID SERVICE FEES PAID DISTRIBUTION PLAN PLAN
TO ADMINISTRATOR TO ADMINISTRATOR FEES PAID ($)FOR FEES PAID ($)FOR
FOR FISCAL YEAR FOR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED
FUND 2006 2006 2006 2006
---------------------------------------------------------------------------------------------------------------
CLS AdvisorOne Amerigo Fund $585,201 $232,834 $0 $585,201
---------------------------------------------------------------------------------------------------------------
CLS AdvisorOne Berolina Fund $3,398* $1,360* $0* $3,398*
---------------------------------------------------------------------------------------------------------------
CLS AdvisorOne Clermont Fund $286,773 $114,709 $0 $286,773
---------------------------------------------------------------------------------------------------------------
* Since the commencement of operations on November 10, 2006.
-------------------------------------------------------------------------------------------------------
PERCENTAGE OF TOTAL
BROKERAGE
PERCENTAGE OF TOTAL TRANSACTIONS,
AGGREGATE BROKERAGE BROKERAGE INVOLVING PAYMENT OF
COMMISSIONS PAID TO COMMISSIONS PAID TO COMMISSIONS, EFFECTED
DISTRIBUTOR FOR FISCAL AFFILIATED BROKER IN THROUGH AFFILIATED
FUND YEAR ENDED 2006 2006 BROKERS IN 2006
-------------------------------------------------------------------------------------------------------
CLS AdvisorOne Amerigo Fund $218,984 100% 60.79%
-------------------------------------------------------------------------------------------------------
CLS AdvisorOne Berolina Fund $4,551* 100%* 84.14%*
-------------------------------------------------------------------------------------------------------
CLS AdvisorOne Clermont Fund $39,585 100% 48.57%
-------------------------------------------------------------------------------------------------------
* Since the commencement of operations on November 10, 2006.
INFORMATION ABOUT CLS. CLS is organized as a Nebraska limited liability company
with its principal place of business located at 4020 S. 147th Street, Omaha,
Nebraska 68137. CLS is a wholly-owned subsidiary of Northstar Financial Services
Group, LLC ("Northstar"), a Nevada limited liability company. Northstar is owned
50% by W. Patrick Clarke, who serves as Chief Executive Officer and Manager of
CLS, and 50% by Michael Miola, who serves as a Manager of CLS.
The name and principal occupation of each principal executive officer of CLS are
listed below. Unless otherwise noted, the business address of each officer is
c/o CLS Investment Firm LLC, 4020 S. 147th Street, Omaha, Nebraska 68137.
23
-------------------------------------------------------------------------------------------------------------------
NAME TITLE PRINCIPAL OCCUPATION
-------------------------------------------------------------------------------------------------------------------
W. Patrick Clarke Chief Executive Officer Manager, CLS; Co-Owner, NorthStar Financial Services Group, LLC
and Manager
-------------------------------------------------------------------------------------------------------------------
Michael Miola Chief Executive Officer Manager, CLS; Co-Owner, NorthStar Financial Services Group, LLC
and Manager
-------------------------------------------------------------------------------------------------------------------
Robert M. Jergovic Chief Investment Officer Chief Investment Officer, CLS
-------------------------------------------------------------------------------------------------------------------
Todd Clarke President President, CLS
-------------------------------------------------------------------------------------------------------------------
Scott R. Kubie Vice President Vice President and Director of Research, CLS
-------------------------------------------------------------------------------------------------------------------
Brian Nielson General Counsel/Chief General Counsel/Chief Compliance Officer, CLS; General Counsel,
Compliance Officer NorthStar Financial Services Group, LLC
-------------------------------------------------------------------------------------------------------------------
BOARD RECOMMENDATION ON PROPOSAL 3(b).
At its meeting on July 10, 2007, based on its deliberations on and evaluation of
the information described above, the Board, including all of the Independent
Trustees, unanimously: (a) concluded that the terms of the New Agreement are
fair and reasonable; (b) concluded that the Sub-Advisor's fees are reasonable in
light of the services that the Sub-Advisor will provide to the Funds; (c)
subject to the Board's reapproval as described in (d) below, agreed to approve
the New Agreement for an initial term of two years and to recommend the approval
of the New Agreement to Shareholders; and (d) agreed to consider the reapproval
of the New Agreement at the annual renewal meeting to be held in August 2007 in
light of additional information to be provided by CLS.
THE TRUSTEES UNANIMOUSLY RECOMMEND THAT SHAREHOLDERS OF EACH FUND VOTE "FOR"
PROPOSAL 3(b).
PROPOSAL 4. THE APPROVAL OF A NEW INVESTMENT ADVISORY AGREEMENT BETWEEN RYDEX
ETF TRUST AND PADCO ADVISORS II, INC.
TRUSTS/FUNDS VOTING ON PROPOSAL 4: RYDEX ETF TRUST/ALL FUNDS
The Current Agreement between the Advisor and the Trust is dated April 30, 2004,
and was approved by the shareholders of the Trust at the 2004 Special Meeting.
In accordance with the Board's best practices, the Current Agreement has been
renewed by the Board on an annual basis following its initial approval. The
Current Agreement will remain in place until the completion of the Transaction
at which time, as a result of the change in the control of the Advisor, the
Current Agreement will terminate and, subject to shareholder approval, the New
Agreement will go into effect. The terms of the New Agreement, including fees,
are identical, with the exception of the date and term, to the terms of the
Current Agreement. The other terms of the New Agreement are substantially
similar in all material respects to those of the other New Agreements, and are
described in the section above entitled "Description of the Terms of the New
Agreements." A form of the New Agreement is included as Appendix H to this Proxy
Statement.
The tables below provide, with respect to each of the Trust's Funds: (i) the
Advisor's annual rate of compensation under the Current and New Agreements,
stated as a percentage of the Fund's assets; (ii) the amount of advisory fees
paid to the Advisor pursuant to the Current Agreement for the Trust's most
recently completed fiscal year ended October 31, 2006; and (iii) amounts paid by
the Advisor to State Street Bank and Trust Company for administration, custody
and transfer agency services for the Trust's most recently completed fiscal year
ended October 31, 2006. For the fiscal year ended October 31, 2006, the Trust's
Funds did not pay any brokerage commissions to the Distributor. Each Fund has
adopted a Distribution Plan pursuant to which the Distributor, or designated
service providers, may receive up to 0.25% of a Fund's assets attributable to
shares as compensation for distribution services pursuant to Rule 12b-1 of the
1940 Act. However, for the fiscal year ended October 31, 2006, the Funds did not
pay the Distributor any fees for services provided pursuant to the terms of the
Distribution Plan.
24
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CUSTODY,
CURRENT ADMINISTRATION AND
AND ADVISORY FEES TRANSFER AGENCY
ANTICIPATED PAID TO ADVISOR EXPENSES PAID
ADVISORY OR FISCAL YEAR DURING THE FISCAL
FUND FEE RATE* ENDED 2006 YEAR ENDED 2006
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Rydex Russell Top 50 ETF 0.20% $326,403 $59,541.06
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Rydex S&P Equal Weight ETF 0.40% $6,067,717 $550,815.24
---------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight Consumer Discretionary ETF 0.50% ** **
---------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight Consumer Staples ETF 0.50% ** **
---------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight Energy ETF 0.50% ** **
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Rydex S&P Equal Weight Financials ETF 0.50% ** **
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Rydex S&P Equal Weight Health Care Fund 0.50% ** **
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Rydex S&P Equal Weight Industrials ETF 0.50% ** **
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Rydex S&P Equal Weight Materials ETF 0.50% ** **
---------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight Technology ETF 0.50% ** **
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Rydex S&P Equal Weight Utilities ETF 0.50% ** **
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Rydex S&P 500 Pure Growth ETF 0.35% $32,115*** $12,699.53***
---------------------------------------------------------------------------------------------------------
Rydex S&P 500 Pure Value ETF 0.35% $28,282*** $9,649.14***
---------------------------------------------------------------------------------------------------------
Rydex S&P MidCap 400 Pure Growth ETF 0.35% $42,331*** $12,575.06***
---------------------------------------------------------------------------------------------------------
Rydex S&P MidCap 400 Pure Value ETF 0.35% $27,406*** $6,627.65***
---------------------------------------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure Growth ETF 0.35% $16,689*** $11,867.99***
---------------------------------------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure Value ETF 0.35% $13,382*** $14,680.74***
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* The Advisor has contractually agreed to pay all operating expenses of each
Rydex ETF Trust Fund, excluding interest expense and taxes (expected to be de
minimis), brokerage commissions and other expenses connected with the execution
of portfolio transactions, any future distribution fees or expenses, and
extraordinary expenses.
** Not in operation for the period indicated. The Fund commenced operations on
November 1, 2006.
*** Since the commencement of operations on March 1, 2006.
BOARD RECOMMENDATION ON PROPOSAL 4.
At its meeting on July 10, 2007, based on its deliberations on and evaluation of
the information described above, the Board, including all of the Independent
Trustees, unanimously: (a) concluded that the terms of the New Agreement are
fair and reasonable; (b) concluded that the Advisor's fees are reasonable in
light of the services that the Advisor will provide to the Funds; (c) subject to
the Board's reapproval as described in (d) below, agreed to approve the New
Agreement for an initial term of two years and to recommend the approval of the
New Agreement to Shareholders; and (d) agreed to consider the reapproval of the
New Agreement at the annual renewal meeting to be held in August 2007 in light
of additional information to be provided by Rydex.
THE TRUSTEES UNANIMOUSLY RECOMMEND THAT SHAREHOLDERS OF THE FUND VOTE "FOR"
PROPOSAL 4.
25
GENERAL INFORMATION ABOUT THE TRUSTS AND OTHER MATTERS
INFORMATION ABOUT TRUST OFFICERS AND SERVICE PROVIDERS
PRINCIPAL UNDERWRITER. Rydex Distributors, Inc., located at 9601 Blackwell Road,
Suite 500, Rockville, Maryland 20850, serves as the distributor and principal
underwriter to the Trusts.
ADMINISTRATOR. Rydex Fund Services, Inc., 9601 Blackwell Road, Suite 500,
Rockville, Maryland 20850, serves as the administrator for the Rydex Series
Funds, Rydex Dynamic Funds, and Rydex Variable Trust. State Street Bank and
Trust Company serves as the administrator for the Rydex ETF Trust.
TRUST OFFICERS. Set forth below are the names, ages, position with the Trusts,
length of term of office, and the principal occupations for a minimum of the
last five years of each of the persons currently serving as officers of the
Trusts. The business address of each officer is 9601 Blackwell Road, Suite 500,
Rockville, Maryland 20850. None of the officers receive compensation from the
Trusts for their services.
------------------------------------------------------------------------------------------------------------------------------------
POSITION(S) NUMBER OF
HELD WITH PORTFOLIOS IN
THE TRUSTS, FUND
TERM OF COMPLEX
NAME, ADDRESS OFFICE AND OVERSEEN
AND AGE OF LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
Carl G. Trustee from PADCO ADVISORS, INC.: 138 None.
Verboncoeur (54) 2004 to
present; Chief Executive Officer from October 2003
President from to present; Executive Vice President of
2003 to PADCO Advisors, Inc. from December 2002 to
present; Vice October 2003; President of PADCO Advisors,
President from Inc. from October 2003 to May 2004; and
1997 to Treasurer from December 2002 to present
present; and
Treasurer from PADCO ADVISORS II, INC.:
1997 to 2003.
Chief Executive Officer from December 2003
to present; Executive Vice President of
PADCO Advisors II, Inc. from December 2002
to December 2003; President of PADCO
Advisors II, Inc. from December 2002 to
May 2004 and Treasurer from December 2003
to present
RYDEX CAPITAL PARTNERS I, LLC:
Treasurer from October 2003 to April 2007,
and Executive Vice President from October
2003 to August 2006
RYDEX CAPITAL PARTNERS II, LLC:
Treasurer from October 2003 to April 2007,
and Executive Vice President
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26
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POSITION(S) NUMBER OF
HELD WITH PORTFOLIOS IN
THE TRUSTS, FUND
TERM OF COMPLEX
NAME, ADDRESS OFFICE AND OVERSEEN
AND AGE OF LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
from October 2003 to August 2006
RYDEX ADVISORY SERVICES:
Chief Executive Officer from August 2004
to present
RYDEX DISTRIBUTORS, INC.:
President and Chief Executive Officer from
December 2003 to present; Treasurer from
December 2002 to present; Executive Vice
President from December 2002 to December
2003; and Vice President from December
2001 to December 2002
RYDEX FUND SERVICES, INC.:
Chief Executive Officer from December 2003
to present; President and Treasurer from
December 2002 to present; and Executive
Vice President from December 2001 to
December 2002
RYDEX HOLDINGS, INC.:
Chief Executive Officer, President and
Treasurer from December 2005 to present
ADVISOR RESEARCH CENTER, INC.:
Chief Executive Officer, President and
Treasurer from May 2006 to present
RYDEX SPECIALIZED PRODUCTS, LLC:
Chief Executive Officer, Director and
Treasurer from September 2005 to present
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Michael P. Byrum Trustee and PADCO ADVISORS, INC.: 138 None.
(36) Secretary from
2005 to present. Chief Investment Officer from August 2006
to present; Chief Operating Officer of
PADCO Advisors, Inc. from October 2003 to
May 2004;
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27
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POSITION(S) NUMBER OF
HELD WITH PORTFOLIOS IN
THE TRUSTS, FUND
TERM OF COMPLEX
NAME, ADDRESS OFFICE AND OVERSEEN
AND AGE OF LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
Executive Vice President from December
2002 to May 2004; President from May 2004
to present; and Secretary from December
2002 to present
PADCO ADVISORS II, INC.:
Chief Investment Officer from August 2006
to present; Chief Operating Officer of
PADCO Advisors II, Inc. from December 2003
to May 2004; Executive Vice President from
December 2002 to May 2004; President from
May 2004 to present; and Secretary from
December 2002 to present
RYDEX ADVISORY SERVICES:
President from August 2004 to present
RYDEX CAPITAL PARTNERS I, LLC:
President and Secretary from October 2003
to April 2007
RYDEX CAPITAL PARTNERS II, LLC:
President and Secretary from October 2003
to April 2007
RYDEX DISTRIBUTORS, INC.:
Secretary from December 2001 to May 2004;
Executive Vice President from December
2002 to May 2004; and Chief Operating
Officer from December 2003 to May 2004
RYDEX FUND SERVICES, INC.:
Secretary from December 2002 to present;
Executive Vice President from December
2002 to August 2006; and Chief Operating
Officer from December 2003 to May 2004
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28
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POSITION(S) NUMBER OF
HELD WITH PORTFOLIOS IN
THE TRUSTS, FUND
TERM OF COMPLEX
NAME, ADDRESS OFFICE AND OVERSEEN
AND AGE OF LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
RYDEX HOLDINGS, INC.:
Secretary from December 2005 to present
and Executive Vice President from December
2005 to August 2006
ADVISOR RESEARCH CENTER, INC.:
Secretary from May 2006 to present and
Executive Vice President from May 2006 to
August 2006
RYDEX SPECIALIZED PRODUCTS, LLC:
Director and Secretary from September 2005
to present
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Nick Bonos (43) Vice President Senior Vice President of Fund Services of 138 Not Applicable.
and Treasurer PADCO Advisors, Inc. from August 2006 to
from 2003 to present; Senior Vice President of
present. Rydex Fund Services, Inc. from December
2003 to August 2006; Vice President of
Accounting, Rydex Fund Services, Inc. from
2001 to 2003; and Chief Financial Officer
and Manager of Rydex Specialized Products,
LLC from September 2005 to present
------------------------------------------------------------------------------------------------------------------------------------
Joanna M. Haigney Chief Chief Compliance Officer of PADCO 138 Not Applicable.
(40) Compliance Advisors, Inc. and PADCO Advisors II, Inc.
Officer from from May 2005 to present and Rydex Capital
2004 to Partners I, LLC and Rydex Capital Partners
present; and II, LLC from August 2006 to April 2007;
Secretary from Vice President of Compliance of PADCO
2000 to present. Advisors, Inc. from August 2006 to
present; Assistant Secretary of Rydex
Distributors, Inc. from December 2001 to
December 2003; and Vice President of Rydex
Distributors, Inc. from December 2003 to
May 2004 and Rydex Fund Services, Inc.
from December 2001 to August 2006
------------------------------------------------------------------------------------------------------------------------------------
Joseph Arruda (40) Assistant Vice President of PADCO Advisors, Inc. and 138 Not Applicable.
Treasurer from PADCO Advisors II, Inc.
------------------------------------------------------------------------------------------------------------------------------------
29
------------------------------------------------------------------------------------------------------------------------------------
POSITION(S) NUMBER OF
HELD WITH PORTFOLIOS IN
THE TRUSTS, FUND
TERM OF COMPLEX
NAME, ADDRESS OFFICE AND OVERSEEN
AND AGE OF LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
2006 to from 2004 to present; Director of
present. Accounting of PADCO Advisors, Inc.
and PADCO Advisors II, Inc. from
2003 to 2004; Vice President of
Mutual Funds, State Street Bank &
Trust from 2000 to 2003.
------------------------------------------------------------------------------------------------------------------------------------
Paula Billos (33) Controller from Director of Fund Administration of PADCO 138 Not Applicable.
2006 to present. Advisors, Inc. and PADCO Advisors II, Inc.
from 2001 to present.
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SHAREHOLDERS SHARING THE SAME ADDRESS
If two or more Shareholders share the same address, only one copy of this Proxy
Statement will be delivered to that address, unless a Fund has received contrary
instructions from one or more of the Shareholders at that shared address. Upon
written or oral request, a Fund will deliver promptly a separate copy of this
Proxy Statement to a Shareholder at a shared address. Please note that each
Shareholder will receive a separate proxy card, regardless of whether he or she
resides at a shared address. Please call 1-888-XXX-XXXX (1-888-XXX-XXXX) or
forward a written request to a Fund c/o Rydex Investments, 9601 Blackwell Road,
Suite 500, Rockville, Maryland 20850 if you would like to: (1) receive a
separate copy of this Proxy Statement; (2) receive your annual reports or proxy
statements separately in the future; or (3) request delivery of a single copy of
annual reports or proxy statements if you are currently receiving multiple
copies at a shared address.
OUTSTANDING SHARES AND SIGNIFICANT SHAREHOLDERS
Shareholders of record on the Record Date are entitled to notice of and to vote
at the Meeting and any adjournments or postponements thereof. Appendix A to this
Proxy Statement lists for each Fund the total number of shares outstanding as of
the Record Date for each class of each Fund's shares. It also identifies
holders, as of the Record Date, of more than 5% of any class of shares of each
Fund.
SHAREHOLDER PROPOSALS
The Trusts are organized as statutory trusts under the laws of Delaware. As
such, the Trusts are not required to, and do not, hold annual shareholder
meetings. Nonetheless, the Board of a Trust may call a special meeting of
shareholders for action by shareholder vote as may be required by the 1940 Act
or as required or permitted by the Declaration of Trust and By-Laws of a Trust.
Shareholders who wish to present a proposal for action at a future meeting
should submit a written proposal to the Secretary of Rydex Series Funds, Rydex
Dynamic Funds, Rydex Variable Trust or Rydex ETF Trust, as applicable, c/o Rydex
Investments, 9601 Blackwell Road, Suite 500, Rockville, Maryland 20850 for
inclusion in a future proxy statement. Shareholder proposals to be presented at
any future meeting of a Trust must be received by the Trust in writing within a
reasonable amount of time before the Trust solicits proxies for that meeting, in
order to be considered for inclusion in the proxy materials for that meeting.
Whether a proposal is submitted in a proxy statement will be determined in
accordance with applicable federal and state laws. Shareholders retain the right
to request that a meeting of the shareholders be held for the purpose of
considering matters requiring shareholder approval.
30
OTHER MATTERS
The Trustees know of no other business to be brought before the Meeting.
However, if any other matters properly come before the Meeting, it is their
intention that proxies which do not contain specific restrictions to the
contrary will be voted on such matters in accordance with the judgment of the
persons named in the enclosed proxy.
ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS
For a free copy of a Trust's most recent Annual Report (and most recent
Semi-Annual Report succeeding the Annual Report, if any), Shareholders may call
1-800-XXX-XXXX or write to the Rydex Funds at 9601 Blackwell Road, Suite 500,
Rockville, Maryland 20850.
OTHER BUSINESS
The Board does not intend to present any other business at the Meeting. If any
other matter may properly come before the Meeting, or any adjournment thereof,
the persons named in the accompanying proxy card(s) intend to vote, act, or
consent thereunder in accordance with their best judgment at that time on such
matters. No annual or other special meeting is currently scheduled for the
Trusts. Mere submission of a shareholder proposal does not guarantee the
inclusion of the proposal in the proxy statement or presentation of the proposal
at the Meeting because inclusion and presentation are subject to compliance with
certain federal regulations.
PROMPT EXECUTION AND RETURN OF THE ENCLOSED PROXY CARD IS REQUESTED. A
SELF-ADDRESSED, POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE, ALONG
WITH INSTRUCTIONS ON HOW TO VOTE OVER THE INTERNET OR BY TELEPHONE SHOULD YOU
PREFER TO VOTE BY ONE OF THOSE METHODS. YOU MAY ALSO ATTEND THE MEETING AND VOTE
IN PERSON.
31
APPENDIX A
OUTSTANDING SHARES AND SIGNIFICANT SHAREHOLDERS
I. OUTSTANDING SHARES
As of the Record Date, the total number of shares outstanding for each Fund and
for each class of each Fund is set forth in the table below:
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SHARES OUTSTANDING
TRUST -----------------------------------------------------------------
AND INVESTOR ADVISOR H-CLASS C-CLASS A-CLASS
FUND CLASS SHARES CLASS SHARES SHARES SHARES SHARES TOTAL
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RYDEX SERIES FUNDS
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RYDEX DYNAMIC FUNDS
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RYDEX VARIABLE TRUST
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RYDEX ETF TRUST
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AGGREGATE NUMBER OF SHARES OUTSTANDING
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1
II. SIGNIFICANT SHAREHOLDERS
As of the Record Date, the following persons were the only persons who were
record owners or, to the best knowledge of the Trust, were beneficial owners of
5% or more of the shares of a Fund.
--------------------------------------------------------------------------------
PERCENTAGE OF
NAME AND ADDRESS NUMBER OF FUND SHARES
FUND OF BENEFICIAL OWNER SHARES OWNED OUTSTANDING
--------------------------------------------------------------------------------
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2
APPENDIX B
ADVISORY AGREEMENT
ADVISORY AGREEMENT made as of this __th day of __________, 2007 by and
between RYDEX SERIES FUNDS (the "Trust"), a Delaware statutory trust registered
as an investment company under the Investment Company Act of 1940, as amended
(the "1940 Act"), and PADCO ADVISORS, INC., a Maryland corporation with its
principal place of business at 9601 Blackwell Road, Suite 500, Rockville,
Maryland 20850 (the "Adviser").
W I T N E S S E T H
WHEREAS, the Board of Trustees (the "Board") of the Trust has selected the
Adviser to act as investment adviser to the Trust on behalf of the series set
forth on Schedule A to this Agreement (each a "Fund" and, collectively, the
"Funds"), as such Schedule may be amended from time to time upon mutual
agreement of the parties, and to provide certain related services, as more fully
set forth below, and to perform such services under the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits set
forth herein, the Trust and the Adviser do hereby agree as follows:
1. THE ADVISER'S SERVICES.
(a) DISCRETIONARY INVESTMENT MANAGEMENT SERVICES. The Adviser shall
act as investment adviser with respect to the Funds. In such capacity, the
Adviser shall, subject to the supervision of the Board, regularly provide
the Funds with investment research, advice and supervision and shall
furnish continuously an investment program for the Funds, consistent with
the respective investment objectives and policies of each Fund. The Adviser
shall determine, from time to time, what securities shall be purchased for
the Funds, what securities shall be held or sold by the Funds and what
portion of the Funds' assets shall be held uninvested in cash, subject
always to the provisions of the Trust's Declaration of Trust, By-Laws and
its registration statement on Form N-1A (the "Registration Statement")
under the 1940 Act, and under the Securities Act of 1933, as amended (the
"1933 Act"), covering Fund shares, as filed with the Securities and
Exchange Commission (the "Commission"), and to the investment objectives,
policies and restrictions of the Funds, as each of the same shall be from
time to time in effect. To carry out such obligations, the Adviser shall
exercise full discretion and act for the Funds in the same manner and with
the same force and effect as the Funds themselves might or could do with
respect to purchases, sales or other transactions, as well as with respect
to all other such things necessary or incidental to the furtherance or
conduct of such purchases, sales or other transactions. No reference in
this Agreement to the Adviser having full discretionary authority over each
Fund's investments shall in any way limit the right of the Board, in its
sole discretion, to establish or revise policies in connection with the
management of a Fund's assets or to otherwise exercise its right to control
the overall management of a Fund.
1
(b) COMPLIANCE. The Adviser agrees to comply with the requirements of
the 1940 Act, the Investment Advisers Act of 1940 (the "Advisers Act"), the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"),
the Commodity Exchange Act and the respective rules and regulations
thereunder, as applicable, as well as with all other applicable federal and
state laws, rules, regulations and case law that relate to the services and
relationships described hereunder and to the conduct of its business as a
registered investment adviser. The Adviser also agrees to comply with the
objectives, policies and restrictions set forth in the Registration
Statement, as amended or supplemented, of the Funds, and with any policies,
guidelines, instructions and procedures approved by the Board and provided
to the Adviser. In selecting each Fund's portfolio securities and
performing the Adviser's obligations hereunder, the Adviser shall cause the
Fund to comply with the diversification and source of income requirements
of Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company. The Adviser
shall maintain compliance procedures that it reasonably believes are
adequate to ensure its compliance with the foregoing. No supervisory
activity undertaken by the Board shall limit the Adviser's full
responsibility for any of the foregoing.
(c) PROXY VOTING. The Board has the authority to determine how proxies
with respect to securities that are held by the Funds shall be voted, and
the Board has initially determined to delegate the authority and
responsibility to vote proxies for the Funds' securities to the Adviser. So
long as proxy voting authority for the Funds has been delegated to the
Adviser, the Adviser shall exercise its proxy voting responsibilities. The
Adviser shall carry out such responsibility in accordance with any
instructions that the Board shall provide from time to time, and at all
times in a manner consistent with Rule 206(4)-6 under the Advisers Act and
its fiduciary responsibilities to the Trust. The Adviser shall provide
periodic reports and keep records relating to proxy voting as the Board may
reasonably request or as may be necessary for the Funds to comply with the
1940 Act and other applicable law. Any such delegation of proxy voting
responsibility to the Adviser may be revoked or modified by the Board at
any time.
(d) RECORDKEEPING. The Adviser shall not be responsible for the
provision of administrative, bookkeeping or accounting services to the
Funds, except as otherwise provided herein or as may be necessary for the
Adviser to supply to the Trust or its Board the information required to be
supplied under this Agreement.
The Adviser shall maintain separate books and detailed records of all
matters pertaining to Fund assets advised by the Adviser required by Rule
31a-1 under the 1940 Act (other than those records being maintained by any
administrator, custodian or transfer agent appointed by the Funds) relating
to its responsibilities provided hereunder with respect to the Funds, and
shall preserve such records for the periods and in a manner prescribed
therefore by Rule 31a-2 under the 1940 Act (the "Fund Books and Records").
The Fund Books and Records shall be available to the Board at any time upon
request, shall be delivered to the Trust upon the termination of this
Agreement and shall be available without delay during any day the Trust is
open for business.
2
(e) HOLDINGS INFORMATION AND PRICING. The Adviser shall provide
regular reports regarding Fund holdings, and shall, on its own initiative,
furnish the Trust and its Board from time to time with whatever information
the Adviser believes is appropriate for this purpose. The Adviser agrees to
immediately notify the Trust if the Adviser reasonably believes that the
value of any security held by a Fund may not reflect fair value. The
Adviser agrees to provide any pricing information of which the Adviser is
aware to the Trust, its Board and/or any Fund pricing agent to assist in
the determination of the fair value of any Fund holdings for which market
quotations are not readily available or as otherwise required in accordance
with the 1940 Act or the Trust's valuation procedures for the purpose of
calculating the Fund net asset value in accordance with procedures and
methods established by the Board.
(f) COOPERATION WITH AGENTS OF THE TRUST. The Adviser agrees to
cooperate with and provide reasonable assistance to the Trust, any Trust
custodian or foreign sub-custodians, any Trust pricing agents and all other
agents and representatives of the Trust, such information with respect to
the Funds as they may reasonably request from time to time in the
performance of their obligations, provide prompt responses to reasonable
requests made by such persons and establish appropriate interfaces with
each so as to promote the efficient exchange of information and compliance
with applicable laws and regulations.
2. CODE OF ETHICS. The Adviser has adopted a written code of ethics that it
reasonably believes complies with the requirements of Rule 17j-1 under the 1940
Act, which it will provide to the Trust. The Adviser shall ensure that its
Access Persons (as defined in the Adviser's Code of Ethics) comply in all
material respects with the Adviser's Code of Ethics, as in effect from time to
time. Upon request, the Adviser shall provide the Trust with a (i) a copy of the
Adviser's current Code of Ethics, as in effect from time to time, and (ii)
certification that it has adopted procedures reasonably necessary to prevent
Access Persons from engaging in any conduct prohibited by the Adviser's Code of
Ethics. Annually, the Adviser shall furnish a written report, which complies
with the requirements of Rule 17j-1, concerning the Adviser's Code of Ethics to
the Trust. The Adviser shall respond to requests for information from the Trust
as to violations of the Code of Ethics by Access Persons and the sanctions
imposed by the Adviser. The Adviser shall immediately notify the Trust of any
material violation of the Code of Ethics, whether or not such violation relates
to a security held by any Fund.
3. INFORMATION AND REPORTING. The Adviser shall provide the Trust and its
respective officers with such periodic reports concerning the obligations the
Adviser has assumed under this Agreement as the Trust may from time to time
reasonably request.
(a) NOTIFICATION OF BREACH / COMPLIANCE REPORTS. The Adviser shall
notify the Trust immediately upon detection of (i) any material failure to
manage any Fund in accordance with its investment objectives and policies
or any applicable law; or (ii) any material breach of the Funds' or the
Adviser's policies, guidelines or procedures. In addition, the Adviser
shall provide a quarterly report regarding each Fund's compliance with its
investment objectives and policies, applicable law, including, but not
limited to the 1940 Act and Subchapter M of the Code, and the Fund's
policies, guidelines or
3
procedures as applicable to the Adviser's obligations under this Agreement.
The Adviser agrees to correct any such failure promptly and to take any
action that the Board may reasonably request in connection with any such
breach. Upon request, the Adviser shall also provide the officers of the
Trust with supporting certifications in connection with such certifications
of Fund financial statements and disclosure controls pursuant to the
Sarbanes-Oxley Act. The Adviser will promptly notify the Trust in the event
(i) the Adviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board, or body, involving the affairs of the Trust (excluding
class action suits in which a Fund is a member of the plaintiff class by
reason of the Fund's ownership of shares in the defendant) or the
compliance by the Adviser with the federal or state securities laws or (ii)
an actual change in control of the Adviser resulting in an "assignment" (as
defined in the 1940 Act) has occurred or is otherwise proposed to occur.
(b) BOARD AND FILINGS INFORMATION. The Adviser will also provide the
Trust with any information reasonably requested regarding its management of
the Funds required for any meeting of the Board, or for any shareholder
report, amended registration statement, proxy statement, or prospectus
supplement to be filed by the Trust with the Commission. The Adviser will
make its officers and employees available to meet with the Board from time
to time on due notice to review its investment management services to the
Funds in light of current and prospective economic and market conditions
and shall furnish to the Board such information as may reasonably be
necessary in order for the Board to evaluate this Agreement or any proposed
amendments thereto.
(c) TRANSACTION INFORMATION. The Adviser shall furnish to the Trust
such information concerning portfolio transactions as may be necessary to
enable the Trust or its designated agent to perform such compliance testing
on the Funds and the Adviser's services as the Trust may, in its sole
discretion, determine to be appropriate. The provision of such information
by the Adviser to the Trust or its designated agent in no way relieves the
Adviser of its own responsibilities under this Agreement.
4. BROKERAGE.
(a) PRINCIPAL TRANSACTIONS. In connection with purchases or sales of
securities for the account of a Fund, neither the Adviser nor any of its
directors, officers or employees will act as a principal or agent or
receive any commission except as permitted by the 1940 Act.
(b) PLACEMENT OF ORDERS. The Adviser shall arrange for the placing of
all orders for the purchase and sale of securities for a Fund's account
with brokers or dealers selected by the Adviser. In the selection of such
brokers or dealers and the placing of such orders, the Adviser is directed
at all times to seek for the Fund the most favorable execution and net
price available under the circumstances. It is also understood that it is
desirable for the Fund that the Adviser have access to brokerage and
research services provided by brokers who may execute brokerage
transactions at a higher cost to the Fund
4
than may result when allocating brokerage to other brokers, consistent with
section 28(e) of the 1934 Act and any Commission staff interpretations
thereof. Therefore, the Adviser is authorized to place orders for the
purchase and sale of securities for a Fund with such brokers, subject to
review by the Board from time to time with respect to the extent and
continuation of this practice. It is understood that the services provided
by such brokers may be useful to the Adviser in connection with its or its
affiliates' services to other clients.
(c) AGGREGATED TRANSACTIONS. On occasions when the Adviser deems the
purchase or sale of a security to be in the best interest of a Fund as well
as other clients of the Adviser, the Adviser may, to the extent permitted
by applicable law and regulations, aggregate the order for securities to be
sold or purchased. In such event, the Adviser will allocate securities or
futures contracts so purchased or sold, as well as the expenses incurred in
the transaction, in the manner the Adviser reasonably considers to be
equitable and consistent with its fiduciary obligations to the Fund and to
such other clients under the circumstances.
(d) AFFILIATED BROKERS. The Adviser or any of its affiliates may act
as broker in connection with the purchase or sale of securities or other
investments for a Fund, subject to: (a) the requirement that the Adviser
seek to obtain best execution and price within the policy guidelines
determined by the Board and set forth in the Fund's current prospectus and
SAI; (b) the provisions of the 1940 Act; (c) the provisions of the Advisers
Act; (d) the provisions of the 1934 Act; and (e) other provisions of
applicable law. These brokerage services are not within the scope of the
duties of the Adviser under this Agreement. Subject to the requirements of
applicable law and any procedures adopted by the Board, the Adviser or its
affiliates may receive brokerage commissions, fees or other remuneration
from a Fund for these services in addition to the Adviser's fees for
services under this Agreement.
5. CUSTODY. Nothing in this Agreement shall permit the Adviser to take or
receive physical possession of cash, securities or other investments of a Fund.
6. ALLOCATION OF CHARGES AND EXPENSES. The Adviser will bear its own costs
of providing services hereunder. Other than as herein specifically indicated,
the Adviser shall not be responsible for a Fund's expenses, including brokerage
and other expenses incurred in placing orders for the purchase and sale of
securities and other investment instruments.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) PROPERLY REGISTERED. The Adviser is registered as an investment
adviser under the Advisers Act, and will remain so registered for the
duration of this Agreement. The Adviser is not prohibited by the Advisers
Act or the 1940 Act from performing the services contemplated by this
Agreement, and to the best knowledge of the Adviser, there is no proceeding
or investigation that is reasonably likely to result in the Adviser being
prohibited from performing the services contemplated by this Agreement. The
Adviser agrees to promptly notify the Trust of the occurrence of any event
that would disqualify
5
the Adviser from serving as an investment adviser to an investment company.
The Adviser is in compliance in all material respects with all applicable
federal and state law in connection with its investment management
operations.
(b) ADV DISCLOSURE. The Adviser has provided the Trust with a copy of
its Form ADV as most recently filed with the Commission and will, promptly
after filing any amendment to its Form ADV with the Commission, furnish a
copy of such amendment(s) to the Trust. The information contained in the
Adviser's Form ADV is accurate and complete in all material respects and
does not omit to state any material fact necessary in order to make the
statements made, in light of the circumstances under which they were made,
not misleading.
(c) FUND DISCLOSURE DOCUMENTS. The Adviser has reviewed and will in
the future review, the Registration Statement, and any amendments or
supplements thereto, the annual or semi-annual reports to shareholders,
other reports filed with the Commission and any marketing material of the
Funds (collectively the "Disclosure Documents") and represents and warrants
that with respect to disclosure about the Adviser, the manner in which the
Adviser manages the Funds or information relating directly or indirectly to
the Adviser, such Disclosure Documents contain or will contain, as of the
date thereof, no untrue statement of any material fact and does not omit
any statement of material fact which was required to be stated therein or
necessary to make the statements contained therein not misleading.
(d) USE OF THE NAME "RYDEX". The Adviser has the right to use the name
"Rydex" in connection with its services to the Trust and that, subject to
the terms set forth in Section 8 of this Agreement, the Trust shall have
the right to use the name "Rydex" in connection with the management and
operation of the Funds. The Adviser is not aware of any threatened or
existing actions, claims, litigation or proceedings that would adversely
effect or prejudice the rights of the Adviser or the Trust to use the name
"Rydex".
(e) INSURANCE. The Adviser maintains errors and omissions insurance
coverage in an appropriate amount and shall provide prior written notice to
the Trust (i) of any material changes in its insurance policies or
insurance coverage; or (ii) if any material claims will be made on its
insurance policies. Furthermore, the Adviser shall upon reasonable request
provide the Trust with any information it may reasonably require concerning
the amount of or scope of such insurance.
(f) NO DETRIMENTAL AGREEMENT. The Adviser represents and warrants that
it has no arrangement or understanding with any party, other than the
Trust, that would influence the decision of the Adviser with respect to its
selection of securities for a Fund, and that all selections shall be done
in accordance with what is in the best interest of the Fund.
(g) CONFLICTS. The Adviser shall act honestly, in good faith and in
the best interests of the Trust including requiring any of its personnel
with knowledge of Fund
6
activities to place the interest of the Funds first, ahead of their own
interests, in all personal trading scenarios that may involve a conflict of
interest with the Funds, consistent with its fiduciary duties under
applicable law.
(h) REPRESENTATIONS. The representations and warranties in this
Section 7 shall be deemed to be made on the date this Agreement is executed
and at the time of delivery of the quarterly compliance report required by
Section 3(a), whether or not specifically referenced in such report.
8. THE NAME "RYDEX". The Adviser grants to the Trust a license to use the
name "Rydex" (the "Name") as part of the name of any Fund. The foregoing
authorization by the Adviser to the Trust to use the Name as part of the name of
any Fund is not exclusive of the right of the Adviser itself to use, or to
authorize others to use, the Name; the Trust acknowledges and agrees that, as
between the Trust and the Adviser, the Adviser has the right to use, or
authorize others to use, the Name. The Trust shall (1) only use the Name in a
manner consistent with uses approved by the Adviser; (2) use its best efforts to
maintain the quality of the services offered using the Name; (3) adhere to such
other specific quality control standards as the Adviser may from time to time
promulgate. At the request of the Adviser, the Trust will (a) submit to Adviser
representative samples of any promotional materials using the Name; and (b)
change the name of any Fund within three months of its receipt of the Adviser's
request, or such other shorter time period as may be required under the terms of
a settlement agreement or court order, so as to eliminate all reference to the
Name and will not thereafter transact any business using the Name in the name of
any Fund; provided, however, that the Trust may continue to use beyond such date
any supplies of prospectuses, marketing materials and similar documents that the
Trust had at the date of such name change in quantities not exceeding those
historically produced and used in connection with such Fund.
9. ADVISER'S COMPENSATION. The Funds shall pay to the Adviser, as
compensation for the Adviser's services hereunder, a fee, determined as
described in Schedule A that is attached hereto and made a part hereof. Such fee
shall be computed daily and paid not less than monthly in arrears by the Funds.
The method for determining net assets of a Fund for purposes hereof shall
be the same as the method for determining net assets for purposes of
establishing the offering and redemption prices of Fund shares as described in
the Funds' prospectus(es). In the event of termination of this Agreement, the
fee provided in this Section shall be computed on the basis of the period ending
on the last business day on which this Agreement is in effect subject to a pro
rata adjustment based on the number of days elapsed in the current month as a
percentage of the total number of days in such month.
10. INDEPENDENT CONTRACTOR. In the performance of its duties hereunder, the
Adviser is and shall be an independent contractor and, unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Trust or any Fund in any way or otherwise
be deemed to be an agent of the Trust or any Fund. If any occasion should arise
in which the Adviser gives any advice to its clients concerning the shares
7
of a Fund, the Adviser will act solely as investment counsel for such
clients and not in any way on behalf of the Fund.
11. ASSIGNMENT AND AMENDMENTS. This Agreement shall automatically
terminate, without the payment of any penalty, in the event of its assignment
(as defined in section 2(a)(4) of the 1940 Act); provided that such termination
shall not relieve the Adviser of any liability incurred hereunder.
This Agreement may not be added to or changed orally and may not be
modified or rescinded except by a writing signed by the parties hereto and in
accordance with the 1940 Act, when applicable.
12. DURATION AND TERMINATION.
(a) This Agreement shall become effective as of the date executed and
shall remain in full force and effect continually thereafter, subject to
renewal as provided in Section 12(d) and unless terminated automatically as
set forth in Section 11 hereof or until terminated as follows:
(b) The Trust may cause this Agreement to terminate either (i) by vote
of its Board or (ii) with respect to any Fund, upon the affirmative vote of
a majority of the outstanding voting securities of the Fund; or
(c) The Adviser may at any time terminate this Agreement by not more
than sixty (60) days' nor less than thirty (30) days' written notice
delivered or mailed by registered mail, postage prepaid, to the Trust; or
(d) This Agreement shall automatically terminate two years from the
date of its execution unless its renewal is specifically approved at least
annually thereafter by (i) a majority vote of the Trustees, including a
majority vote of such Trustees who are not interested persons of the Trust
or the Adviser, at a meeting called for the purpose of voting on such
approval; or (ii) the vote of a majority of the outstanding voting
securities of each Fund; provided, however, that if the continuance of this
Agreement is submitted to the shareholders of the Funds for their approval
and such shareholders fail to approve such continuance of this Agreement as
provided herein, the Adviser may continue to serve hereunder as to the
Funds in a manner consistent with the 1940 Act and the rules and
regulations thereunder; and
Termination of this Agreement pursuant to this Section shall be without
payment of any penalty.
In the event of termination of this Agreement for any reason, the Adviser
shall, immediately upon notice of termination or on such later date as may be
specified in such notice, cease all activity on behalf of the Funds and with
respect to any of their assets, except as otherwise required by any fiduciary
duties of the Adviser under applicable law. In addition, the Adviser shall
deliver the Fund Books and Records to the Trust by such means and in accordance
8
with such schedule as the Trust shall direct and shall otherwise cooperate, as
reasonably directed by the Trust, in the transition of portfolio asset
management to any successor of the Adviser.
13. CERTAIN DEFINITIONS. For the purposes of this Agreement:
(a) "Affirmative vote of a majority of the outstanding voting
securities of the Fund" shall have the meaning as set forth in the 1940
Act, subject, however, to such exemptions as may be granted by the
Commission under the 1940 Act or any interpretations of the Commission
staff.
(b) "Interested persons" and "Assignment" shall have their respective
meanings as set forth in the 1940 Act, subject, however, to such exemptions
as may be granted by the Commission under the 1940 Act or any
interpretations of the Commission staff.
14. LIABILITY OF THE ADVISER. The Adviser shall indemnify and hold harmless
the Trust and all affiliated persons thereof (within the meaning of Section
2(a)(3) of the 1940 Act) and all controlling persons (as described in Section 15
of the 1933 Act) (collectively, the "Adviser Indemnitees") against any and all
losses, claims, damages, liabilities or litigation (including reasonable legal
and other expenses) by reason of or arising out of: (a) the Adviser being in
material violation of any applicable federal or state law, rule or regulation or
any investment policy or restriction set forth in the Funds' Registration
Statement or any written guidelines or instruction provided in writing by the
Board, (b) a Fund's failure to satisfy the diversification or source of income
requirements of Subchapter M of the Code, or (c) the Adviser's willful
misfeasance, bad faith or gross negligence generally in the performance of its
duties hereunder or its reckless disregard of its obligations and duties under
this Agreement.
15. ENFORCEABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms or provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
16. LIMITATION OF LIABILITY. The parties to this Agreement acknowledge and
agree that all litigation arising hereunder, whether direct or indirect, and of
any and every nature whatsoever shall be satisfied solely out of the assets of
the affected Fund and that no Trustee, officer or holder of shares of beneficial
interest of the Fund shall be personally liable for any of the foregoing
liabilities. The Trust's Certificate of Trust, as amended from time to time, is
on file in the Office of the Secretary of State of the State of Delaware. Such
Certificate of Trust and the Trust's Declaration of Trust describe in detail the
respective responsibilities and limitations on liability of the Trustees,
officers, and holders of shares of beneficial interest.
17. JURISDICTION. This Agreement shall be governed by and construed in
accordance with the substantive laws of state of Delaware and the Adviser
consents to the jurisdiction of courts, both state or federal, in Delaware, with
respect to any dispute under this Agreement.
9
18. PARAGRAPH HEADINGS. The headings of paragraphs contained in this
Agreement are provided for convenience only, form no part of this Agreement and
shall not affect its construction.
19. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
signed on their behalf by their duly authorized officers as of the date first
above written.
RYDEX SERIES FUNDS, on behalf of each
Fund listed on Schedule A
By:
-----------------------------------
Name: Carl G. Verboncoeur
Title: President
PADCO ADVISORS, INC.
By:
------------------------------------
Name: Carl G. Verboncoeur
Title: Chief Executive Officer
11
SCHEDULE A
TO THE
ADVISORY AGREEMENT
DATED __________, 2007 BETWEEN
RYDEX SERIES FUNDS
AND
PADCO ADVISORS, INC.
The Trust will pay to the Adviser as compensation for the Adviser's services
rendered, a fee, computed daily at an annual rate based on the average daily net
assets of the respective Fund in accordance the following fee schedule:
FUND RATE FUND RATE
---- ---- ---- ----
Nova Fund* .............................. 0.75% Banking.................................. 0.85%
Nova Master.............................. 0.75% Basic Materials.......................... 0.85%
Inverse S&P 500 Strategy*................ 0.90% Biotechnology............................ 0.85%
Inverse S&P 500 Strategy Master.......... 0.90% Consumer Products........................ 0.85%
OTC * ................................... 0.75% Electronics.............................. 0.85%
OTC Master............................... 0.75% Energy................................... 0.85%
Inverse OTC Strategy .................... 0.90% Energy Services.......................... 0.85%
Mid-Cap 1.5x Strategy * ................. 0.90% Financial Services....................... 0.85%
Mid-Cap 1.5x Strategy Master............. 0.90% Health Care.............................. 0.85%
Russell 2000(R) 1.5x Strategy............ 0.90% Internet................................. 0.85%
Government Long Bond 1.2x Strategy....... 0.50% Leisure.................................. 0.85%
Inverse Government Long Bond Strategy * . 0.90% Precious Metals.......................... 0.75%
Inverse Government Long Bond Master...... 0.90% Real Estate.............................. 0.85%
Europe 1.25x Strategy.................... 0.90% Retailing................................ 0.85%
Japan 1.25x Strategy..................... 0.90% Technology............................... 0.85%
Large-Cap Value.......................... 0.75% Telecommunications....................... 0.85%
Large-Cap Growth......................... 0.75% Transportation........................... 0.85%
Mid-Cap Value............................ 0.75% Utilities................................ 0.85%
Mid-Cap Growth........................... 0.75% Commodities Strategy..................... 0.75%
Inverse Mid-Cap Strategy................* 0.90% Sector Rotation.......................... 0.90%
A-1
FUND RATE FUND RATE
---- ---- ---- ----
Inverse Mid-Cap Strategy Master ......... 0.90% Multi-Cap Core Equity ** ................ 0.70%
Small-Cap Value.......................... 0.75% S&P 500 ................................. 0.75%
Small-Cap Growth ........................ 0.75% Russell 2000(R) ......................... 0.75%
Inverse Russell 2000(R) Strategy ........ 0.90% Essential Portfolio Moderate ............ 0.00%
Strengthening Dollar 2x Strategy......... 0.90% Essential Portfolio Conservative......... 0.00%
Weakening Dollar 2x Strategy............. 0.90% Essential Portfolio Aggressive........... 0.00%
U.S. Government Money Market............. 0.50% Managed Futures Strategy................. 0.90%
High Yield Strategy...................... 0.75% Inverse High Yield Strategy.............. 0.75%
ADDITIONS ARE NOTED IN BOLD.
* The fee will be reduced to 0.00% for any period during which the Fund
invests through a master-feeder structure.
** The management fee with respect to the Multi-Cap Core Equity Fund (the
"Fund") is comprised of a basic fee (the "Basic Fee") at the annual rate of
0.70% of the Fund's average daily net assets and a performance adjustment
(the "Performance Adjustment") as discussed below.
A. CALCULATING THE PERFORMANCE ADJUSTMENT.
The performance adjustment shall be calculated monthly by:
(i) Determining the difference in performance (the "Performance
Difference") between the Fund and the Russell 3000(R) Index
(the "Index"), as described in paragraph C;
(ii) Using the Performance Difference calculated under paragraph B
(ii) to determine the performance adjustment ( the
"Performance Adjustment"), as illustrated in paragraph D; and
(iii) Adding the Performance Adjustment to the Basic Fee to
determine the management fee for the applicable month.
B. COMPUTING THE PERFORMANCE DIFFERENCE.
The Performance Difference is calculated monthly, and is determined by
measuring the percentage difference between the performance of one H-Class
Share of the Fund and the performance of the Index over the most recent
12-month period. The performance of one H-Class Share of the Fund shall be
measured by computing the percentage difference, carried to five decimal
places, between the net asset value as of the last business day of the
period selected for comparison and the net asset value of such share as of
the last business day of the prior period, adjusted for dividends or
capital gain distributions treated as reinvested immediately. The
performance of the Index will be established by measuring the percentage
difference, carried to five decimal places, between the beginning and
ending values of the Index for the comparison
A-2
period, with dividends or capital gain distributions on the securities that
comprise the Index being treated as reinvested immediately.
C. DETERMINING THE PERFORMANCE ADJUSTMENT.
For every 0.0375% in Performance Difference, the Adviser's fee will be
adjusted upwards or downwards by 0.01%. The maximum adjustment rate is
0.20% per year, resulting in a minimum possible annual fee of 0.50% and a
maximum possible annual fee of 0.90%.
D. PERFORMANCE ADJUSTMENT EXAMPLE.
The following example illustrates the application of the Performance
Adjustment:
Fund's Index's Fund's
For the rolling 12-month investment cumulative performance relative
PERFORMANCE PERIOD PERFORMANCE CHANGE TO THE INDEX
------------------ ----------- ------ ------------
January 1 $50.00 100.00
December 31 $55.25 110.20
Absolute change + $5.25 + $10.20
Actual change +10.50% + 10.20% +0.30%
Based on these assumptions, the Multi-Cap Core Equity Fund calculates the
Adviser's management fee rate for the month-ended December 31 as follows:
o The portion of the annual basic fee rate of 0.70% applicable to that month
is multiplied by the Fund's average daily net assets for the month. This
results in the dollar amount of the basic fee.
o The +0.30% difference between the performance of the Fund and the record of
the Index is divided by 3.75, producing a rate of 0.08%.
o The 0.08% rate (adjusted for the number of days in the month) is multiplied
by the Fund's average daily net assets for the performance period. This
results in the dollar amount of the performance adjustment.
o The dollar amount of the performance adjustment is added to the dollar
amount of the basic fee, producing the adjusted management fee.
2. PERFORMANCE PERIODS
For the period from July 1, 2003 through May 31, 2004, the Adviser will be paid
at the Base Rate, without regard to any Performance Adjustment. For the month
ending June 30, 2004, the Adviser will begin applying the Performance Adjustment
as described herein, based upon the performance of the Fund relative to the
performance of the Index during the 12-month period from July 1, 2003 through
June 30, 2004. The 12-month comparison period will roll over with each
succeeding month, so that it will always equal 12 months, ending with the month
for which the performance incentive adjustment is being computed.
3. CHANGES TO THE "INDEX" OR THE "CLASS"
The Trustees have initially designated the Russell 3000(R) Index and the H-Class
Shares as the index and
A-3
class to be used for purposes of determining the Performance Adjustment
(referred to herein as the "Index" and the "Class," respectively). From time to
time, to the extent permitted by the 1940 Act, the Trustees may, by a vote of
the Trustees of the Trust voting in person, including a majority of the Trustees
who are not parties to this Agreement or "interested persons" (as defined in the
1940 Act) of any such parties, determine (i) that another securities index is a
more appropriate benchmark than the Index for purposes of evaluating the
performance of the Trust; and/or (ii) that a different class of shares of the
Trust representing interests in the Fund other than the Class is most
appropriate for use in calculating the Performance Adjustment. After ten days'
written notice to the Adviser, a different index (the "Successor Index") may be
substituted for the Index in prospectively calculating the Performance
Adjustment, and/or a different class of shares (the "Successor Class") may be
substituted in calculating the Performance Adjustment. However, the calculation
of that portion of the Performance Adjustment attributable to any portion of the
performance period prior to the adoption of the Successor Index will still be
based upon the Fund's performance compared to the Index. The use of a Successor
Class of shares for purposes of calculating the Performance Adjustment shall
apply to the entire performance period so long as such Successor Class was
outstanding at the beginning of such period. In the event that such Successor
Class of shares was not outstanding for all or a portion of the Performance
Period, it may only be used in calculating that portion of the Performance
adjustment attributable to the period during which such Successor Class was
outstanding and any prior portion of the Performance Period shall be calculated
using the Class of shares previously designated.
A-4
APPENDIX C
ADVISORY AGREEMENT
ADVISORY AGREEMENT made as of this __th day of __________, 2007 by and
between RYDEX SERIES FUNDS (the "Trust"), a Delaware statutory trust registered
as an investment company under the Investment Company Act of 1940, as amended
(the "1940 Act"), and PADCO ADVISORS, INC., a Maryland corporation with its
principal place of business at 9601 Blackwell Road, Suite 500, Rockville,
Maryland 20850 (the "Adviser").
W I T N E S S E T H
WHEREAS, the Board of Trustees (the "Board") of the Trust has selected the
Adviser to act as investment adviser to the Trust on behalf of the series set
forth on Schedule A to this Agreement (each a "Fund" and, collectively, the
"Funds"), as such Schedule may be amended from time to time upon mutual
agreement of the parties, and to provide certain related services, as more fully
set forth below, and to perform such services under the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits set
forth herein, the Trust and the Adviser do hereby agree as follows:
1. THE ADVISER'S SERVICES.
(a) DISCRETIONARY INVESTMENT MANAGEMENT SERVICES. The Adviser shall
act as investment adviser with respect to the Funds. In such capacity, the
Adviser shall, subject to the supervision of the Board, regularly provide
the Funds with investment research, advice and supervision and shall
furnish continuously an investment program for the Funds, consistent with
the respective investment objectives and policies of each Fund. The Adviser
shall determine, from time to time, what securities shall be purchased for
the Funds, what securities shall be held or sold by the Funds and what
portion of the Funds' assets shall be held uninvested in cash, subject
always to the provisions of the Trust's Declaration of Trust, By-Laws and
its registration statement on Form N-1A (the "Registration Statement")
under the 1940 Act, and under the Securities Act of 1933, as amended (the
"1933 Act"), covering Fund shares, as filed with the Securities and
Exchange Commission (the "Commission"), and to the investment objectives,
policies and restrictions of the Funds, as each of the same shall be from
time to time in effect. To carry out such obligations, the Adviser shall
exercise full discretion and act for the Funds in the same manner and with
the same force and effect as the Funds themselves might or could do with
respect to purchases, sales or other transactions, as well as with respect
to all other such things necessary or incidental to the furtherance or
conduct of such purchases, sales or other transactions. No reference in
this Agreement to the Adviser having full discretionary authority over each
Fund's investments shall in any way limit the right of the Board, in its
sole discretion, to establish or revise policies in connection with the
management of a Fund's assets or to otherwise exercise its right to control
the overall management of a Fund.
1
(b) COMPLIANCE. The Adviser agrees to comply with the requirements of
the 1940 Act, the Investment Advisers Act of 1940 (the "Advisers Act"), the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"),
the Commodity Exchange Act and the respective rules and regulations
thereunder, as applicable, as well as with all other applicable federal and
state laws, rules, regulations and case law that relate to the services and
relationships described hereunder and to the conduct of its business as a
registered investment adviser. The Adviser also agrees to comply with the
objectives, policies and restrictions set forth in the Registration
Statement, as amended or supplemented, of the Funds, and with any policies,
guidelines, instructions and procedures approved by the Board and provided
to the Adviser. In selecting each Fund's portfolio securities and
performing the Adviser's obligations hereunder, the Adviser shall cause the
Fund to comply with the diversification and source of income requirements
of Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company. The Adviser
shall maintain compliance procedures that it reasonably believes are
adequate to ensure its compliance with the foregoing. No supervisory
activity undertaken by the Board shall limit the Adviser's full
responsibility for any of the foregoing.
(c) PROXY VOTING. The Board has the authority to determine how proxies
with respect to securities that are held by the Funds shall be voted, and
the Board has initially determined to delegate the authority and
responsibility to vote proxies for the Funds' securities to the Adviser. So
long as proxy voting authority for the Funds has been delegated to the
Adviser, the Adviser shall exercise its proxy voting responsibilities. The
Adviser shall carry out such responsibility in accordance with any
instructions that the Board shall provide from time to time, and at all
times in a manner consistent with Rule 206(4)-6 under the Advisers Act and
its fiduciary responsibilities to the Trust. The Adviser shall provide
periodic reports and keep records relating to proxy voting as the Board may
reasonably request or as may be necessary for the Funds to comply with the
1940 Act and other applicable law. Any such delegation of proxy voting
responsibility to the Adviser may be revoked or modified by the Board at
any time.
(d) RECORDKEEPING. The Adviser shall not be responsible for the
provision of administrative, bookkeeping or accounting services to the
Funds, except as otherwise provided herein or as may be necessary for the
Adviser to supply to the Trust or its Board the information required to be
supplied under this Agreement.
The Adviser shall maintain separate books and detailed records of all
matters pertaining to Fund assets advised by the Adviser required by Rule
31a-1 under the 1940 Act (other than those records being maintained by any
administrator, custodian or transfer agent appointed by the Funds) relating
to its responsibilities provided hereunder with respect to the Funds, and
shall preserve such records for the periods and in a manner prescribed
therefore by Rule 31a-2 under the 1940 Act (the "Fund Books and Records").
The Fund Books and Records shall be available to the Board at any time upon
request, shall be delivered to the Trust upon the termination of this
Agreement and shall be available without delay during any day the Trust is
open for business.
2
(e) HOLDINGS INFORMATION AND PRICING. The Adviser shall provide
regular reports regarding Fund holdings, and shall, on its own initiative,
furnish the Trust and its Board from time to time with whatever information
the Adviser believes is appropriate for this purpose. The Adviser agrees to
immediately notify the Trust if the Adviser reasonably believes that the
value of any security held by a Fund may not reflect fair value. The
Adviser agrees to provide any pricing information of which the Adviser is
aware to the Trust, its Board and/or any Fund pricing agent to assist in
the determination of the fair value of any Fund holdings for which market
quotations are not readily available or as otherwise required in accordance
with the 1940 Act or the Trust's valuation procedures for the purpose of
calculating the Fund net asset value in accordance with procedures and
methods established by the Board.
(f) COOPERATION WITH AGENTS OF THE TRUST. The Adviser agrees to
cooperate with and provide reasonable assistance to the Trust, any Trust
custodian or foreign sub-custodians, any Trust pricing agents and all other
agents and representatives of the Trust, such information with respect to
the Funds as they may reasonably request from time to time in the
performance of their obligations, provide prompt responses to reasonable
requests made by such persons and establish appropriate interfaces with
each so as to promote the efficient exchange of information and compliance
with applicable laws and regulations.
2. CODE OF ETHICS. The Adviser has adopted a written code of ethics that it
reasonably believes complies with the requirements of Rule 17j-1 under the 1940
Act, which it will provide to the Trust. The Adviser shall ensure that its
Access Persons (as defined in the Adviser's Code of Ethics) comply in all
material respects with the Adviser's Code of Ethics, as in effect from time to
time. Upon request, the Adviser shall provide the Trust with a (i) a copy of the
Adviser's current Code of Ethics, as in effect from time to time, and (ii)
certification that it has adopted procedures reasonably necessary to prevent
Access Persons from engaging in any conduct prohibited by the Adviser's Code of
Ethics. Annually, the Adviser shall furnish a written report, which complies
with the requirements of Rule 17j-1, concerning the Adviser's Code of Ethics to
the Trust. The Adviser shall respond to requests for information from the Trust
as to violations of the Code of Ethics by Access Persons and the sanctions
imposed by the Adviser. The Adviser shall immediately notify the Trust of any
material violation of the Code of Ethics, whether or not such violation relates
to a security held by any Fund.
3. INFORMATION AND REPORTING. The Adviser shall provide the Trust and its
respective officers with such periodic reports concerning the obligations the
Adviser has assumed under this Agreement as the Trust may from time to time
reasonably request.
(a) NOTIFICATION OF BREACH / COMPLIANCE REPORTS. The Adviser shall
notify the Trust immediately upon detection of (i) any material failure to
manage any Fund in accordance with its investment objectives and policies
or any applicable law; or (ii) any material breach of any of the Funds' or
the Adviser's policies, guidelines or procedures. In addition, the Adviser
shall provide a quarterly report regarding each Fund's compliance with its
investment objectives and policies, applicable law, including, but not
3
limited to the 1940 Act and Subchapter M of the Code, and the Fund's
policies, guidelines or procedures as applicable to the Adviser's
obligations under this Agreement. The Adviser agrees to correct any such
failure promptly and to take any action that the Board may reasonably
request in connection with any such breach. Upon request, the Adviser shall
also provide the officers of the Trust with supporting certifications in
connection with such certifications of Fund financial statements and
disclosure controls pursuant to the Sarbanes-Oxley Act. The Adviser will
promptly notify the Trust in the event (i) the Adviser is served or
otherwise receives notice of any action, suit, proceeding, inquiry or
investigation, at law or in equity, before or by any court, public board,
or body, involving the affairs of the Trust (excluding class action suits
in which a Fund is a member of the plaintiff class by reason of the Fund's
ownership of shares in the defendant) or the compliance by the Adviser with
the federal or state securities laws or (ii) an actual change in control of
the Adviser resulting in an "assignment" (as defined in the 1940 Act) has
occurred or is otherwise proposed to occur.
(b) BOARD AND FILINGS INFORMATION. The Adviser will also provide the
Trust with any information reasonably requested regarding its management of
the Funds required for any meeting of the Board, or for any shareholder
report, amended registration statement, proxy statement, or prospectus
supplement to be filed by the Trust with the Commission. The Adviser will
make its officers and employees available to meet with the Board from time
to time on due notice to review its investment management services to the
Funds in light of current and prospective economic and market conditions
and shall furnish to the Board such information as may reasonably be
necessary in order for the Board to evaluate this Agreement or any proposed
amendments thereto.
(c) TRANSACTION INFORMATION. The Adviser shall furnish to the Trust
such information concerning portfolio transactions as may be necessary to
enable the Trust or its designated agent to perform such compliance testing
on the Funds and the Adviser's services as the Trust may, in its sole
discretion, determine to be appropriate. The provision of such information
by the Adviser to the Trust or its designated agent in no way relieves the
Adviser of its own responsibilities under this Agreement.
4. BROKERAGE.
(a) PRINCIPAL TRANSACTIONS. In connection with purchases or sales of
securities for the account of a Fund, neither the Adviser nor any of its
directors, officers or employees will act as a principal or agent or
receive any commission except as permitted by the 1940 Act.
(b) PLACEMENT OF ORDERS. The Adviser shall arrange for the placing of
all orders for the purchase and sale of securities for a Fund's account
with brokers or dealers selected by the Adviser. In the selection of such
brokers or dealers and the placing of such orders, the Adviser is directed
at all times to seek for the Fund the most favorable execution and net
price available under the circumstances. It is also understood that it is
4
desirable for the Fund that the Adviser have access to brokerage and
research services provided by brokers who may execute brokerage
transactions at a higher cost to the Fund than may result when allocating
brokerage to other brokers, consistent with section 28(e) of the 1934 Act
and any Commission staff interpretations thereof. Therefore, the Adviser is
authorized to place orders for the purchase and sale of securities for a
Fund with such brokers, subject to review by the Board from time to time
with respect to the extent and continuation of this practice. It is
understood that the services provided by such brokers may be useful to the
Adviser in connection with its or its affiliates' services to other
clients.
(c) AGGREGATED TRANSACTIONS. On occasions when the Adviser deems the
purchase or sale of a security to be in the best interest of a Fund as well
as other clients of the Adviser, the Adviser may, to the extent permitted
by applicable law and regulations, aggregate the order for securities to be
sold or purchased. In such event, the Adviser will allocate securities or
futures contracts so purchased or sold, as well as the expenses incurred in
the transaction, in the manner the Adviser reasonably considers to be
equitable and consistent with its fiduciary obligations to the Fund and to
such other clients under the circumstances.
(d) AFFILIATED BROKERS. The Adviser or any of its affiliates may act
as broker in connection with the purchase or sale of securities or other
investments for a Fund, subject to: (a) the requirement that the Adviser
seek to obtain best execution and price within the policy guidelines
determined by the Board and set forth in the Fund's current prospectus and
SAI; (b) the provisions of the 1940 Act; (c) the provisions of the Advisers
Act; (d) the provisions of the 1934 Act; and (e) other provisions of
applicable law. These brokerage services are not within the scope of the
duties of the Adviser under this Agreement. Subject to the requirements of
applicable law and any procedures adopted by the Board, the Adviser or its
affiliates may receive brokerage commissions, fees or other remuneration
from a Fund for these services in addition to the Adviser's fees for
services under this Agreement.
5. CUSTODY. Nothing in this Agreement shall permit the Adviser to take or
receive physical possession of cash, securities or other investments of a Fund.
6. ALLOCATION OF CHARGES AND EXPENSES. The Adviser will bear its own costs
of providing services hereunder. The Adviser agrees to pay all expenses incurred
by the Trust except for interest, taxes, brokerage and other expenses incurred
in placing orders for the purchase and sale of securities and other investment
instruments, extraordinary expenses, and distribution fees and expenses paid by
the Trust under any distribution plan adopted pursuant to Rule 12b-1 under the
1940 Act.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) PROPERLY REGISTERED. The Adviser is registered as an investment
adviser under the Advisers Act, and will remain so registered for the
duration of this Agreement.
5
The Adviser is not prohibited by the Advisers Act or the 1940 Act from
performing the services contemplated by this Agreement, and to the best
knowledge of the Adviser, there is no proceeding or investigation that is
reasonably likely to result in the Adviser being prohibited from performing
the services contemplated by this Agreement. The Adviser agrees to promptly
notify the Trust of the occurrence of any event that would disqualify the
Adviser from serving as an investment adviser to an investment company. The
Adviser is in compliance in all material respects with all applicable
federal and state law in connection with its investment management
operations.
(b) ADV DISCLOSURE. The Adviser has provided the Trust with a copy of
its Form ADV as most recently filed with the Commission and will, promptly
after filing any amendment to its Form ADV with the Commission, furnish a
copy of such amendment(s) to the Trust. The information contained in the
Adviser's Form ADV is accurate and complete in all material respects and
does not omit to state any material fact necessary in order to make the
statements made, in light of the circumstances under which they were made,
not misleading.
(c) FUND DISCLOSURE DOCUMENTS. The Adviser has reviewed and will in
the future review, the Registration Statement, and any amendments or
supplements thereto, the annual or semi-annual reports to shareholders,
other reports filed with the Commission and any marketing material of the
Funds (collectively the "Disclosure Documents") and represents and warrants
that with respect to disclosure about the Adviser, the manner in which the
Adviser manages the Funds or information relating directly or indirectly to
the Adviser, such Disclosure Documents contain or will contain, as of the
date thereof, no untrue statement of any material fact and does not omit
any statement of material fact which was required to be stated therein or
necessary to make the statements contained therein not misleading.
(d) USE OF THE NAME "RYDEX". The Adviser has the right to use the name
"Rydex" in connection with its services to the Trust and that, subject to
the terms set forth in Section 8 of this Agreement, the Trust shall have
the right to use the name "Rydex" in connection with the management and
operation of the Funds. The Adviser is not aware of any threatened or
existing actions, claims, litigation or proceedings that would adversely
effect or prejudice the rights of the Adviser or the Trust to use the name
"Rydex".
(e) INSURANCE. The Adviser maintains errors and omissions insurance
coverage in an appropriate amount and shall provide prior written notice to
the Trust (i) of any material changes in its insurance policies or
insurance coverage; or (ii) if any material claims will be made on its
insurance policies. Furthermore, the Adviser shall upon reasonable request
provide the Trust with any information it may reasonably require concerning
the amount of or scope of such insurance.
(f) NO DETRIMENTAL AGREEMENT. The Adviser represents and warrants that
it has no arrangement or understanding with any party, other than the
Trust, that would
6
influence the decision of the Adviser with respect to its selection of
securities for a Fund, and that all selections shall be done in accordance
with what is in the best interest of the Fund.
(g) CONFLICTS. The Adviser shall act honestly, in good faith and in
the best interests of the Trust including requiring any of its personnel
with knowledge of Fund activities to place the interest of the Funds first,
ahead of their own interests, in all personal trading scenarios that may
involve a conflict of interest with the Funds, consistent with its
fiduciary duties under applicable law.
(h) REPRESENTATIONS. The representations and warranties in this
Section 7 shall be deemed to be made on the date this Agreement is executed
and at the time of delivery of the quarterly compliance report required by
Section 3(a), whether or not specifically referenced in such report.
8. THE NAME "RYDEX". The Adviser grants to the Trust a sublicense to use
the name "Rydex" (the "Name") as part of the name of any Fund. The foregoing
authorization by the Adviser to the Trust to use the Name as part of the name of
any Fund is not exclusive of the right of the Adviser itself to use, or to
authorize others to use, the Name; the Trust acknowledges and agrees that, as
between the Trust and the Adviser, the Adviser has the right to use, or
authorize others to use, the Name. The Trust shall (1) only use the Name in a
manner consistent with uses approved by the Adviser; (2) use its best efforts to
maintain the quality of the services offered using the Name; (3) adhere to such
other specific quality control standards as the Adviser may from time to time
promulgate. At the request of the Adviser, the Trust will (a) submit to Adviser
representative samples of any promotional materials using the Name; and (b)
change the name of any Fund within three months of its receipt of the Adviser's
request, or such other shorter time period as may be required under the terms of
a settlement agreement or court order, so as to eliminate all reference to the
Name and will not thereafter transact any business using the Name in the name of
any Fund; provided, however, that the Trust may continue to use beyond such date
any supplies of prospectuses, marketing materials and similar documents that the
Trust had on the date of such name change in quantities not exceeding those
historically produced and used in connection with such Fund.
9. ADVISER'S COMPENSATION. The Funds shall pay to the Adviser, as
compensation for the Adviser's services hereunder, a fee, determined as
described in Schedule A that is attached hereto and made a part hereof. Such fee
shall be computed daily and paid not less than monthly in arrears by the Funds.
The method for determining net assets of a Fund for purposes hereof shall
be the same as the method for determining net assets for purposes of
establishing the offering and redemption prices of Fund shares as described in
the Funds' prospectus(es). In the event of termination of this Agreement, the
fee provided in this Section shall be computed on the basis of the period ending
on the last business day on which this Agreement is in effect subject to a pro
rata adjustment based on the number of days elapsed in the current month as a
percentage of the total number of days in such month.
7
10. INDEPENDENT CONTRACTOR. In the performance of its duties hereunder, the
Adviser is and shall be an independent contractor and, unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Trust or any Fund in any way or otherwise
be deemed to be an agent of the Trust or any Fund. If any occasion should arise
in which the Adviser gives any advice to its clients concerning the shares of a
Fund, the Adviser will act solely as investment counsel for such clients and not
in any way on behalf of the Fund.
11. ASSIGNMENT AND AMENDMENTS. This Agreement shall automatically
terminate, without the payment of any penalty, in the event of its assignment
(as defined in section 2(a)(4) of the 1940 Act); provided that such termination
shall not relieve the Adviser of any liability incurred hereunder.
This Agreement may not be added to or changed orally and may not be
modified or rescinded except by a writing signed by the parties hereto and in
accordance with the 1940 Act, when applicable.
12. DURATION AND TERMINATION.
(a) This Agreement shall become effective as of the date executed and
shall remain in full force and effect continually thereafter, subject to
renewal as provided in Section 12(d) and unless terminated automatically as
set forth in Section 11 hereof or until terminated as follows:
(b) The Trust may cause this Agreement to terminate either (i) by vote
of its Board or (ii) with respect to any Fund, upon the affirmative vote of
a majority of the outstanding voting securities of the Fund; or
(c) The Adviser may at any time terminate this Agreement by not more
than sixty (60) days' nor less than thirty (30) days' written notice
delivered or mailed by registered mail, postage prepaid, to the Trust; or
(d) This Agreement shall automatically terminate two years from the
date of its execution unless its renewal is specifically approved at least
annually thereafter by (i) a majority vote of the Trustees, including a
majority vote of such Trustees who are not interested persons of the Trust
or the Adviser, at a meeting called for the purpose of voting on such
approval; or (ii) the vote of a majority of the outstanding voting
securities of each Fund; provided, however, that if the continuance of this
Agreement is submitted to the shareholders of the Funds for their approval
and such shareholders fail to approve such continuance of this Agreement as
provided herein, the Adviser may continue to serve hereunder as to the
Funds in a manner consistent with the 1940 Act and the rules and
regulations thereunder; and
Termination of this Agreement pursuant to this Section shall be without
payment of any penalty.
8
In the event of termination of this Agreement for any reason, the Adviser
shall, immediately upon notice of termination or on such later date as may be
specified in such notice, cease all activity on behalf of the Funds and with
respect to any of their assets, except as otherwise required by any fiduciary
duties of the Adviser under applicable law. In addition, the Adviser shall
deliver the Fund Books and Records to the Trust by such means and in accordance
with such schedule as the Trust shall direct and shall otherwise cooperate, as
reasonably directed by the Trust, in the transition of portfolio asset
management to any successor of the Adviser.
13. CERTAIN DEFINITIONS. For the purposes of this Agreement:
(a) "Affirmative vote of a majority of the outstanding voting
securities of the Fund" shall have the meaning as set forth in the 1940
Act, subject, however, to such exemptions as may be granted by the
Commission under the 1940 Act or any interpretations of the Commission
staff.
(b) "Interested persons" and "Assignment" shall have their respective
meanings as set forth in the 1940 Act, subject, however, to such exemptions
as may be granted by the Commission under the 1940 Act or any
interpretations of the Commission staff.
14. LIABILITY OF THE ADVISER. The Adviser shall indemnify and hold harmless
the Trust and all affiliated persons thereof (within the meaning of Section
2(a)(3) of the 1940 Act) and all controlling persons (as described in Section 15
of the 1933 Act) (collectively, the "Adviser Indemnitees") against any and all
losses, claims, damages, liabilities or litigation (including reasonable legal
and other expenses) by reason of or arising out of: (a) the Adviser being in
material violation of any applicable federal or state law, rule or regulation or
any investment policy or restriction set forth in the Funds' Registration
Statement or any written guidelines or instruction provided in writing by the
Board, (b) a Fund's failure to satisfy the diversification or source of income
requirements of Subchapter M of the Code, or (c) the Adviser's willful
misfeasance, bad faith or gross negligence generally in the performance of its
duties hereunder or its reckless disregard of its obligations and duties under
this Agreement.
15. ENFORCEABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms or provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
16. LIMITATION OF LIABILITY. The parties to this Agreement acknowledge and
agree that all litigation arising hereunder, whether direct or indirect, and of
any and every nature whatsoever shall be satisfied solely out of the assets of
the affected Fund and that no Trustee, officer or holder of shares of beneficial
interest of the Fund shall be personally liable for any of the foregoing
liabilities. The Trust's Certificate of Trust, as amended from time to time, is
on file in the Office of the Secretary of State of the State of Delaware. Such
Certificate of Trust and
9
the Trust's Declaration of Trust describe in detail the respective
responsibilities and limitations on liability of the Trustees, officers, and
holders of shares of beneficial interest.
17. JURISDICTION. This Agreement shall be governed by and construed in
accordance with the substantive laws of state of Delaware and the Adviser
consents to the jurisdiction of courts, both state and federal, in Delaware,
with respect to any dispute under this Agreement.
18. PARAGRAPH HEADINGS. The headings of paragraphs contained in this
Agreement are provided for convenience only, form no part of this Agreement and
shall not affect its construction.
19. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
signed on their behalf by their duly authorized officers as of the date first
above written.
RYDEX SERIES FUNDS, on behalf of each
Fund listed on Schedule A
By:
-----------------------------------
Name: Carl G. Verboncoeur
Title: President
PADCO ADVISORS, INC.
By:
------------------------------------
Name: Carl G. Verboncoeur
Title: Chief Executive Officer
11
SCHEDULE A
TO THE
ADVISORY AGREEMENT
DATED _______, 2007 BETWEEN
RYDEX SERIES FUNDS
AND
PADCO ADVISORS, INC.
The Trust will pay to the Adviser as compensation for the Adviser's services
rendered, a fee, computed daily at an annual rate based on the average daily net
assets of the respective Fund in accordance the following fee schedule:
FUND RATE
Absolute Return Strategies Fund.......... 1.15%
Hedged Equity Fund....................... 1.15%
Market Neutral Fund ..................... 1.15%
A-1
APPENDIX D
APPENDIX D
ADVISORY AGREEMENT
ADVISORY AGREEMENT made as of this __th day of __________, 2007 by and
between RYDEX DYNAMIC FUNDS (the "Trust"), a Delaware statutory trust registered
as an investment company under the Investment Company Act of 1940, as amended
(the "1940 Act"), and PADCO ADVISORS, INC., a Maryland corporation with its
principal place of business at 9601 Blackwell Road, Suite 500, Rockville,
Maryland 20850 (the "Adviser").
W I T N E S S E T H
WHEREAS, the Board of Trustees (the "Board") of the Trust has selected the
Adviser to act as investment adviser to the Trust on behalf of the series set
forth on Schedule A to this Agreement (each a "Fund" and, collectively, the
"Funds"), as such Schedule may be amended from time to time upon mutual
agreement of the parties, and to provide certain related services, as more fully
set forth below, and to perform such services under the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits set
forth herein, the Trust and the Adviser do hereby agree as follows:
1. THE ADVISER'S SERVICES.
(a) DISCRETIONARY INVESTMENT MANAGEMENT SERVICES. The Adviser shall
act as investment adviser with respect to the Funds. In such capacity, the
Adviser shall, subject to the supervision of the Board, regularly provide
the Funds with investment research, advice and supervision and shall
furnish continuously an investment program for the Funds, consistent with
the respective investment objectives and policies of each Fund. The Adviser
shall determine, from time to time, what securities shall be purchased for
the Funds, what securities shall be held or sold by the Funds and what
portion of the Funds' assets shall be held uninvested in cash, subject
always to the provisions of the Trust's Declaration of Trust, By-Laws and
its registration statement on Form N-1A (the "Registration Statement")
under the 1940 Act, and under the Securities Act of 1933, as amended (the
"1933 Act"), covering Fund shares, as filed with the U.S. Securities and
Exchange Commission (the "Commission"), and to the investment objectives,
policies and restrictions of the Funds, as each of the same shall be from
time to time in effect. To carry out such obligations, the Adviser shall
exercise full discretion and act for the Funds in the same manner and with
the same force and effect as the Funds themselves might or could do with
respect to purchases, sales or other transactions, as well as with respect
to all other such things necessary or incidental to the furtherance or
conduct of such purchases, sales or other transactions. No reference in
this Agreement to the Adviser having full discretionary authority over each
Fund's investments shall in any way limit the right of the Board, in its
sole discretion, to establish or revise policies in connection with the
management of a Fund's assets or to otherwise exercise its right to control
the overall management of a Fund.
1
(b) COMPLIANCE. The Adviser agrees to comply with the requirements of
the 1940 Act, the Investment Advisers Act of 1940 (the "Advisers Act"), the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"),
the Commodity Exchange Act and the respective rules and regulations
thereunder, as applicable, as well as with all other applicable federal and
state laws, rules, regulations and case law that relate to the services and
relationships described hereunder and to the conduct of its business as a
registered investment adviser. The Adviser also agrees to comply with the
objectives, policies and restrictions set forth in the Registration
Statement, as amended or supplemented, of the Funds, and with any policies,
guidelines, instructions and procedures approved by the Board and provided
to the Adviser. In selecting each Fund's portfolio securities and
performing the Adviser's obligations hereunder, the Adviser shall cause the
Fund to comply with the diversification and source of income requirements
of Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company. The Adviser
shall maintain compliance procedures that it reasonably believes are
adequate to ensure its compliance with the foregoing. No supervisory
activity undertaken by the Board shall limit the Adviser's full
responsibility for any of the foregoing.
(c) PROXY VOTING. The Board has the authority to determine how proxies
with respect to securities that are held by the Funds shall be voted, and
the Board has initially determined to delegate the authority and
responsibility to vote proxies for the Funds' securities to the Adviser. So
long as proxy voting authority for the Funds has been delegated to the
Adviser, the Adviser shall exercise its proxy voting responsibilities. The
Adviser shall carry out such responsibility in accordance with any
instructions that the Board shall provide from time to time, and at all
times in a manner consistent with Rule 206(4)-6 under the Advisers Act and
its fiduciary responsibilities to the Trust. The Adviser shall provide
periodic reports and keep records relating to proxy voting as the Board may
reasonably request or as may be necessary for the Funds to comply with the
1940 Act and other applicable law. Any such delegation of proxy voting
responsibility to the Adviser may be revoked or modified by the Board at
any time.
(d) RECORDKEEPING. The Adviser shall not be responsible for the
provision of administrative, bookkeeping or accounting services to the
Funds, except as otherwise provided herein or as may be necessary for the
Adviser to supply to the Trust or its Board the information required to be
supplied under this Agreement.
The Adviser shall maintain separate books and detailed records of all
matters pertaining to Fund assets advised by the Adviser required by Rule
31a-1 under the 1940 Act (other than those records being maintained by any
administrator, custodian or transfer agent appointed by the Funds) relating
to its responsibilities provided hereunder with respect to the Funds, and
shall preserve such records for the periods and in a manner prescribed
therefore by Rule 31a-2 under the 1940 Act (the "Fund Books and Records").
The Fund Books and Records shall be available to the Board at any time upon
request, shall be delivered to the Trust upon the termination of this
Agreement and shall be available without delay during any day the Trust is
open for business.
2
(e) HOLDINGS INFORMATION AND PRICING. The Adviser shall provide
regular reports regarding Fund holdings, and shall, on its own initiative,
furnish the Trust and its Board from time to time with whatever information
the Adviser believes is appropriate for this purpose. The Adviser agrees to
immediately notify the Trust if the Adviser reasonably believes that the
value of any security held by a Fund may not reflect fair value. The
Adviser agrees to provide any pricing information of which the Adviser is
aware to the Trust, its Board and/or any Fund pricing agent to assist in
the determination of the fair value of any Fund holdings for which market
quotations are not readily available or as otherwise required in accordance
with the 1940 Act or the Trust's valuation procedures for the purpose of
calculating the Fund net asset value in accordance with procedures and
methods established by the Board.
(f) COOPERATION WITH AGENTS OF THE TRUST. The Adviser agrees to
cooperate with and provide reasonable assistance to the Trust, any Trust
custodian or foreign sub-custodians, any Trust pricing agents and all other
agents and representatives of the Trust, such information with respect to
the Funds as they may reasonably request from time to time in the
performance of their obligations, provide prompt responses to reasonable
requests made by such persons and establish appropriate interfaces with
each so as to promote the efficient exchange of information and compliance
with applicable laws and regulations.
2. CODE OF ETHICS. The Adviser has adopted a written code of ethics that it
reasonably believes complies with the requirements of Rule 17j-1 under the 1940
Act, which it will provide to the Trust. The Adviser shall ensure that its
Access Persons (as defined in the Adviser's Code of Ethics) comply in all
material respects with the Adviser's Code of Ethics, as in effect from time to
time. Upon request, the Adviser shall provide the Trust with a (i) a copy of the
Adviser's current Code of Ethics, as in effect from time to time, and (ii)
certification that it has adopted procedures reasonably necessary to prevent
Access Persons from engaging in any conduct prohibited by the Adviser's Code of
Ethics. Annually, the Adviser shall furnish a written report, which complies
with the requirements of Rule 17j-1, concerning the Adviser's Code of Ethics to
the Trust. The Adviser shall respond to requests for information from the Trust
as to violations of the Code of Ethics by Access Persons and the sanctions
imposed by the Adviser. The Adviser shall immediately notify the Trust of any
material violation of the Code of Ethics, whether or not such violation relates
to a security held by any Fund.
3. INFORMATION AND REPORTING. The Adviser shall provide the Trust and its
respective officers with such periodic reports concerning the obligations the
Adviser has assumed under this Agreement as the Trust may from time to time
reasonably request.
(a) NOTIFICATION OF BREACH / COMPLIANCE REPORTS. The Adviser shall
notify the Trust immediately upon detection of (i) any material failure to
manage any Fund in accordance with its investment objectives and policies
or any applicable law; or (ii) any material breach of the Funds' or the
Adviser's policies, guidelines or procedures. In addition, the Adviser
shall provide a quarterly report regarding each Fund's compliance with its
investment objectives and policies, applicable law, including, but not
limited to the 1940 Act and Subchapter M of the Code, and the Fund's
policies, guidelines or
3
procedures as applicable to the Adviser's obligations under this Agreement.
The Adviser agrees to correct any such failure promptly and to take any
action that the Board may reasonably request in connection with any such
breach. Upon request, the Adviser shall also provide the officers of the
Trust with supporting certifications in connection with such certifications
of Fund financial statements and disclosure controls pursuant to the
Sarbanes-Oxley Act. The Adviser will promptly notify the Trust in the event
(i) the Adviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board, or body, involving the affairs of the Trust (excluding
class action suits in which a Fund is a member of the plaintiff class by
reason of the Fund's ownership of shares in the defendant) or the
compliance by the Adviser with the federal or state securities laws or (ii)
an actual change in control of the Adviser resulting in an "assignment" (as
defined in the 1940 Act) has occurred or is otherwise proposed to occur.
(b) BOARD AND FILINGS INFORMATION. The Adviser will also provide the
Trust with any information reasonably requested regarding its management of
the Funds required for any meeting of the Board, or for any shareholder
report, amended registration statement, proxy statement, or prospectus
supplement to be filed by the Trust with the Commission. The Adviser will
make its officers and employees available to meet with the Board from time
to time on due notice to review its investment management services to the
Funds in light of current and prospective economic and market conditions
and shall furnish to the Board such information as may reasonably be
necessary in order for the Board to evaluate this Agreement or any proposed
amendments thereto.
(c) TRANSACTION INFORMATION. The Adviser shall furnish to the Trust
such information concerning portfolio transactions as may be necessary to
enable the Trust or its designated agent to perform such compliance testing
on the Funds and the Adviser's services as the Trust may, in its sole
discretion, determine to be appropriate. The provision of such information
by the Adviser to the Trust or its designated agent in no way relieves the
Adviser of its own responsibilities under this Agreement.
4. BROKERAGE.
(a) PRINCIPAL TRANSACTIONS. In connection with purchases or sales of
securities for the account of a Fund, neither the Adviser nor any of its
directors, officers or employees will act as a principal or agent or
receive any commission except as permitted by the 1940 Act.
(b) PLACEMENT OF ORDERS. The Adviser shall arrange for the placing of
all orders for the purchase and sale of securities for a Fund's account
with brokers or dealers selected by the Adviser. In the selection of such
brokers or dealers and the placing of such orders, the Adviser is directed
at all times to seek for the Fund the most favorable execution and net
price available under the circumstances. It is also understood that it is
desirable for the Fund that the Adviser have access to brokerage and
research services provided by brokers who may execute brokerage
transactions at a higher cost to the Fund
4
than may result when allocating brokerage to other brokers, consistent with
section 28(e) of the 1934 Act and any Commission staff interpretations
thereof. Therefore, the Adviser is authorized to place orders for the
purchase and sale of securities for a Fund with such brokers, subject to
review by the Board from time to time with respect to the extent and
continuation of this practice. It is understood that the services provided
by such brokers may be useful to the Adviser in connection with its or its
affiliates' services to other clients.
(c) AGGREGATED TRANSACTIONS. On occasions when the Adviser deems the
purchase or sale of a security to be in the best interest of a Fund as well
as other clients of the Adviser, the Adviser may, to the extent permitted
by applicable law and regulations, aggregate the order for securities to be
sold or purchased. In such event, the Adviser will allocate securities or
futures contracts so purchased or sold, as well as the expenses incurred in
the transaction, in the manner the Adviser reasonably considers to be
equitable and consistent with its fiduciary obligations to the Fund and to
such other clients under the circumstances.
(d) AFFILIATED BROKERS. The Adviser or any of its affiliates may act
as broker in connection with the purchase or sale of securities or other
investments for a Fund, subject to: (a) the requirement that the Adviser
seek to obtain best execution and price within the policy guidelines
determined by the Board and set forth in the Fund's current prospectus and
SAI; (b) the provisions of the 1940 Act; (c) the provisions of the Advisers
Act; (d) the provisions of the 1934 Act; and (e) other provisions of
applicable law. These brokerage services are not within the scope of the
duties of the Adviser under this Agreement. Subject to the requirements of
applicable law and any procedures adopted by the Board, the Adviser or its
affiliates may receive brokerage commissions, fees or other remuneration
from a Fund for these services in addition to the Adviser's fees for
services under this Agreement.
5. CUSTODY. Nothing in this Agreement shall permit the Adviser to take or
receive physical possession of cash, securities or other investments of a Fund.
6. ALLOCATION OF CHARGES AND EXPENSES. The Adviser will bear its own costs
of providing services hereunder. Other than as herein specifically indicated,
the Adviser shall not be responsible for a Fund's expenses, including brokerage
and other expenses incurred in placing orders for the purchase and sale of
securities and other investment instruments.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) PROPERLY REGISTERED. The Adviser is registered as an investment
adviser under the Advisers Act, and will remain so registered for the
duration of this Agreement. The Adviser is not prohibited by the Advisers
Act or the 1940 Act from performing the services contemplated by this
Agreement, and to the best knowledge of the Adviser, there is no proceeding
or investigation that is reasonably likely to result in the Adviser being
prohibited from performing the services contemplated by this Agreement. The
Adviser agrees to promptly notify the Trust of the occurrence of any event
that would disqualify
5
the Adviser from serving as an investment adviser to an investment company.
The Adviser is in compliance in all material respects with all applicable
federal and state law in connection with its investment management
operations.
(b) ADV DISCLOSURE. The Adviser has provided the Trust with a copy of
its Form ADV as most recently filed with the Commission and will, promptly
after filing any amendment to its Form ADV with the Commission, furnish a
copy of such amendment(s) to the Trust. The information contained in the
Adviser's Form ADV is accurate and complete in all material respects and
does not omit to state any material fact necessary in order to make the
statements made, in light of the circumstances under which they were made,
not misleading.
(c) FUND DISCLOSURE DOCUMENTS. The Adviser has reviewed and will in
the future review, the Registration Statement, and any amendments or
supplements thereto, the annual or semi-annual reports to shareholders,
other reports filed with the Commission and any marketing material of the
Funds (collectively the "Disclosure Documents") and represents and warrants
that with respect to disclosure about the Adviser, the manner in which the
Adviser manages the Funds or information relating directly or indirectly to
the Adviser, such Disclosure Documents contain or will contain, as of the
date thereof, no untrue statement of any material fact and does not omit
any statement of material fact which was required to be stated therein or
necessary to make the statements contained therein not misleading.
(d) USE OF THE NAME "RYDEX". The Adviser has the right to use the name
"Rydex" in connection with its services to the Trust and that, subject to
the terms set forth in Section 8 of this Agreement, the Trust shall have
the right to use the name "Rydex" in connection with the management and
operation of the Funds. The Adviser is not aware of any threatened or
existing actions, claims, litigation or proceedings that would adversely
effect or prejudice the rights of the Adviser or the Trust to use the name
"Rydex".
(e) INSURANCE. The Adviser maintains errors and omissions insurance
coverage in an appropriate amount and shall provide prior written notice to
the Trust (i) of any material changes in its insurance policies or
insurance coverage; or (ii) if any material claims will be made on its
insurance policies. Furthermore, the Adviser shall upon reasonable request
provide the Trust with any information it may reasonably require concerning
the amount of or scope of such insurance.
(f) NO DETRIMENTAL AGREEMENT. The Adviser represents and warrants that
it has no arrangement or understanding with any party, other than the
Trust, that would influence the decision of the Adviser with respect to its
selection of securities for a Fund, and that all selections shall be done
in accordance with what is in the best interest of the Fund.
(g) CONFLICTS. The Adviser shall act honestly, in good faith and in
the best interests of the Trust including requiring any of its personnel
with knowledge of Fund
6
activities to place the interest of the Funds first, ahead of their own
interests, in all personal trading scenarios that may involve a conflict of
interest with the Funds, consistent with its fiduciary duties under
applicable law.
(h) REPRESENTATIONS. The representations and warranties in this
Section 7 shall be deemed to be made on the date this Agreement is executed
and at the time of delivery of the quarterly compliance report required by
Section 3(a), whether or not specifically referenced in such report.
8. THE NAME "RYDEX". The Adviser grants to the Trust a license to use the
name "Rydex" (the "Name") as part of the name of any Fund. The foregoing
authorization by the Adviser to the Trust to use the Name as part of the name of
any Fund is not exclusive of the right of the Adviser itself to use, or to
authorize others to use, the Name; the Trust acknowledges and agrees that, as
between the Trust and the Adviser, the Adviser has the right to use, or
authorize others to use, the Name. The Trust shall (1) only use the Name in a
manner consistent with uses approved by the Adviser; (2) use its best efforts to
maintain the quality of the services offered using the Name; (3) adhere to such
other specific quality control standards as the Adviser may from time to time
promulgate. At the request of the Adviser, the Trust will (a) submit to Adviser
representative samples of any promotional materials using the Name; and (b)
change the name of any Fund within three months of its receipt of the Adviser's
request, or such other shorter time period as may be required under the terms of
a settlement agreement or court order, so as to eliminate all reference to the
Name and will not thereafter transact any business using the Name in the name of
any Fund; provided, however, that the Trust may continue to use beyond such date
any supplies of prospectuses, marketing materials and similar documents that the
Trust had at the date of such name change in quantities not exceeding those
historically produced and used in connection with such Fund.
9. ADVISER'S COMPENSATION. The Funds shall pay to the Adviser, as
compensation for the Adviser's services hereunder, a fee, determined as
described in Schedule A that is attached hereto and made a part hereof. Such fee
shall be computed daily and paid not less than monthly in arrears by the Funds.
The method for determining net assets of a Fund for purposes hereof shall
be the same as the method for determining net assets for purposes of
establishing the offering and redemption prices of Fund shares as described in
the Funds' prospectus(es). In the event of termination of this Agreement, the
fee provided in this Section shall be computed on the basis of the period ending
on the last business day on which this Agreement is in effect subject to a pro
rata adjustment based on the number of days elapsed in the current month as a
percentage of the total number of days in such month.
10. INDEPENDENT CONTRACTOR. In the performance of its duties hereunder, the
Adviser is and shall be an independent contractor and, unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Trust or any Fund in any way or otherwise
be deemed to be an agent of the Trust or any Fund. If any occasion should arise
in which the Adviser gives any advice to its clients concerning the shares
7
of a Fund, the Adviser will act solely as investment counsel for such clients
and not in any way on behalf of the Fund.
11. ASSIGNMENT AND AMENDMENTS. This Agreement shall automatically
terminate, without the payment of any penalty, in the event of its assignment
(as defined in section 2(a)(4) of the 1940 Act); provided that such termination
shall not relieve the Adviser of any liability incurred hereunder.
This Agreement may not be added to or changed orally and may not be
modified or rescinded except by a writing signed by the parties hereto and in
accordance with the 1940 Act, when applicable.
12. DURATION AND TERMINATION.
(a) This Agreement shall become effective as of the date executed and
shall remain in full force and effect continually thereafter, subject to
renewal as provided in Section 12(d) and unless terminated automatically as
set forth in Section 11 hereof or until terminated as follows:
(b) The Trust may cause this Agreement to terminate either (i) by vote
of its Board or (ii) with respect to any Fund, upon the affirmative vote of
a majority of the outstanding voting securities of the Fund; or
(c) The Adviser may at any time terminate this Agreement by not more
than sixty (60) days' nor less than thirty (30) days' written notice
delivered or mailed by registered mail, postage prepaid, to the Trust; or
(d) This Agreement shall automatically terminate two years from the
date of its execution unless its renewal is specifically approved at least
annually thereafter by (i) a majority vote of the Trustees, including a
majority vote of such Trustees who are not interested persons of the Trust
or the Adviser, at a meeting called for the purpose of voting on such
approval; or (ii) the vote of a majority of the outstanding voting
securities of each Fund; provided, however, that if the continuance of this
Agreement is submitted to the shareholders of the Funds for their approval
and such shareholders fail to approve such continuance of this Agreement as
provided herein, the Adviser may continue to serve hereunder as to the
Funds in a manner consistent with the 1940 Act and the rules and
regulations thereunder; and
Termination of this Agreement pursuant to this Section shall be without
payment of any penalty.
In the event of termination of this Agreement for any reason, the Adviser
shall, immediately upon notice of termination or on such later date as may be
specified in such notice, cease all activity on behalf of the Funds and with
respect to any of their assets, except as otherwise required by any fiduciary
duties of the Adviser under applicable law. In addition, the Adviser shall
deliver the Fund Books and Records to the Trust by such means and in accordance
8
with such schedule as the Trust shall direct and shall otherwise cooperate, as
reasonably directed by the Trust, in the transition of portfolio asset
management to any successor of the Adviser.
13. CERTAIN DEFINITIONS. For the purposes of this Agreement:
(a) "Affirmative vote of a majority of the outstanding voting
securities of the Fund" shall have the meaning as set forth in the 1940
Act, subject, however, to such exemptions as may be granted by the
Commission under the 1940 Act or any interpretations of the Commission
staff.
(b) "Interested persons" and "Assignment" shall have their respective
meanings as set forth in the 1940 Act, subject, however, to such exemptions
as may be granted by the Commission under the 1940 Act or any
interpretations of the Commission staff.
14. LIABILITY OF THE ADVISER. The Adviser shall indemnify and hold harmless
the Trust and all affiliated persons thereof (within the meaning of Section
2(a)(3) of the 1940 Act) and all controlling persons (as described in Section 15
of the 1933 Act) (collectively, the "Adviser Indemnitees") against any and all
losses, claims, damages, liabilities or litigation (including reasonable legal
and other expenses) by reason of or arising out of: (a) the Adviser being in
material violation of any applicable federal or state law, rule or regulation or
any investment policy or restriction set forth in the Funds' Registration
Statement or any written guidelines or instruction provided in writing by the
Board, (b) a Fund's failure to satisfy the diversification or source of income
requirements of Subchapter M of the Code, or (c) the Adviser's willful
misfeasance, bad faith or gross negligence generally in the performance of its
duties hereunder or its reckless disregard of its obligations and duties under
this Agreement.
15. ENFORCEABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms or provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
16. LIMITATION OF LIABILITY. The parties to this Agreement acknowledge and
agree that all litigation arising hereunder, whether direct or indirect, and of
any and every nature whatsoever shall be satisfied solely out of the assets of
the affected Fund and that no Trustee, officer or holder of shares of beneficial
interest of the Fund shall be personally liable for any of the foregoing
liabilities. The Trust's Certificate of Trust, as amended from time to time, is
on file in the Office of the Secretary of State of the State of Delaware. Such
Certificate of Trust and the Trust's Declaration of Trust describe in detail the
respective responsibilities and limitations on liability of the Trustees,
officers, and holders of shares of beneficial interest.
17. JURISDICTION. This Agreement shall be governed by and construed in
accordance with the substantive laws of state of Delaware and the Adviser
consents to the jurisdiction of courts, both state and/or federal, in Delaware,
with respect to any dispute under this Agreement.
9
18. PARAGRAPH HEADINGS. The headings of paragraphs contained in this
Agreement are provided for convenience only, form no part of this Agreement and
shall not affect its construction.
19. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
signed on their behalf by their duly authorized officers as of the date first
above written.
RYDEX DYNAMIC FUNDS, on behalf of each
Fund listed on Schedule A
By:
-----------------------------------
Name: Carl G. Verboncoeur
Title: President
PADCO ADVISORS, INC.
By:
------------------------------------
Name: Carl G. Verboncoeur
Title: Chief Executive Officer
11
SCHEDULE A
TO THE
ADVISORY AGREEMENT
DATED ____, 2007 BETWEEN
RYDEX DYNAMIC FUNDS
AND
PADCO ADVISORS, INC.
The Trust will pay to the Adviser as compensation for the Adviser's services
rendered, a fee, computed daily at an annual rate based on the average daily net
assets of the respective Fund in accordance the following fee schedule:
-------------------------------------------------------------------------
FUND RATE
-------------------------------------------------------------------------
S&P 500 2x Strategy* 0.90%
-------------------------------------------------------------------------
S&P 500 2x Strategy Master 0.90%
-------------------------------------------------------------------------
Inverse S&P 500 2x Strategy* 0.90%
-------------------------------------------------------------------------
Inverse S&P 500 2x Strategy Master 0.90%
-------------------------------------------------------------------------
OTC 2x Strategy* 0.90%
-------------------------------------------------------------------------
OTC 2x Strategy Master 0.90%
-------------------------------------------------------------------------
Inverse OTC 2x Strategy* 0.90%
-------------------------------------------------------------------------
Inverse OTC 2x Strategy Master 0.90%
-------------------------------------------------------------------------
Dow 2x Strategy* 0.90%
-------------------------------------------------------------------------
Dow 2x Strategy Master 0.90%
-------------------------------------------------------------------------
Inverse Dow 2x Strategy* 0.90%
-------------------------------------------------------------------------
Inverse Dow 2x Strategy Master 0.90%
-------------------------------------------------------------------------
Russell 2000(R) 2x Strategy 0.90%
-------------------------------------------------------------------------
Inverse Russell 2000(R) 2x Strategy 0.90%
-------------------------------------------------------------------------
Russell 2000(R) 2x Strategy Master 0.90%
-------------------------------------------------------------------------
Inverse Russell 2000(R) 2x Strategy Master 0.90%
-------------------------------------------------------------------------
* The fee will be reduced to 0.00% for any period during which the Fund
invests through a master-feeder structure.
A-1
APPENDIX E
ADVISORY AGREEMENT
ADVISORY AGREEMENT made as of this __th day of __________, 2007 by and
between RYDEX VARIABLE TRUST (the "Trust"), a Delaware statutory trust
registered as an investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and PADCO ADVISORS II, INC., a Maryland corporation
with its principal place of business at 9601 Blackwell Road, Suite 500,
Rockville, Maryland 20850 (the "Adviser").
W I T N E S S E T H
WHEREAS, the Board of Trustees (the "Board") of the Trust has selected the
Adviser to act as investment adviser to the Trust on behalf of the series set
forth on Schedule A to this Agreement (each a "Fund" and, collectively, the
"Funds"), as such Schedule may be amended from time to time upon mutual
agreement of the parties, and to provide certain related services, as more fully
set forth below, and to perform such services under the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits set
forth herein, the Trust and the Adviser do hereby agree as follows:
1. THE ADVISER'S SERVICES.
(a) DISCRETIONARY INVESTMENT MANAGEMENT SERVICES. The Adviser shall
act as investment adviser with respect to the Funds. In such capacity, the
Adviser shall, subject to the supervision of the Board, regularly provide
the Funds with investment research, advice and supervision and shall
furnish continuously an investment program for the Funds, consistent with
the respective investment objectives and policies of each Fund. The Adviser
shall determine, from time to time, what securities shall be purchased for
the Funds, what securities shall be held or sold by the Funds and what
portion of the Funds' assets shall be held uninvested in cash, subject
always to the provisions of the Trust's Declaration of Trust, By-Laws and
its registration statement on Form N-1A (the "Registration Statement")
under the 1940 Act, and under the Securities Act of 1933, as amended (the
"1933 Act"), covering Fund shares, as filed with the Securities and
Exchange Commission (the "Commission"), and to the investment objectives,
policies and restrictions of the Funds, as each of the same shall be from
time to time in effect. To carry out such obligations, the Adviser shall
exercise full discretion and act for the Funds in the same manner and with
the same force and effect as the Funds themselves might or could do with
respect to purchases, sales or other transactions, as well as with respect
to all other such things necessary or incidental to the furtherance or
conduct of such purchases, sales or other transactions. No reference in
this Agreement to the Adviser having full discretionary authority over each
Fund's investments shall in any way limit the right of the Board, in its
sole discretion, to establish or revise policies in connection with the
management of a Fund's assets or to otherwise exercise its right to control
the overall management of a Fund.
1
(b) COMPLIANCE. The Adviser agrees to comply with the requirements of
the 1940 Act, the Investment Advisers Act of 1940 (the "Advisers Act"), the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"),
the Commodity Exchange Act and the respective rules and regulations
thereunder, as applicable, as well as with all other applicable federal and
state laws, rules, regulations and case law that relate to the services and
relationships described hereunder and to the conduct of its business as a
registered investment adviser. The Adviser also agrees to comply with the
objectives, policies and restrictions set forth in the Registration
Statement, as amended or supplemented, of the Funds, and with any policies,
guidelines, instructions and procedures approved by the Board and provided
to the Adviser. In selecting each Fund's portfolio securities and
performing the Adviser's obligations hereunder, the Adviser shall cause the
Fund to comply with the diversification and source of income requirements
of Subchapter M and Section 817(h) of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
The Adviser shall maintain compliance procedures that it reasonably
believes are adequate to ensure its compliance with the foregoing. No
supervisory activity undertaken by the Board shall limit the Adviser's full
responsibility for any of the foregoing.
(c) PROXY VOTING. The Board has the authority to determine how proxies
with respect to securities that are held by the Funds shall be voted, and
the Board has initially determined to delegate the authority and
responsibility to vote proxies for the Funds' securities to the Adviser. So
long as proxy voting authority for the Funds has been delegated to the
Adviser, the Adviser shall exercise its proxy voting responsibilities. The
Adviser shall carry out such responsibility in accordance with any
instructions that the Board shall provide from time to time, and at all
times in a manner consistent with Rule 206(4)-6 under the Advisers Act and
its fiduciary responsibilities to the Trust. The Adviser shall provide
periodic reports and keep records relating to proxy voting as the Board may
reasonably request or as may be necessary for the Funds to comply with the
1940 Act and other applicable law. Any such delegation of proxy voting
responsibility to the Adviser may be revoked or modified by the Board at
any time.
(d) RECORDKEEPING. The Adviser shall not be responsible for the
provision of administrative, bookkeeping or accounting services to the
Funds, except as otherwise provided herein or as may be necessary for the
Adviser to supply to the Trust or its Board the information required to be
supplied under this Agreement.
The Adviser shall maintain separate books and detailed records of all
matters pertaining to Fund assets advised by the Adviser required by Rule
31a-1 under the 1940 Act (other than those records being maintained by any
administrator, custodian or transfer agent appointed by the Funds) relating
to its responsibilities provided hereunder with respect to the Funds, and
shall preserve such records for the periods and in a manner prescribed
therefore by Rule 31a-2 under the 1940 Act (the "Fund Books and Records").
The Fund Books and Records shall be available to the Board at any time upon
request, shall be delivered to the Trust upon the termination of this
Agreement and shall be available without delay during any day the Trust is
open for business.
2
(e) HOLDINGS INFORMATION AND PRICING. The Adviser shall provide
regular reports regarding Fund holdings, and shall, on its own initiative,
furnish the Trust and its Board from time to time with whatever information
the Adviser believes is appropriate for this purpose. The Adviser agrees to
immediately notify the Trust if the Adviser reasonably believes that the
value of any security held by a Fund may not reflect fair value. The
Adviser agrees to provide any pricing information of which the Adviser is
aware to the Trust, its Board and/or any Fund pricing agent to assist in
the determination of the fair value of any Fund holdings for which market
quotations are not readily available or as otherwise required in accordance
with the 1940 Act or the Trust's valuation procedures for the purpose of
calculating the Fund net asset value in accordance with procedures and
methods established by the Board.
(f) COOPERATION WITH AGENTS OF THE TRUST. The Adviser agrees to
cooperate with and provide reasonable assistance to the Trust, any Trust
custodian or foreign sub-custodians, any Trust pricing agents and all other
agents and representatives of the Trust, such information with respect to
the Funds as they may reasonably request from time to time in the
performance of their obligations, provide prompt responses to reasonable
requests made by such persons and establish appropriate interfaces with
each so as to promote the efficient exchange of information and compliance
with applicable laws and regulations.
2. CODE OF ETHICS. The Adviser has adopted a written code of ethics that it
reasonably believes complies with the requirements of Rule 17j-1 under the 1940
Act, which it will provide to the Trust. The Adviser shall ensure that its
Access Persons (as defined in the Adviser's Code of Ethics) comply in all
material respects with the Adviser's Code of Ethics, as in effect from time to
time. Upon request, the Adviser shall provide the Trust with a (i) a copy of the
Adviser's current Code of Ethics, as in effect from time to time, and (ii)
certification that it has adopted procedures reasonably necessary to prevent
Access Persons from engaging in any conduct prohibited by the Adviser's Code of
Ethics. Annually, the Adviser shall furnish a written report, which complies
with the requirements of Rule 17j-1, concerning the Adviser's Code of Ethics to
the Trust. The Adviser shall respond to requests for information from the Trust
as to violations of the Code of Ethics by Access Persons and the sanctions
imposed by the Adviser. The Adviser shall immediately notify the Trust of any
material violation of the Code of Ethics, whether or not such violation relates
to a security held by any Fund.
3. INFORMATION AND REPORTING. The Adviser shall provide the Trust and its
respective officers with such periodic reports concerning the obligations the
Adviser has assumed under this Agreement as the Trust may from time to time
reasonably request.
(a) NOTIFICATION OF BREACH / COMPLIANCE REPORTS. The Adviser shall
notify the Trust immediately upon detection of (i) any material failure to
manage any Fund in accordance with its investment objectives and policies
or any applicable law; or (ii) any material breach of the Funds' or the
Adviser's policies, guidelines or procedures. In addition, the Adviser
shall provide a quarterly report regarding each Fund's compliance with its
investment objectives and policies, applicable law, including, but not
limited to the 1940 Act and Subchapter M and Section 817(h) of the Code,
and the Fund's policies,
3
guidelines or procedures as applicable to the Adviser's obligations under
this Agreement. The Adviser agrees to correct any such failure promptly and
to take any action that the Board may reasonably request in connection with
any such breach. Upon request, the Adviser shall also provide the officers
of the Trust with supporting certifications in connection with such
certifications of Fund financial statements and disclosure controls
pursuant to the Sarbanes-Oxley Act. The Adviser will promptly notify the
Trust in the event (i) the Adviser is served or otherwise receives notice
of any action, suit, proceeding, inquiry or investigation, at law or in
equity, before or by any court, public board, or body, involving the
affairs of the Trust (excluding class action suits in which a Fund is a
member of the plaintiff class by reason of the Fund's ownership of shares
in the defendant) or the compliance by the Adviser with the federal or
state securities laws or (ii) an actual change in control of the Adviser
resulting in an "assignment" (as defined in the 1940 Act) has occurred or
is otherwise proposed to occur.
(b) BOARD AND FILINGS INFORMATION. The Adviser will also provide the
Trust with any information reasonably requested regarding its management of
the Funds required for any meeting of the Board, or for any shareholder
report, amended registration statement, proxy statement, or prospectus
supplement to be filed by the Trust with the Commission. The Adviser will
make its officers and employees available to meet with the Board from time
to time on due notice to review its investment management services to the
Funds in light of current and prospective economic and market conditions
and shall furnish to the Board such information as may reasonably be
necessary in order for the Board to evaluate this Agreement or any proposed
amendments thereto.
(c) TRANSACTION INFORMATION. The Adviser shall furnish to the Trust
such information concerning portfolio transactions as may be necessary to
enable the Trust or its designated agent to perform such compliance testing
on the Funds and the Adviser's services as the Trust may, in its sole
discretion, determine to be appropriate. The provision of such information
by the Adviser to the Trust or its designated agent in no way relieves the
Adviser of its own responsibilities under this Agreement.
4. BROKERAGE.
(a) PRINCIPAL TRANSACTIONS. In connection with purchases or sales of
securities for the account of a Fund, neither the Adviser nor any of its
directors, officers or employees will act as a principal or agent or
receive any commission except as permitted by the 1940 Act.
(b) PLACEMENT OF ORDERS. The Adviser shall arrange for the placing of
all orders for the purchase and sale of securities for a Fund's account
with brokers or dealers selected by the Adviser. In the selection of such
brokers or dealers and the placing of such orders, the Adviser is directed
at all times to seek for the Fund the most favorable execution and net
price available under the circumstances. It is also understood that it is
desirable for the Fund that the Adviser have access to brokerage and
research services provided by brokers who may execute brokerage
transactions at a higher cost to the Fund
4
than may result when allocating brokerage to other brokers, consistent with
section 28(e) of the 1934 Act and any Commission staff interpretations
thereof. Therefore, the Adviser is authorized to place orders for the
purchase and sale of securities for a Fund with such brokers, subject to
review by the Board from time to time with respect to the extent and
continuation of this practice. It is understood that the services provided
by such brokers may be useful to the Adviser in connection with its or its
affiliates' services to other clients.
(c) AGGREGATED TRANSACTIONS. On occasions when the Adviser deems the
purchase or sale of a security to be in the best interest of a Fund as well
as other clients of the Adviser, the Adviser may, to the extent permitted
by applicable law and regulations, aggregate the order for securities to be
sold or purchased. In such event, the Adviser will allocate securities or
futures contracts so purchased or sold, as well as the expenses incurred in
the transaction, in the manner the Adviser reasonably considers to be
equitable and consistent with its fiduciary obligations to the Fund and to
such other clients under the circumstances.
(d) AFFILIATED BROKERS. The Adviser or any of its affiliates may act
as broker in connection with the purchase or sale of securities or other
investments for a Fund, subject to: (a) the requirement that the Adviser
seek to obtain best execution and price within the policy guidelines
determined by the Board and set forth in the Fund's current prospectus and
SAI; (b) the provisions of the 1940 Act; (c) the provisions of the Advisers
Act; (d) the provisions of the 1934 Act; and (e) other provisions of
applicable law. These brokerage services are not within the scope of the
duties of the Adviser under this Agreement. Subject to the requirements of
applicable law and any procedures adopted by the Board, the Adviser or its
affiliates may receive brokerage commissions, fees or other remuneration
from a Fund for these services in addition to the Adviser's fees for
services under this Agreement.
5. CUSTODY. Nothing in this Agreement shall permit the Adviser to take or
receive physical possession of cash, securities or other investments of a Fund.
6. ALLOCATION OF CHARGES AND EXPENSES. The Adviser will bear its own costs
of providing services hereunder. Other than as herein specifically indicated,
the Adviser shall not be responsible for a Fund's expenses, including brokerage
and other expenses incurred in placing orders for the purchase and sale of
securities and other investment instruments.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) PROPERLY REGISTERED. The Adviser is registered as an investment
adviser under the Advisers Act, and will remain so registered for the
duration of this Agreement. The Adviser is not prohibited by the Advisers
Act or the 1940 Act from performing the services contemplated by this
Agreement, and to the best knowledge of the Adviser, there is no proceeding
or investigation that is reasonably likely to result in the Adviser being
prohibited from performing the services contemplated by this Agreement. The
Adviser agrees to promptly notify the Trust of the occurrence of any event
that would disqualify
5
the Adviser from serving as an investment adviser to an investment company.
The Adviser is in compliance in all material respects with all applicable
federal and state law in connection with its investment management
operations.
(b) ADV DISCLOSURE. The Adviser has provided the Trust with a copy of
its Form ADV as most recently filed with the Commission and will, promptly
after filing any amendment to its Form ADV with the Commission, furnish a
copy of such amendment(s) to the Trust. The information contained in the
Adviser's Form ADV is accurate and complete in all material respects and
does not omit to state any material fact necessary in order to make the
statements made, in light of the circumstances under which they were made,
not misleading.
(c) FUND DISCLOSURE DOCUMENTS. The Adviser has reviewed and will in
the future review, the Registration Statement, and any amendments or
supplements thereto, the annual or semi-annual reports to shareholders,
other reports filed with the Commission and any marketing material of the
Funds (collectively the "Disclosure Documents") and represents and warrants
that with respect to disclosure about the Adviser, the manner in which the
Adviser manages the Funds or information relating directly or indirectly to
the Adviser, such Disclosure Documents contain or will contain, as of the
date thereof, no untrue statement of any material fact and does not omit
any statement of material fact which was required to be stated therein or
necessary to make the statements contained therein not misleading.
(d) USE OF THE NAME "RYDEX". The Adviser has the right to use the name
"Rydex" in connection with its services to the Trust and that, subject to
the terms set forth in Section 8 of this Agreement, the Trust shall have
the right to use the name "Rydex" in connection with the management and
operation of the Funds. The Adviser is not aware of any threatened or
existing actions, claims, litigation or proceedings that would adversely
effect or prejudice the rights of the Adviser or the Trust to use the name
"Rydex".
(e) INSURANCE. The Adviser maintains errors and omissions insurance
coverage in an appropriate amount and shall provide prior written notice to
the Trust (i) of any material changes in its insurance policies or
insurance coverage; or (ii) if any material claims will be made on its
insurance policies. Furthermore, the Adviser shall upon reasonable request
provide the Trust with any information it may reasonably require concerning
the amount of or scope of such insurance.
(f) NO DETRIMENTAL AGREEMENT. The Adviser represents and warrants that
it has no arrangement or understanding with any party, other than the
Trust, that would influence the decision of the Adviser with respect to its
selection of securities for a Fund, and that all selections shall be done
in accordance with what is in the best interest of the Fund.
(g) CONFLICTS. The Adviser shall act honestly, in good faith and in
the best interests of the Trust including requiring any of its personnel
with knowledge of Fund
6
activities to place the interest of the Funds first, ahead of their own
interests, in all personal trading scenarios that may involve a conflict of
interest with the Funds, consistent with its fiduciary duties under
applicable law.
(h) REPRESENTATIONS. The representations and warranties in this
Section 7 shall be deemed to be made on the date this Agreement is executed
and at the time of delivery of the quarterly compliance report required by
Section 3(a), whether or not specifically referenced in such report.
8. THE NAME "RYDEX". The Adviser grants to the Trust a sublicense to use
the name "Rydex" (the "Name") as part of the name of any Fund. The foregoing
authorization by the Adviser to the Trust to use the Name as part of the name of
any Fund is not exclusive of the right of the Adviser itself to use, or to
authorize others to use, the Name; the Trust acknowledges and agrees that, as
between the Trust and the Adviser, the Adviser has the right to use, or
authorize others to use, the Name. The Trust shall (1) only use the Name in a
manner consistent with uses approved by the Adviser; (2) use its best efforts to
maintain the quality of the services offered using the Name; (3) adhere to such
other specific quality control standards as the Adviser may from time to time
promulgate. At the request of the Adviser, the Trust will (a) submit to Adviser
representative samples of any promotional materials using the Name; and (b)
change the name of any Fund within three months of its receipt of the Adviser's
request, or such other shorter time period as may be required under the terms of
a settlement agreement or court order, so as to eliminate all reference to the
Name and will not thereafter transact any business using the Name in the name of
any Fund; provided, however, that the Trust may continue to use beyond such date
any supplies of prospectuses, marketing materials and similar documents that the
Trust had at the date of such name change in quantities not exceeding those
historically produced and used in connection with such Fund.
9. ADVISER'S COMPENSATION. The Funds shall pay to the Adviser, as
compensation for the Adviser's services hereunder, a fee, determined as
described in Schedule A that is attached hereto and made a part hereof. Such fee
shall be computed daily and paid not less than monthly in arrears by the Funds.
The method for determining net assets of a Fund for purposes hereof shall
be the same as the method for determining net assets for purposes of
establishing the offering and redemption prices of Fund shares as described in
the Funds' prospectus(es). In the event of termination of this Agreement, the
fee provided in this Section shall be computed on the basis of the period ending
on the last business day on which this Agreement is in effect subject to a pro
rata adjustment based on the number of days elapsed in the current month as a
percentage of the total number of days in such month.
10. INDEPENDENT CONTRACTOR. In the performance of its duties hereunder, the
Adviser is and shall be an independent contractor and, unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Trust or any Fund in any way or otherwise
be deemed to be an agent of the Trust or any Fund. If any occasion should arise
in which the Adviser gives any advice to its clients concerning the shares
7
of a Fund, the Adviser will act solely as investment counsel for such clients
and not in any way on behalf of the Fund.
11. ASSIGNMENT AND AMENDMENTS. This Agreement shall automatically
terminate, without the payment of any penalty, in the event of its assignment
(as defined in section 2(a)(4) of the 1940 Act); provided that such termination
shall not relieve the Adviser of any liability incurred hereunder.
This Agreement may not be added to or changed orally and may not be
modified or rescinded except by a writing signed by the parties hereto and in
accordance with the 1940 Act, when applicable.
12. DURATION AND TERMINATION.
(a) This Agreement shall become effective as of the date executed and
shall remain in full force and effect continually thereafter, subject to
renewal as provided in Section 12(d) and unless terminated automatically as
set forth in Section 11 hereof or until terminated as follows:
(b) The Trust may cause this Agreement to terminate either (i) by vote
of its Board or (ii) with respect to any Fund, upon the affirmative vote of
a majority of the outstanding voting securities of the Fund; or
(c) The Adviser may at any time terminate this Agreement by not more
than sixty (60) days' nor less than thirty (30) days' written notice
delivered or mailed by registered mail, postage prepaid, to the Trust; or
(d) This Agreement shall automatically terminate two years from the
date of its execution unless its renewal is specifically approved at least
annually thereafter by (i) a majority vote of the Trustees, including a
majority vote of such Trustees who are not interested persons of the Trust
or the Adviser, at a meeting called for the purpose of voting on such
approval; or (ii) the vote of a majority of the outstanding voting
securities of each Fund; provided, however, that if the continuance of this
Agreement is submitted to the shareholders of the Funds for their approval
and such shareholders fail to approve such continuance of this Agreement as
provided herein, the Adviser may continue to serve hereunder as to the
Funds in a manner consistent with the 1940 Act and the rules and
regulations thereunder; and
Termination of this Agreement pursuant to this Section shall be without
payment of any penalty.
In the event of termination of this Agreement for any reason, the Adviser
shall, immediately upon notice of termination or on such later date as may be
specified in such notice, cease all activity on behalf of the Funds and with
respect to any of their assets, except as otherwise required by any fiduciary
duties of the Adviser under applicable law. In addition, the Adviser shall
deliver the Fund Books and Records to the Trust by such means and in accordance
8
with such schedule as the Trust shall direct and shall otherwise cooperate, as
reasonably directed by the Trust, in the transition of portfolio asset
management to any successor of the Adviser.
13. CERTAIN DEFINITIONS. For the purposes of this Agreement:
(a) "Affirmative vote of a majority of the outstanding voting
securities of the Fund" shall have the meaning as set forth in the 1940
Act, subject, however, to such exemptions as may be granted by the
Commission under the 1940 Act or any interpretations of the Commission
staff.
(b) "Interested persons" and "Assignment" shall have their respective
meanings as set forth in the 1940 Act, subject, however, to such exemptions
as may be granted by the Commission under the 1940 Act or any
interpretations of the Commission staff.
14. LIABILITY OF THE ADVISER. The Adviser shall indemnify and hold harmless
the Trust and all affiliated persons thereof (within the meaning of Section
2(a)(3) of the 1940 Act) and all controlling persons (as described in Section 15
of the 1933 Act) (collectively, the "Adviser Indemnitees") against any and all
losses, claims, damages, liabilities or litigation (including reasonable legal
and other expenses) by reason of or arising out of: (a) the Adviser being in
material violation of any applicable federal or state law, rule or regulation or
any investment policy or restriction set forth in the Funds' Registration
Statement or any written guidelines or instruction provided in writing by the
Board, (b) a Fund's failure to satisfy the diversification or source of income
requirements of Subchapter M of the Code, or (c) the Adviser's willful
misfeasance, bad faith or gross negligence generally in the performance of its
duties hereunder or its reckless disregard of its obligations and duties under
this Agreement.
15. ENFORCEABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms or provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
16. LIMITATION OF LIABILITY. The parties to this Agreement acknowledge and
agree that all litigation arising hereunder, whether direct or indirect, and of
any and every nature whatsoever shall be satisfied solely out of the assets of
the affected Fund and that no Trustee, officer or holder of shares of beneficial
interest of the Fund shall be personally liable for any of the foregoing
liabilities. The Trust's Certificate of Trust, as amended from time to time, is
on file in the Office of the Secretary of State of the State of Delaware. Such
Certificate of Trust and the Trust's Declaration of Trust describe in detail the
respective responsibilities and limitations on liability of the Trustees,
officers, and holders of shares of beneficial interest.
17. JURISDICTION. This Agreement shall be governed by and construed in
accordance with the substantive laws of state of Delaware and the Adviser
consents to the jurisdiction of courts, both state or federal, in Delaware, with
respect to any dispute under this Agreement.
9
18. PARAGRAPH HEADINGS. The headings of paragraphs contained in this
Agreement are provided for convenience only, form no part of this Agreement and
shall not affect its construction.
19. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
signed on their behalf by their duly authorized officers as of the date first
above written.
RYDEX VARIABLE TRUST, on behalf of each
Fund listed on Schedule A
By:
-----------------------------------
Name: Carl G. Verboncoeur
Title: President
PADCO ADVISORS, INC.
By:
------------------------------------
Name: Carl G. Verboncoeur
Title: Chief Executive Officer
11
SCHEDULE A
TO THE
ADVISORY AGREEMENT
DATED ____, 2007 BETWEEN
RYDEX VARIABLE TRUST
AND
PADCO ADVISORS II, INC.
The Trust will pay to the Adviser as compensation for the Adviser's services
rendered, a fee, computed daily at an annual rate based on the average daily net
assets of the respective Fund in accordance the following fee schedule:
FUND RATE FUND RATE
---- ---- ---- ----
Nova Fund ............................... 0.75% Banking.................................. 0.85%
Inverse S&P 500 Strategy................. 0.90% Basic Materials.......................... 0.85%
OTC ..................................... 0.75% Biotechnology............................ 0.85%
Inverse OTC Strategy .................... 0.90% Consumer Products........................ 0.85%
Mid-Cap 1.5x Strategy.................... 0.90% Electronics.............................. 0.85%
Russell 2000(R) 1.5x Strategy............ 0.90% Energy................................... 0.85%
Government Long Bond 1.2x Strategy....... 0.50% Energy Services.......................... 0.85%
Inverse Government Long Bond Strategy ... 0.90% Financial Services....................... 0.85%
Europe 1.25x Strategy.................... 0.90% Health Care.............................. 0.85%
Japan 1.25x Strategy..................... 0.90% Internet................................. 0.85%
Large-Cap Value.......................... 0.75% Leisure.................................. 0.85%
Large-Cap Growth......................... 0.75% Precious Metals.......................... 0.75%
Mid-Cap Value............................ 0.75% Real Estate.............................. 0.85%
Mid-Cap Growth........................... 0.75% Retailing................................ 0.85%
Inverse Mid-Cap Strategy................. 0.90% Technology............................... 0.85%
Small-Cap Value.......................... 0.75% Telecommunications....................... 0.85%
Small-Cap Growth ........................ 0.75% Transportation........................... 0.85%
Inverse Russell 2000(R) Strategy ........ 0.90% Utilities................................ 0.85%
Strengthening Dollar 2x Strategy......... 0.90% Commodities Strategy..................... 0.75%
Weakening Dollar 2x Strategy............. 0.90% Sector Rotation.......................... 0.90%
A-1
FUND RATE FUND RATE
---- ---- ---- ----
U.S. Government Money Market............. 0.50% Multi-Cap Core Equity * ................. 0.70%
High Yield Strategy....... .............. 0.75% S&P 500 ................................. 0.75%
Inverse High Yield Strategy.............. 0.75% Russell 2000(R) ......................... 0.75%
Dow 2x Strategy Fund..................... 0.90% Essential Portfolio Moderate ............ 0.00%
OTC 2x Strategy Fund..................... 0.90% Essential Portfolio Conservative ........ 0.00%
Russell 2000(R) 2x Strategy.............. 0.90% Essential Portfolio Aggressive........... 0.00%
S&P 500 2x Strategy ..................... 0.90% Inverse Dow 2x Strategy.................. 0.90%
Inverse OTC 2x Strategy.................. 0.90% Inverse Russell 2000(R) 2x Strategy...... 0.90%
Inverse S&P 500 2x Strategy.............. 0.90% CLS AdvisorOne Amerigo VT ............... 0.90%
CLS AdvisorOne Clermont VT............... 0.90% CLS AdvisorOne Berolina.................. 0.90%
ADDITIONS ARE NOTED IN BOLD.
* The management fee with respect to the Multi-Cap Core Equity Fund (the
"Fund") is comprised of a basic fee (the "Basic Fee") at the annual
rate of 0.70% of the Fund's average daily net assets and a performance
adjustment (the "Performance Adjustment") as discussed below.
A. CALCULATING THE PERFORMANCE ADJUSTMENT.
The performance adjustment shall be calculated monthly by:
(i) Determining the difference in performance (the "Performance
Difference") between the Fund and the Russell 3000(R) Index
(the "Index"), as described in paragraph C;
(ii) Using the Performance Difference calculated under paragraph B
(ii) to determine the performance adjustment ( the
"Performance Adjustment"), as illustrated in paragraph D; and
(iii) Adding the Performance Adjustment to the Basic Fee to
determine the management fee for the applicable month.
A-2
B. COMPUTING THE PERFORMANCE DIFFERENCE.
The Performance Difference is calculated monthly, and is determined by
measuring the percentage difference between the performance of one Share of
the Fund and the performance of the Index over the most recent 12-month
period. The performance of one Share of the Fund shall be measured by
computing the percentage difference, carried to five decimal places,
between the net asset value as of the last business day of the period
selected for comparison and the net asset value of such share as of the
last business day of the prior period, adjusted for dividends or capital
gain distributions treated as reinvested immediately. The performance of
the Index will be established by measuring the percentage difference,
carried to five decimal places, between the beginning and ending values of
the Index for the comparison period, with dividends or capital gain
distributions on the securities that comprise the Index being treated as
reinvested immediately.
C. DETERMINING THE PERFORMANCE ADJUSTMENT.
For every 0.0375% in Performance Difference, the Adviser's fee will be
adjusted upwards or downwards by 0.01%. The maximum adjustment rate is
0.20% per year, resulting in a minimum possible annual fee of 0.50% and a
maximum possible annual fee of 0.90%.
D. PERFORMANCE ADJUSTMENT EXAMPLE.
The following example illustrates the application of the Performance
Adjustment:
Fund's Index's Fund's
For the rolling 12-month investment cumulative performance relative
PERFORMANCE PERIOD PERFORMANCE CHANGE TO THE INDEX
------------------ ----------- ------ ------------
January 1 $50.00 100.00
December 31 $55.25 110.20
Absolute change + $5.25 + $10.20
Actual change +10.50% + 10.20% +0.30%
Based on these assumptions, the Fund calculates the Adviser's management fee
rate for the month-ended December 31 as follows:
o The portion of the annual basic fee rate of 0.70% applicable to that month
is multiplied by the Fund's average daily net assets for the month. This
results in the dollar amount of the basic fee.
o The +0.30% difference between the performance of the Fund and the record of
the Index is divided by 3.75, producing a rate of 0.08%.
o The 0.08% rate (adjusted for the number of days in the month) is multiplied
by the Fund's average daily net assets for the performance period. This
results in the dollar amount of the performance adjustment.
o The dollar amount of the performance adjustment is added to the dollar
amount of the basic fee, producing the adjusted management fee.
A-3
2. PERFORMANCE PERIODS
For the period from July 1, 2003 through May 31, 2004, the Adviser will be paid
at the Base Rate, without regard to any Performance Adjustment. For the month
ending June 30, 2004, the Adviser will begin applying the Performance Adjustment
as described herein, based upon the performance of the Fund relative to the
performance of the Index during the 12-month period from July 1, 2003 through
June 30, 2004. The 12-month comparison period will roll over with each
succeeding month, so that it will always equal 12 months, ending with the month
for which the performance incentive adjustment is being computed.
3. CHANGES TO THE "INDEX" OR THE "CLASS"
The Trustees have initially designated the Russell 3000(R) Index as the index to
be used for purposes of determining the Performance Adjustment (referred to
herein as the "Index"). From time to time, to the extent permitted by the 1940
Act, the Trustees may, by a vote of the Trustees of the Trust voting in person,
including a majority of the Trustees who are not parties to this Agreement or
"interested persons" (as defined in the 1940 Act) of any such parties, determine
that another securities index is a more appropriate benchmark than the Index for
purposes of evaluating the performance of the Fund in calculating the
Performance Adjustment. After ten days' written notice to the Adviser, a
different index (the "Successor Index") may be substituted for the Index in
prospectively calculating the Performance Adjustment. However, the calculation
of that portion of the Performance Adjustment attributable to any portion of the
performance period prior to the adoption of the Successor Index will still be
based upon the Fund's performance compared to the Index.
A-4
APPENDIX F
ADVISORY AGREEMENT
ADVISORY AGREEMENT made as of this __th day of __________, 2007 by and
between RYDEX VARIABLE TRUST (the "Trust"), a Delaware statutory trust
registered as an investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and PADCO ADVISORS II, INC., a Maryland corporation
with its principal place of business at 9601 Blackwell Road, Suite 500,
Rockville, Maryland 20850 (the "Adviser").
W I T N E S S E T H
WHEREAS, the Board of Trustees (the "Board") of the Trust has selected the
Adviser to act as investment adviser to the Trust on behalf of the series set
forth on Schedule A to this Agreement (each a "Fund" and, collectively, the
"Funds"), as such Schedule may be amended from time to time upon mutual
agreement of the parties, and to provide certain related services, as more fully
set forth below, and to perform such services under the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits set
forth herein, the Trust and the Adviser do hereby agree as follows:
1. THE ADVISER'S SERVICES.
(a) DISCRETIONARY INVESTMENT MANAGEMENT SERVICES. The Adviser shall
act as investment adviser with respect to the Funds. In such capacity, the
Adviser shall, subject to the supervision of the Board, regularly provide
the Funds with investment research, advice and supervision and shall
furnish continuously an investment program for the Funds, consistent with
the respective investment objectives and policies of each Fund. The Adviser
shall determine, from time to time, what securities shall be purchased for
the Funds, what securities shall be held or sold by the Funds and what
portion of the Funds' assets shall be held uninvested in cash, subject
always to the provisions of the Trust's Declaration of Trust, By-Laws and
its registration statement on Form N-1A (the "Registration Statement")
under the 1940 Act, and under the Securities Act of 1933, as amended (the
"1933 Act"), covering Fund shares, as filed with the Securities and
Exchange Commission (the "Commission"), and to the investment objectives,
policies and restrictions of the Funds, as each of the same shall be from
time to time in effect. To carry out such obligations, the Adviser shall
exercise full discretion and act for the Funds in the same manner and with
the same force and effect as the Funds themselves might or could do with
respect to purchases, sales or other transactions, as well as with respect
to all other such things necessary or incidental to the furtherance or
conduct of such purchases, sales or other transactions. No reference in
this Agreement to the Adviser having full discretionary authority over each
Fund's investments shall in any way limit the right of the Board, in its
sole discretion, to establish or revise policies in connection with the
management of a Fund's assets or to otherwise exercise its right to control
the overall management of a Fund.
1
(b) COMPLIANCE. The Adviser agrees to comply with the requirements of
the 1940 Act, the Investment Advisers Act of 1940 (the "Advisers Act"), the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"),
the Commodity Exchange Act and the respective rules and regulations
thereunder, as applicable, as well as with all other applicable federal and
state laws, rules, regulations and case law that relate to the services and
relationships described hereunder and to the conduct of its business as a
registered investment adviser. The Adviser also agrees to comply with the
objectives, policies and restrictions set forth in the Registration
Statement, as amended or supplemented, of the Funds, and with any policies,
guidelines, instructions and procedures approved by the Board and provided
to the Adviser. In selecting each Fund's portfolio securities and
performing the Adviser's obligations hereunder, the Adviser shall cause the
Fund to comply with the diversification and source of income requirements
of Subchapter M and Section 817(h) of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
The Adviser shall maintain compliance procedures that it reasonably
believes are adequate to ensure its compliance with the foregoing. No
supervisory activity undertaken by the Board shall limit the Adviser's full
responsibility for any of the foregoing.
(c) PROXY VOTING. The Board has the authority to determine how proxies
with respect to securities that are held by the Funds shall be voted, and
the Board has initially determined to delegate the authority and
responsibility to vote proxies for the Funds' securities to the Adviser. So
long as proxy voting authority for the Funds has been delegated to the
Adviser, the Adviser shall exercise its proxy voting responsibilities. The
Adviser shall carry out such responsibility in accordance with any
instructions that the Board shall provide from time to time, and at all
times in a manner consistent with Rule 206(4)-6 under the Advisers Act and
its fiduciary responsibilities to the Trust. The Adviser shall provide
periodic reports and keep records relating to proxy voting as the Board may
reasonably request or as may be necessary for the Funds to comply with the
1940 Act and other applicable law. Any such delegation of proxy voting
responsibility to the Adviser may be revoked or modified by the Board at
any time.
(d) RECORDKEEPING. The Adviser shall not be responsible for the
provision of administrative, bookkeeping or accounting services to the
Funds, except as otherwise provided herein or as may be necessary for the
Adviser to supply to the Trust or its Board the information required to be
supplied under this Agreement.
The Adviser shall maintain separate books and detailed records of all
matters pertaining to Fund assets advised by the Adviser required by Rule
31a-1 under the 1940 Act (other than those records being maintained by any
administrator, custodian or transfer agent appointed by the Funds) relating
to its responsibilities provided hereunder with respect to the Funds, and
shall preserve such records for the periods and in a manner prescribed
therefore by Rule 31a-2 under the 1940 Act (the "Fund Books and Records").
The Fund Books and Records shall be available to the Board at any time upon
request, shall be delivered to the Trust upon the termination of this
Agreement and shall be available without delay during any day the Trust is
open for business.
2
(e) HOLDINGS INFORMATION AND PRICING. The Adviser shall provide
regular reports regarding Fund holdings, and shall, on its own initiative,
furnish the Trust and its Board from time to time with whatever information
the Adviser believes is appropriate for this purpose. The Adviser agrees to
immediately notify the Trust if the Adviser reasonably believes that the
value of any security held by a Fund may not reflect fair value. The
Adviser agrees to provide any pricing information of which the Adviser is
aware to the Trust, its Board and/or any Fund pricing agent to assist in
the determination of the fair value of any Fund holdings for which market
quotations are not readily available or as otherwise required in accordance
with the 1940 Act or the Trust's valuation procedures for the purpose of
calculating the Fund net asset value in accordance with procedures and
methods established by the Board.
(f) COOPERATION WITH AGENTS OF THE TRUST. The Adviser agrees to
cooperate with and provide reasonable assistance to the Trust, any Trust
custodian or foreign sub-custodians, any Trust pricing agents and all other
agents and representatives of the Trust, such information with respect to
the Funds as they may reasonably request from time to time in the
performance of their obligations, provide prompt responses to reasonable
requests made by such persons and establish appropriate interfaces with
each so as to promote the efficient exchange of information and compliance
with applicable laws and regulations.
2. CODE OF ETHICS. The Adviser has adopted a written code of ethics that it
reasonably believes complies with the requirements of Rule 17j-1 under the 1940
Act, which it will provide to the Trust. The Adviser shall ensure that its
Access Persons (as defined in the Adviser's Code of Ethics) comply in all
material respects with the Adviser's Code of Ethics, as in effect from time to
time. Upon request, the Adviser shall provide the Trust with a (i) a copy of the
Adviser's current Code of Ethics, as in effect from time to time, and (ii)
certification that it has adopted procedures reasonably necessary to prevent
Access Persons from engaging in any conduct prohibited by the Adviser's Code of
Ethics. Annually, the Adviser shall furnish a written report, which complies
with the requirements of Rule 17j-1, concerning the Adviser's Code of Ethics to
the Trust. The Adviser shall respond to requests for information from the Trust
as to violations of the Code of Ethics by Access Persons and the sanctions
imposed by the Adviser. The Adviser shall immediately notify the Trust of any
material violation of the Code of Ethics, whether or not such violation relates
to a security held by any Fund.
3. INFORMATION AND REPORTING. The Adviser shall provide the Trust and its
respective officers with such periodic reports concerning the obligations the
Adviser has assumed under this Agreement as the Trust may from time to time
reasonably request.
(a) NOTIFICATION OF BREACH / COMPLIANCE REPORTS. The Adviser shall
notify the Trust immediately upon detection of (i) any material failure to
manage any Fund in accordance with its investment objectives and policies
or any applicable law; or (ii) any material breach of any of the Funds' or
the Adviser's policies, guidelines or procedures. In addition, the Adviser
shall provide a quarterly report regarding each Fund's compliance with its
investment objectives and policies, applicable law, including, but not
3
limited to the 1940 Act and Subchapter M and Section 817(h) of the Code,
and the Fund's policies, guidelines or procedures as applicable to the
Adviser's obligations under this Agreement. The Adviser agrees to correct
any such failure promptly and to take any action that the Board may
reasonably request in connection with any such breach. Upon request, the
Adviser shall also provide the officers of the Trust with supporting
certifications in connection with such certifications of Fund financial
statements and disclosure controls pursuant to the Sarbanes-Oxley Act. The
Adviser will promptly notify the Trust in the event (i) the Adviser is
served or otherwise receives notice of any action, suit, proceeding,
inquiry or investigation, at law or in equity, before or by any court,
public board, or body, involving the affairs of the Trust (excluding class
action suits in which a Fund is a member of the plaintiff class by reason
of the Fund's ownership of shares in the defendant) or the compliance by
the Adviser with the federal or state securities laws or (ii) an actual
change in control of the Adviser resulting in an "assignment" (as defined
in the 1940 Act) has occurred or is otherwise proposed to occur.
(b) BOARD AND FILINGS INFORMATION. The Adviser will also provide the
Trust with any information reasonably requested regarding its management of
the Funds required for any meeting of the Board, or for any shareholder
report, amended registration statement, proxy statement, or prospectus
supplement to be filed by the Trust with the Commission. The Adviser will
make its officers and employees available to meet with the Board from time
to time on due notice to review its investment management services to the
Funds in light of current and prospective economic and market conditions
and shall furnish to the Board such information as may reasonably be
necessary in order for the Board to evaluate this Agreement or any proposed
amendments thereto.
(c) TRANSACTION INFORMATION. The Adviser shall furnish to the Trust
such information concerning portfolio transactions as may be necessary to
enable the Trust or its designated agent to perform such compliance testing
on the Funds and the Adviser's services as the Trust may, in its sole
discretion, determine to be appropriate. The provision of such information
by the Adviser to the Trust or its designated agent in no way relieves the
Adviser of its own responsibilities under this Agreement.
4. BROKERAGE.
(a) PRINCIPAL TRANSACTIONS. In connection with purchases or sales of
securities for the account of a Fund, neither the Adviser nor any of its
directors, officers or employees will act as a principal or agent or
receive any commission except as permitted by the 1940 Act.
(b) PLACEMENT OF ORDERS. The Adviser shall arrange for the placing of
all orders for the purchase and sale of securities for a Fund's account
with brokers or dealers selected by the Adviser. In the selection of such
brokers or dealers and the placing of such orders, the Adviser is directed
at all times to seek for the Fund the most favorable execution and net
price available under the circumstances. It is also understood that it is
4
desirable for the Fund that the Adviser have access to brokerage and
research services provided by brokers who may execute brokerage
transactions at a higher cost to the Fund than may result when allocating
brokerage to other brokers, consistent with section 28(e) of the 1934 Act
and any Commission staff interpretations thereof. Therefore, the Adviser is
authorized to place orders for the purchase and sale of securities for a
Fund with such brokers, subject to review by the Board from time to time
with respect to the extent and continuation of this practice. It is
understood that the services provided by such brokers may be useful to the
Adviser in connection with its or its affiliates' services to other
clients.
(c) AGGREGATED TRANSACTIONS. On occasions when the Adviser deems the
purchase or sale of a security to be in the best interest of a Fund as well
as other clients of the Adviser, the Adviser may, to the extent permitted
by applicable law and regulations, aggregate the order for securities to be
sold or purchased. In such event, the Adviser will allocate securities or
futures contracts so purchased or sold, as well as the expenses incurred in
the transaction, in the manner the Adviser reasonably considers to be
equitable and consistent with its fiduciary obligations to the Fund and to
such other clients under the circumstances.
(d) AFFILIATED BROKERS. The Adviser or any of its affiliates may act
as broker in connection with the purchase or sale of securities or other
investments for a Fund, subject to: (a) the requirement that the Adviser
seek to obtain best execution and price within the policy guidelines
determined by the Board and set forth in the Fund's current prospectus and
SAI; (b) the provisions of the 1940 Act; (c) the provisions of the Advisers
Act; (d) the provisions of the 1934 Act; and (e) other provisions of
applicable law. These brokerage services are not within the scope of the
duties of the Adviser under this Agreement. Subject to the requirements of
applicable law and any procedures adopted by the Board, the Adviser or its
affiliates may receive brokerage commissions, fees or other remuneration
from a Fund for these services in addition to the Adviser's fees for
services under this Agreement.
5. CUSTODY. Nothing in this Agreement shall permit the Adviser to take or
receive physical possession of cash, securities or other investments of a Fund.
6. ALLOCATION OF CHARGES AND EXPENSES. The Adviser will bear its own costs
of providing services hereunder. The Adviser agrees to pay all expenses incurred
by the Trust except for interest, taxes, brokerage and other expenses incurred
in placing orders for the purchase and sale of securities and other investment
instruments, extraordinary expenses, distribution fees, investors services fees,
and expenses paid by the Trust under any distribution plan adopted pursuant to
Rule 12b-1 under the 1940 Act or investor services plan.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) PROPERLY REGISTERED. The Adviser is registered as an investment
adviser under the Advisers Act, and will remain so registered for the
duration of this Agreement.
5
The Adviser is not prohibited by the Advisers Act or the 1940 Act from
performing the services contemplated by this Agreement, and to the best
knowledge of the Adviser, there is no proceeding or investigation that is
reasonably likely to result in the Adviser being prohibited from performing
the services contemplated by this Agreement. The Adviser agrees to promptly
notify the Trust of the occurrence of any event that would disqualify the
Adviser from serving as an investment adviser to an investment company. The
Adviser is in compliance in all material respects with all applicable
federal and state law in connection with its investment management
operations.
(b) ADV DISCLOSURE. The Adviser has provided the Trust with a copy of
its Form ADV as most recently filed with the Commission and will, promptly
after filing any amendment to its Form ADV with the Commission, furnish a
copy of such amendment(s) to the Trust. The information contained in the
Adviser's Form ADV is accurate and complete in all material respects and
does not omit to state any material fact necessary in order to make the
statements made, in light of the circumstances under which they were made,
not misleading.
(c) FUND DISCLOSURE DOCUMENTS. The Adviser has reviewed and will in
the future review, the Registration Statement, and any amendments or
supplements thereto, the annual or semi-annual reports to shareholders,
other reports filed with the Commission and any marketing material of the
Funds (collectively the "Disclosure Documents") and represents and warrants
that with respect to disclosure about the Adviser, the manner in which the
Adviser manages the Funds or information relating directly or indirectly to
the Adviser, such Disclosure Documents contain or will contain, as of the
date thereof, no untrue statement of any material fact and does not omit
any statement of material fact which was required to be stated therein or
necessary to make the statements contained therein not misleading.
(d) USE OF THE NAME "RYDEX". The Adviser has the right to use the name
"Rydex" in connection with its services to the Trust and that, subject to
the terms set forth in Section 8 of this Agreement, the Trust shall have
the right to use the name "Rydex" in connection with the management and
operation of the Funds. The Adviser is not aware of any threatened or
existing actions, claims, litigation or proceedings that would adversely
effect or prejudice the rights of the Adviser or the Trust to use the name
"Rydex".
(e) INSURANCE. The Adviser maintains errors and omissions insurance
coverage in an appropriate amount and shall provide prior written notice to
the Trust (i) of any material changes in its insurance policies or
insurance coverage; or (ii) if any material claims will be made on its
insurance policies. Furthermore, the Adviser shall upon reasonable request
provide the Trust with any information it may reasonably require concerning
the amount of or scope of such insurance.
(f) NO DETRIMENTAL AGREEMENT. The Adviser represents and warrants that
it has no arrangement or understanding with any party, other than the
Trust, that would
6
influence the decision of the Adviser with respect to its selection of
securities for a Fund, and that all selections shall be done in accordance
with what is in the best interest of the Fund.
(g) CONFLICTS. The Adviser shall act honestly, in good faith and in
the best interests of the Trust including requiring any of its personnel
with knowledge of Fund activities to place the interest of the Funds first,
ahead of their own interests, in all personal trading scenarios that may
involve a conflict of interest with the Funds, consistent with its
fiduciary duties under applicable law.
(h) REPRESENTATIONS. The representations and warranties in this
Section 7 shall be deemed to be made on the date this Agreement is executed
and at the time of delivery of the quarterly compliance report required by
Section 3(a), whether or not specifically referenced in such report.
8. THE NAME "RYDEX". The Adviser grants to the Trust a sublicense to use
the name "Rydex" (the "Name") as part of the name of any Fund. The foregoing
authorization by the Adviser to the Trust to use the Name as part of the name of
any Fund is not exclusive of the right of the Adviser itself to use, or to
authorize others to use, the Name; the Trust acknowledges and agrees that, as
between the Trust and the Adviser, the Adviser has the right to use, or
authorize others to use, the Name. The Trust shall (1) only use the Name in a
manner consistent with uses approved by the Adviser; (2) use its best efforts to
maintain the quality of the services offered using the Name; (3) adhere to such
other specific quality control standards as the Adviser may from time to time
promulgate. At the request of the Adviser, the Trust will (a) submit to Adviser
representative samples of any promotional materials using the Name; and (b)
change the name of any Fund within three months of its receipt of the Adviser's
request, or such other shorter time period as may be required under the terms of
a settlement agreement or court order, so as to eliminate all reference to the
Name and will not thereafter transact any business using the Name in the name of
any Fund; provided, however, that the Trust may continue to use beyond such date
any supplies of prospectuses, marketing materials and similar documents that the
Trust had on the date of such name change in quantities not exceeding those
historically produced and used in connection with such Fund.
9. ADVISER'S COMPENSATION. The Funds shall pay to the Adviser, as
compensation for the Adviser's services hereunder, a fee, determined as
described in Schedule A that is attached hereto and made a part hereof. Such fee
shall be computed daily and paid not less than monthly in arrears by the Funds.
The method for determining net assets of a Fund for purposes hereof shall
be the same as the method for determining net assets for purposes of
establishing the offering and redemption prices of Fund shares as described in
the Funds' prospectus(es). In the event of termination of this Agreement, the
fee provided in this Section shall be computed on the basis of the period ending
on the last business day on which this Agreement is in effect subject to a pro
rata adjustment based on the number of days elapsed in the current month as a
percentage of the total number of days in such month.
7
10. INDEPENDENT CONTRACTOR. In the performance of its duties hereunder, the
Adviser is and shall be an independent contractor and, unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Trust or any Fund in any way or otherwise
be deemed to be an agent of the Trust or any Fund. If any occasion should arise
in which the Adviser gives any advice to its clients concerning the shares of a
Fund, the Adviser will act solely as investment counsel for such clients and not
in any way on behalf of the Fund.
11. ASSIGNMENT AND AMENDMENTS. This Agreement shall automatically
terminate, without the payment of any penalty, in the event of its assignment
(as defined in section 2(a)(4) of the 1940 Act); provided that such termination
shall not relieve the Adviser of any liability incurred hereunder.
This Agreement may not be added to or changed orally and may not be
modified or rescinded except by a writing signed by the parties hereto and in
accordance with the 1940 Act, when applicable.
12. DURATION AND TERMINATION.
(a) This Agreement shall become effective as of the date executed and
shall remain in full force and effect continually thereafter, subject to
renewal as provided in Section 12(d) and unless terminated automatically as
set forth in Section 11 hereof or until terminated as follows:
(b) The Trust may cause this Agreement to terminate either (i) by vote
of its Board or (ii) with respect to any Fund, upon the affirmative vote of
a majority of the outstanding voting securities of the Fund; or
(c) The Adviser may at any time terminate this Agreement by not more
than sixty (60) days' nor less than thirty (30) days' written notice
delivered or mailed by registered mail, postage prepaid, to the Trust; or
(d) This Agreement shall automatically terminate two years from the
date of its execution unless its renewal is specifically approved at least
annually thereafter by (i) a majority vote of the Trustees, including a
majority vote of such Trustees who are not interested persons of the Trust
or the Adviser, at a meeting called for the purpose of voting on such
approval; or (ii) the vote of a majority of the outstanding voting
securities of each Fund; provided, however, that if the continuance of this
Agreement is submitted to the shareholders of the Funds for their approval
and such shareholders fail to approve such continuance of this Agreement as
provided herein, the Adviser may continue to serve hereunder as to the
Funds in a manner consistent with the 1940 Act and the rules and
regulations thereunder; and
Termination of this Agreement pursuant to this Section shall be without
payment of any penalty.
8
In the event of termination of this Agreement for any reason, the Adviser
shall, immediately upon notice of termination or on such later date as may be
specified in such notice, cease all activity on behalf of the Funds and with
respect to any of their assets, except as otherwise required by any fiduciary
duties of the Adviser under applicable law. In addition, the Adviser shall
deliver the Fund Books and Records to the Trust by such means and in accordance
with such schedule as the Trust shall direct and shall otherwise cooperate, as
reasonably directed by the Trust, in the transition of portfolio asset
management to any successor of the Adviser.
13. CERTAIN DEFINITIONS. For the purposes of this Agreement:
(a) "Affirmative vote of a majority of the outstanding voting
securities of the Fund" shall have the meaning as set forth in the 1940
Act, subject, however, to such exemptions as may be granted by the
Commission under the 1940 Act or any interpretations of the Commission
staff.
(b) "Interested persons" and "Assignment" shall have their respective
meanings as set forth in the 1940 Act, subject, however, to such exemptions
as may be granted by the Commission under the 1940 Act or any
interpretations of the Commission staff.
14. LIABILITY OF THE ADVISER. The Adviser shall indemnify and hold harmless
the Trust and all affiliated persons thereof (within the meaning of Section
2(a)(3) of the 1940 Act) and all controlling persons (as described in Section 15
of the 1933 Act) (collectively, the "Adviser Indemnitees") against any and all
losses, claims, damages, liabilities or litigation (including reasonable legal
and other expenses) by reason of or arising out of: (a) the Adviser being in
material violation of any applicable federal or state law, rule or regulation or
any investment policy or restriction set forth in the Funds' Registration
Statement or any written guidelines or instruction provided in writing by the
Board, (b) a Fund's failure to satisfy the diversification or source of income
requirements of Subchapter M of the Code, or (c) the Adviser's willful
misfeasance, bad faith or gross negligence generally in the performance of its
duties hereunder or its reckless disregard of its obligations and duties under
this Agreement.
15. ENFORCEABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms or provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
16. LIMITATION OF LIABILITY. The parties to this Agreement acknowledge and
agree that all litigation arising hereunder, whether direct or indirect, and of
any and every nature whatsoever shall be satisfied solely out of the assets of
the affected Fund and that no Trustee, officer or holder of shares of beneficial
interest of the Fund shall be personally liable for any of the foregoing
liabilities. The Trust's Certificate of Trust, as amended from time to time, is
on file in the Office of the Secretary of State of the State of Delaware. Such
Certificate of Trust and
9
the Trust's Declaration of Trust describe in detail the respective
responsibilities and limitations on liability of the Trustees, officers, and
holders of shares of beneficial interest.
17. JURISDICTION. This Agreement shall be governed by and construed in
accordance with the substantive laws of state of Delaware and the Adviser
consents to the jurisdiction of courts, both state and federal, in Delaware,
with respect to any dispute under this Agreement.
18. PARAGRAPH HEADINGS. The headings of paragraphs contained in this
Agreement are provided for convenience only, form no part of this Agreement and
shall not affect its construction.
19. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
signed on their behalf by their duly authorized officers as of the date first
above written.
RYDEX VARIABLE TRUST, on behalf of each
Fund listed on Schedule A
By:
-----------------------------------
Name: Carl G. Verboncoeur
Title: President
PADCO ADVISORS, INC.
By:
------------------------------------
Name: Carl G. Verboncoeur
Title: Chief Executive Officer
11
SCHEDULE A
TO THE
ADVISORY AGREEMENT
DATED _____, 2007 BETWEEN
RYDEX VARIABLE TRUST
AND
PADCO ADVISORS II, INC.
The Trust will pay to the Adviser as compensation for the Adviser's services
rendered, a fee, computed daily at an annual rate based on the average daily net
assets of the respective Fund in accordance the following fee schedule:
FUND RATE
---- ----
Absolute Strategies Fund ................ 1.15%
Hedged Equity Fund ...................... 1.15%
Market Neutral Fund ..................... 1.15%
A-1
APPENDIX G
INVESTMENT SUB-ADVISORY AGREEMENT
AGREEMENT made this __th day of __________, 2007, by and between PADCO
Advisors II, Inc., d/b/a Rydex Investments, a Maryland corporation (the
"Adviser"), and CLS Investment Firm, LLC, a Nebraska limited liability company
(the "Sub-Adviser").
WHEREAS, Rydex Variable Trust, a Delaware statutory trust (the "Trust") is
an open-end management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Adviser has entered into an Investment Advisory Agreement
dated __________, 2007, as amended (the "Advisory Agreement") with the Trust,
pursuant to which the Adviser will act as the investment adviser to the separate
series of the Trust set forth therein; and
WHEREAS, the Adviser, with the approval of the Trust, desires to retain the
Sub-Adviser as its agent to furnish sub-investment advisory services to the
Adviser in connection with the management of the separate series of the Trust
set forth on SCHEDULE A of this Investment Sub-Advisory Agreement (each a "Fund"
and together, the "Funds"), and the Sub-Adviser is willing to render such
sub-investment advisory services.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. APPOINTMENT. The Adviser hereby appoints the Sub-Adviser to provide
certain sub-investment advisory services to each Fund for the period and on the
terms set forth in this Agreement (the "Sub-Advisory Agreement"). The
Sub-Adviser hereby accepts such appointment and agrees to furnish the services
herein set forth for the compensation herein provided.
2. DELIVERY OF DOCUMENTS. The Sub-Adviser hereby acknowledges receipt of
properly certified or authenticated copies of each of the following:
(a) The Trust's Declaration of Trust and all amendments thereto or
restatements thereof (such Declaration, as presently in effect
and as it shall from time to time be amended or restated, is
herein called the "Declaration of Trust");
(b) The Trust's By-Laws and amendments thereto;
(c) Resolutions of the Trust's Board of Trustees authorizing the
appointment of the Sub-Adviser and approving this Agreement;
(d) The Trust's Notification of Registration on Form N-8A under the
1940 Act as filed with the U.S. Securities and Exchange
Commission (the "SEC") and all amendments thereto;
(e) The Trust's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended (the "1933 Act") and under the
1940 Act as filed
with the SEC and all amendments thereto insofar as such
Registration Statement and such amendments relate to each Fund;
and
(f) The Trust's most recent prospectus and Statement of Additional
Information for each Fund (such prospectus and Statement of
Additional Information, as presently in effect, and all
amendments and supplements thereto are herein collectively called
the "Prospectus").
The Adviser will furnish the Sub-Adviser from time to time with copies
of all amendments of or supplements to the foregoing.
3. MANAGEMENT. Subject always to the supervision of the Trust's Board of
Trustees and the Adviser, the Sub-Adviser will furnish, direct, and administer
an investment program in respect of, and make investment and reinvestment
decisions for, all assets of each Fund and place all orders for the purchase and
sale of securities, all on behalf of each Fund. In the performance of its
duties, the Sub-Adviser will satisfy its fiduciary duties to each Fund, and will
monitor each Fund's investments, and will comply with the provisions of the
Trust's Declaration of Trust and By-Laws, as amended from time to time, any
policies or restrictions imposed by the Adviser and/or the Trust, and the stated
investment objectives, policies and restrictions of each Fund as provided in
each Fund's prospectus and statement of additional information, as amended from
time to time. The Sub-Adviser and the Adviser will each make its officers and
employees available to the other from time to time at reasonable times to review
investment policies of each Fund and to consult with each other regarding the
investment affairs of each Fund. The Sub-Adviser shall also make itself
reasonably available to the Board of Trustees at such times as the Board of
Trustees shall request.
The Sub-Adviser represents and warrants that it is in compliance with all
applicable rules and regulations of the SEC pertaining to its investment
advisory activities and agrees that it:
(a) will use the same skill and care in providing such services as it
uses in providing services to fiduciary accounts for which it has
investment responsibilities;
(b) will conform with all applicable rules and regulations of the SEC
pertaining to its investment advisory activities;
(c) will place orders pursuant to its investment determinations for
each Fund either directly with the issuer or with any broker or
dealer. In placing orders with brokers or dealers, the
Sub-Adviser will attempt to obtain the best combination of prompt
execution of orders in an effective manner and at the most
favorable price consistent with its "best execution" obligation.
Consistent with this obligation, when the execution and price
offered by two or more brokers or dealers are comparable, the
Sub-Adviser may, in its discretion, purchase and sell portfolio
securities to and from brokers and dealers who provide the
Sub-Adviser with research advice and other services (as those
terms are defined in Section 28(e) of the Securities Act of
1934). In no instance will portfolio securities be purchased from
or
2
sold to the Adviser, the Sub-Adviser, Rydex Distributors, Inc. or
any affiliated person of either the Trust, the Adviser, the
Sub-Adviser or Rydex Distributors, Inc., except as may be
permitted under the 1940 Act;
(d) will report regularly to the Adviser and will make appropriate
persons available for the purpose of reviewing at reasonable
times with representatives of the Adviser and the Board of
Trustees the management of each Fund, including, without
limitation, review of the general investment strategy of each
Fund, the performance of each Fund in relation to standard
industry indices, interest rate considerations and general
conditions affecting the marketplace and will provide various
other reports from time to time as reasonably requested by the
Adviser;
(e) will maintain books and records required to be maintained by Rule
31a-3 under the 1940 Act with respect to the Trust's securities
transactions and will furnish the Adviser and the Trust's Board
of Trustees such periodic and special reports as the Board of
Trustees or the Adviser may request;
(f) will act upon instructions from the Adviser not inconsistent with
the fiduciary duties hereunder; and
(g) will treat confidentially and as proprietary information of the
Trust all such records and other information relative to the
Trust maintained by the Sub-Adviser, and will not use such
records and information for any purpose other than performance of
its responsibilities and duties hereunder, except after prior
notification to and approval in writing by the Trust, which
approval shall not be unreasonably withheld and may not be
withheld where the Sub-Adviser may be exposed to civil or
criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted
authorities, or when so requested by the Trust.
4. PROXY VOTING; CORPORATE ACTIONS. The Sub-Adviser shall execute and
deliver, or cause its nominee to execute and deliver, all proxy votes, notices
of meetings and other notices affecting or relating to the securities of each
Fund during the term of this Sub-Advisory Agreement. The Sub-Adviser shall
maintain and preserve written proxy voting procedures, and shall provide a copy
of such voting procedures, along with a record of its actual proxy votes
relating to the securities of each Fund, to the Adviser or the Trust upon
request. The Adviser and Sub-Adviser understand that the Funds may pursue their
investment objectives by investing in other investment companies that are not
affiliated "underlying funds" and specific proxy rules are applicable under the
1940 Act to this type of relationship. In particular, the Sub-Adviser will vote
all proxies received from the underlying funds in the same proportion that all
shares of the underlying funds are voted, or in accordance with instructions
received from Fund shareholders, pursuant to Section 12(d)(1)(F) of the 1940
Act. Beginning July 1, 2003, the Sub-Adviser shall maintain records regarding
proxy voting on behalf of the Funds in order that the Funds may complete the
annual Form N-PX filing.
3
5. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Sub-Adviser hereby agrees that all records which it
maintains for each Fund, on behalf of the Trust are the property of the Trust
and further agrees to surrender promptly to the Trust any of such records upon
the Trust's request. The Sub-Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the records required to be
maintained by Rule 31a-1 under the 1940 Act.
6. EXPENSES. During the term of this Agreement, the Sub-Adviser will pay
all expenses incurred by it in connection with its activities under this
Sub-Advisory Agreement.
7. COMPENSATION. For the services to be provided by the Sub-Adviser
pursuant to this Agreement, the Adviser will pay the Sub-Adviser, and the
Sub-Adviser agrees to accept as full compensation therefor, a sub-advisory fee
paid at the rate specified on SCHEDULE A, which is attached hereto and made part
of this Agreement. The fee will be calculated based on the average daily net
asset value of the assets under the Sub-Adviser's management. This fee will be
paid at least quarterly. Except as may otherwise be prohibited by law or
regulation (including any then current SEC staff interpretation), the
Sub-Adviser may, in its discretion and from time to time, waive a portion of its
fee. The Sub-Adviser shall not be responsible for expenses and costs of a Fund's
operations payable by a Fund or the Adviser.
8. SERVICES TO OTHERS. The Adviser understands, and has advised the Trust's
Board of Trustees, that the Sub-Adviser now acts, and may in the future act, as
an investment adviser and fiduciary to other managed accounts, and as investment
adviser, sub-investment adviser, and/or administrator to other investment
companies. The Adviser has no objection to the Sub-Adviser's acting in such
capacities, provided that the Sub-Adviser furnishes adequate disclosure of such
possible conflicts of interest and implements procedures designed to mitigate or
eliminate such conflicts. For example, whenever a Fund and one or more other
investment companies advised by the Sub-Adviser have available funds for
investment, investments suitable and appropriate for each will be allocated in
accordance with a formula believed by the Sub-Adviser to be equitable to each
company. The Adviser recognizes, and has advised the Trust's Board of Trustees,
that in some cases the Sub-Adviser's procedures may adversely affect the size of
the position that each Fund may obtain in a particular security. In addition,
the Adviser understands, and has advised the Trust's Board of Trustees, that the
persons employed by the Sub-Adviser to assist in the Sub-Adviser's duties under
this Sub-Advisory Agreement will not devote their full time to such service and
nothing contained in this Sub-Advisory Agreement will be deemed to limit or
restrict the right of the Sub-Adviser or any of its affiliates to engage in and
devote time and attention to other businesses or to render services of whatever
kind or nature.
9. STANDARD OF CARE. Each of the Adviser and Sub-Adviser shall discharge
its duties under this Sub-Advisory Agreement with the care, skill, prudence and
diligence under the circumstances then prevailing that a prudent person acting
in a like capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims. The parties recognize that
the opinions, recommendations and actions of the Sub-Adviser will be based on
advice and information deemed to be reliable but not guaranteed by or to the
Sub-Adviser.
4
10. INDEMNIFICATION. Each of the Adviser and Sub-Adviser agrees to
indemnify each other against any claim, loss or liability (including reasonable
attorney's fees) arising as a result of the failure to meet the standard of care
set forth in the first sentence of Paragraph 9 hereof. Notwithstanding the
generality of the foregoing, the Adviser and Sub-Adviser each further agrees to
indemnify each other against any claim, loss or liability (including reasonable
attorney's fees) arising or as a result of willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of reckless
disregard of its obligation and duties hereunder. The federal securities laws
impose liabilities under certain circumstances on persons who act in good faith,
and therefore nothing herein shall in any way constitute a waiver or limitation
of any rights which each party may have against the other under any federal
securities laws based on negligence and which cannot be modified in advance by
contract.
11. DURATION AND TERMINATION. This Sub-Advisory Agreement will become
effective as of the date hereof provided that it has been approved by vote of a
majority of the outstanding voting securities of each Fund in accordance with
the requirements under the 1940 Act, and, unless sooner terminated as provided
herein, will continue in effect for two years.
Thereafter, if not terminated, this Sub-Advisory Agreement will continue in
effect for each Fund for successive periods of 12 months, each ending on the day
preceding the anniversary of the Sub-Advisory Agreement's effective date of each
year, provided that such continuation is specifically approved at least annually
(a) by the vote of a majority of those members of the Trust's Board of Trustees
who are not interested persons of the Trust, the Sub-Adviser, or the Adviser,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the vote of a majority of the Trust's Board of Trustees or by the
vote of a majority of all votes attributable to the outstanding shares of each
Fund. Notwithstanding the foregoing, this Sub-Advisory Agreement may be
terminated as to each Fund at any time, without the payment of any penalty, on
sixty (60) days' written notice by the Adviser or by the Sub-Adviser. This
Sub-Advisory Agreement will immediately terminate in the event of its
assignment. (As used in this Sub-Advisory Agreement, the terms "majority of the
outstanding voting securities," "interested persons" and "assignment" have the
same meaning of such terms ascribed in the 1940 Act.)
This Agreement will terminate automatically if the investment advisory
agreement between the Trust and the Adviser is terminated.
12. AMENDMENT OF THIS AGREEMENT. No provision of this Sub-Advisory
Agreement may be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
13. MULTIPLE ORIGINALS. This Sub-Advisory Agreement may be executed in two
or more counterparts, each of which when so executed shall be deemed to be an
original, but such counterparts shall together constitute but one and the same
document.
14. CUSTODY. All securities and other assets of each Fund shall be
maintained with a custodian designated by the Adviser. The Sub-Adviser shall
have no responsibility or liability with respect to any custodial function.
5
15. MISCELLANEOUS. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement is held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement will not be affected
thereby. This Agreement will be binding upon and shall inure to the benefit of
the parties hereto and will be governed by the internal laws of the state of
Delaware. The Sub-Adviser shall notify the Adviser of any changes in its
officers and directors within a reasonable time.
16. LIMITATION OF LIABILITY. The names "Rydex Variable Trust" and "Trustees
of the Rydex Variable Trust" refer respectively to the Trust created by, and the
Trustees, as trustees but not individually or personally, acting from time to
time under, the Declaration of Trust, to which reference is hereby made and a
copy of which is on file at the office of the Secretary of State of the State of
Delaware and elsewhere as required by law, and to any and all amendments thereto
so filed or hereafter filed. The obligations of the Trust entered in the name or
on behalf thereof by any of the Trustees, representatives or agents are made not
individually but only in such capacities and are not binding upon any of the
Trustees, shareholders or representatives of the Trust personally, but bind only
the assets of the Trust. Persons dealing with each Fund must look solely to the
assets of the Trust belonging to each Fund for the enforcement of any claims
against the Trust.
6
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PADCO ADVISORS II, INC.
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
CLS INVESTMENT FIRM, LLC
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
7
SCHEDULE A
TO THE
INVESTMENT SUB-ADVISORY AGREEMENT
DATED ____, 2007
BETWEEN
PADCO ADVISORS II, INC.
AND
CLS INVESTMENT FIRM, LLC
Pursuant to Section 7 of this Investment Sub-Advisory Agreement, the Adviser
shall pay the Sub-Adviser compensation at an annual rate as follows:
Amerigo Fund: 0.40%
Clermont Fund: 0.40%
Berolina Fund: 0.40%
Should either of the aforementioned Funds not average $10,000,000 in assets over
a quarter, the Sub-Adviser will not receive compensation for assets in that Fund
for that specific quarter.
8
APPENDIX H
ADVISORY AGREEMENT
ADVISORY AGREEMENT made as of this __th day of __________, 2007 by and
between RYDEX ETF TRUST (the "Trust"), a Delaware statutory trust registered as
an investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), and PADCO ADVISORS II, INC., a Maryland corporation with its
principal place of business at 9601 Blackwell Road, Suite 500, Rockville,
Maryland 20850 (the "Adviser").
W I T N E S S E T H
WHEREAS, the Board of Trustees (the "Board") of the Trust has selected the
Adviser to act as investment adviser to the Trust on behalf of the series set
forth on Schedule A to this Agreement (each a "Fund" and, collectively, the
"Funds"), as such Schedule may be amended from time to time upon mutual
agreement of the parties, and to provide certain related services, as more fully
set forth below, and to perform such services under the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits set
forth herein, the Trust and the Adviser do hereby agree as follows:
1. THE ADVISER'S SERVICES.
(a) DISCRETIONARY INVESTMENT MANAGEMENT SERVICES. The Adviser shall
act as investment adviser with respect to the Funds. In such capacity, the
Adviser shall, subject to the supervision of the Board, regularly provide
the Funds with investment research, advice and supervision and shall
furnish continuously an investment program for the Funds, consistent with
the respective investment objectives and policies of each Fund. The Adviser
shall determine, from time to time, what securities shall be purchased for
the Funds, what securities shall be held or sold by the Funds and what
portion of the Funds' assets shall be held uninvested in cash, subject
always to the provisions of the Trust's Agreement and Declaration of Trust,
By-Laws and its registration statement on Form N-1A (the "Registration
Statement") under the 1940 Act, and under the Securities Act of 1933, as
amended (the "1933 Act"), covering Fund shares, as filed with the U.S.
Securities and Exchange Commission (the "Commission"), and to the
investment objectives, policies and restrictions of the Funds, as each of
the same shall be from time to time in effect. To carry out such
obligations, the Adviser shall exercise full discretion and act for the
Funds in the same manner and with the same force and effect as the Funds
themselves might or could do with respect to purchases, sales or other
transactions, as well as with respect to all other such things necessary or
incidental to the furtherance or conduct of such purchases, sales or other
transactions. No reference in this Agreement to the Adviser having full
discretionary authority over each Fund's investments shall in any way limit
the right of the Board, in its sole discretion, to establish or revise
policies in connection with the management of a Fund's assets or to
otherwise exercise its right to control the overall management of a Fund.
1
(b) COMPLIANCE. The Adviser agrees to comply with the requirements of
the 1940 Act, the Investment Advisers Act of 1940 (the "Advisers Act"), the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"),
the Commodity Exchange Act and the respective rules and regulations
thereunder, as applicable, as well as with all other applicable federal and
state laws, rules, regulations and case law that relate to the services and
relationships described hereunder and to the conduct of its business as a
registered investment adviser. The Adviser also agrees to comply with the
objectives, policies and restrictions set forth in the Registration
Statement, as amended or supplemented, of the Funds, and with any policies,
guidelines, instructions and procedures approved by the Board and provided
to the Adviser. In selecting each Fund's portfolio securities and
performing the Adviser's obligations hereunder, the Adviser shall cause the
Fund to comply with the diversification and source of income requirements
of Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company. The Adviser
shall maintain compliance procedures that it reasonably believes are
adequate to ensure its compliance with the foregoing. No supervisory
activity undertaken by the Board shall limit the Adviser's full
responsibility for any of the foregoing.
(c) PROXY VOTING. The Board has the authority to determine how proxies
with respect to securities that are held by the Funds shall be voted, and
the Board has initially determined to delegate the authority and
responsibility to vote proxies for the Funds' securities to the Adviser. So
long as proxy voting authority for the Funds has been delegated to the
Adviser, the Adviser shall exercise its proxy voting responsibilities. The
Adviser shall carry out such responsibility in accordance with any
instructions that the Board shall provide from time to time, and at all
times in a manner consistent with Rule 206(4)-6 under the Advisers Act and
its fiduciary responsibilities to the Trust. The Adviser shall provide
periodic reports and keep records relating to proxy voting as the Board may
reasonably request or as may be necessary for the Funds to comply with the
1940 Act and other applicable law. Any such delegation of proxy voting
responsibility to the Adviser may be revoked or modified by the Board at
any time.
(d) RECORDKEEPING. The Adviser shall not be responsible for the
provision of administrative, bookkeeping or accounting services to the
Funds, except as otherwise provided herein or as may be necessary for the
Adviser to supply to the Trust or its Board the information required to be
supplied under this Agreement.
The Adviser shall maintain separate books and detailed records of all
matters pertaining to Fund assets advised by the Adviser required by Rule
31a-1 under the 1940 Act (other than those records being maintained by any
administrator, custodian or transfer agent appointed by the Funds) relating
to its responsibilities provided hereunder with respect to the Funds, and
shall preserve such records for the periods and in a manner prescribed
therefore by Rule 31a-2 under the 1940 Act (the "Fund Books and Records").
The Fund Books and Records shall be available to the Board at any time upon
request, shall be delivered to the Trust upon the termination of this
Agreement and shall be available without delay during any day the Trust is
open for business.
2
(e) HOLDINGS INFORMATION AND PRICING. The Adviser shall provide
regular reports regarding Fund holdings, and shall, on its own initiative,
furnish the Trust and its Board from time to time with whatever information
the Adviser believes is appropriate for this purpose. The Adviser agrees to
immediately notify the Trust if the Adviser reasonably believes that the
value of any security held by a Fund may not reflect fair value. The
Adviser agrees to provide any pricing information of which the Adviser is
aware to the Trust, its Board and/or any Fund pricing agent to assist in
the determination of the fair value of any Fund holdings for which market
quotations are not readily available or as otherwise required in accordance
with the 1940 Act or the Trust's valuation procedures for the purpose of
calculating the Fund net asset value in accordance with procedures and
methods established by the Board.
(f) COOPERATION WITH AGENTS OF THE TRUST. The Adviser agrees to
cooperate with and provide reasonable assistance to the Trust, any Trust
custodian or foreign sub-custodians, any Trust pricing agents and all other
agents and representatives of the Trust, such information with respect to
the Funds as they may reasonably request from time to time in the
performance of their obligations, provide prompt responses to reasonable
requests made by such persons and establish appropriate interfaces with
each so as to promote the efficient exchange of information and compliance
with applicable laws and regulations.
2. CODE OF ETHICS. The Adviser has adopted a written code of ethics that it
reasonably believes complies with the requirements of Rule 17j-1 under the 1940
Act, which it will provide to the Trust. The Adviser shall ensure that its
Access Persons (as defined in the Adviser's Code of Ethics) comply in all
material respects with the Adviser's Code of Ethics, as in effect from time to
time. Upon request, the Adviser shall provide the Trust with a (i) a copy of the
Adviser's current Code of Ethics, as in effect from time to time, and (ii)
certification that it has adopted procedures reasonably necessary to prevent
Access Persons from engaging in any conduct prohibited by the Adviser's Code of
Ethics. Annually, the Adviser shall furnish a written report, which complies
with the requirements of Rule 17j-1, concerning the Adviser's Code of Ethics to
the Trust. The Adviser shall respond to requests for information from the Trust
as to violations of the Code of Ethics by Access Persons and the sanctions
imposed by the Adviser. The Adviser shall immediately notify the Trust of any
material violation of the Code of Ethics, whether or not such violation relates
to a security held by any Fund.
3. INFORMATION AND REPORTING. The Adviser shall provide the Trust and its
respective officers with such periodic reports concerning the obligations the
Adviser has assumed under this Agreement as the Trust may from time to time
reasonably request.
(a) NOTIFICATION OF BREACH / COMPLIANCE REPORTS. The Adviser shall
notify the Trust immediately upon detection of (i) any material failure to
manage any Fund in accordance with its investment objectives and policies
or any applicable law; or (ii) any material breach of the Funds' or the
Adviser's policies, guidelines or procedures. In addition, the Adviser
shall provide a quarterly report regarding each Fund's compliance with its
investment objectives and policies, applicable law, including, but not
limited to the 1940 Act and Subchapter M of the Code, and the Fund's
policies, guidelines or
3
procedures as applicable to the Adviser's obligations under this Agreement.
The Adviser agrees to correct any such failure promptly and to take any
action that the Board may reasonably request in connection with any such
breach. Upon request, the Adviser shall also provide the officers of the
Trust with supporting certifications in connection with such certifications
of Fund financial statements and disclosure controls pursuant to the
Sarbanes-Oxley Act. The Adviser will promptly notify the Trust in the event
(i) the Adviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board, or body, involving the affairs of the Trust (excluding
class action suits in which a Fund is a member of the plaintiff class by
reason of the Fund's ownership of shares in the defendant) or the
compliance by the Adviser with the federal or state securities laws or (ii)
an actual change in control of the Adviser resulting in an "assignment" (as
defined in the 1940 Act) has occurred or is otherwise proposed to occur.
(b) BOARD AND FILINGS INFORMATION. The Adviser will also provide the
Trust with any information reasonably requested regarding its management of
the Funds required for any meeting of the Board, or for any shareholder
report, amended registration statement, proxy statement, or prospectus
supplement to be filed by the Trust with the Commission. The Adviser will
make its officers and employees available to meet with the Board from time
to time on due notice to review its investment management services to the
Funds in light of current and prospective economic and market conditions
and shall furnish to the Board such information as may reasonably be
necessary in order for the Board to evaluate this Agreement or any proposed
amendments thereto.
(c) TRANSACTION INFORMATION. The Adviser shall furnish to the Trust
such information concerning portfolio transactions as may be necessary to
enable the Trust or its designated agent to perform such compliance testing
on the Funds and the Adviser's services as the Trust may, in its sole
discretion, determine to be appropriate. The provision of such information
by the Adviser to the Trust or its designated agent in no way relieves the
Adviser of its own responsibilities under this Agreement.
4. BROKERAGE.
(a) PRINCIPAL TRANSACTIONS. In connection with purchases or sales of
securities for the account of a Fund, neither the Adviser nor any of its
directors, officers or employees will act as a principal or agent or
receive any commission except as permitted by the 1940 Act.
(b) PLACEMENT OF ORDERS. The Adviser shall arrange for the placing of
all orders for the purchase and sale of securities for a Fund's account
with brokers or dealers selected by the Adviser. In the selection of such
brokers or dealers and the placing of such orders, the Adviser is directed
at all times to seek for the Fund the most favorable execution and net
price available under the circumstances. It is also understood that it is
desirable for the Fund that the Adviser have access to brokerage and
research services provided by brokers who may execute brokerage
transactions at a higher cost to the Fund
4
than may result when allocating brokerage to other brokers, consistent with
section 28(e) of the 1934 Act and any Commission staff interpretations
thereof. Therefore, the Adviser is authorized to place orders for the
purchase and sale of securities for a Fund with such brokers, subject to
review by the Board from time to time with respect to the extent and
continuation of this practice. It is understood that the services provided
by such brokers may be useful to the Adviser in connection with its or its
affiliates' services to other clients.
(c) AGGREGATED TRANSACTIONS. On occasions when the Adviser deems the
purchase or sale of a security to be in the best interest of a Fund as well
as other clients of the Adviser, the Adviser may, to the extent permitted
by applicable law and regulations, aggregate the order for securities to be
sold or purchased. In such event, the Adviser will allocate securities or
futures contracts so purchased or sold, as well as the expenses incurred in
the transaction, in the manner the Adviser reasonably considers to be
equitable and consistent with its fiduciary obligations to the Fund and to
such other clients under the circumstances.
(d) AFFILIATED BROKERS. The Adviser or any of its affiliates may act
as broker in connection with the purchase or sale of securities or other
investments for a Fund, subject to: (a) the requirement that the Adviser
seek to obtain best execution and price within the policy guidelines
determined by the Board and set forth in the Fund's current prospectus and
SAI; (b) the provisions of the 1940 Act; (c) the provisions of the Advisers
Act; (d) the provisions of the 1934 Act; and (e) other provisions of
applicable law. These brokerage services are not within the scope of the
duties of the Adviser under this Agreement. Subject to the requirements of
applicable law and any procedures adopted by the Board, the Adviser or its
affiliates may receive brokerage commissions, fees or other remuneration
from a Fund for these services in addition to the Adviser's fees for
services under this Agreement.
5. CUSTODY. Nothing in this Agreement shall permit the Adviser to take or
receive physical possession of cash, securities or other investments of a Fund.
6. ALLOCATION OF CHARGES AND EXPENSES. The Adviser will bear its own costs
of providing services hereunder. The Adviser agrees to pay all expenses incurred
by the Trust except for interest, taxes, brokerage and other expenses incurred
in placing orders for the purchase and sale of securities and other investment
instruments, extraordinary expenses, and distribution fees and expenses paid by
the Trust under any distribution plan adopted pursuant to Rule 12b-1 under the
1940 Act.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) PROPERLY REGISTERED. The Adviser is registered as an investment
adviser under the Advisers Act, and will remain so registered for the
duration of this Agreement. The Adviser is not prohibited by the Advisers
Act or the 1940 Act from performing the services contemplated by this
Agreement, and to the best knowledge of the Adviser, there is no proceeding
or investigation that is reasonably likely to result in the Adviser being
5
prohibited from performing the services contemplated by this Agreement. The
Adviser agrees to promptly notify the Trust of the occurrence of any event
that would disqualify the Adviser from serving as an investment adviser to
an investment company. The Adviser is in compliance in all material
respects with all applicable federal and state law in connection with its
investment management operations.
(b) ADV DISCLOSURE. The Adviser has provided the Trust with a copy of
its Form ADV as most recently filed with the Commission and will, promptly
after filing any amendment to its Form ADV with the Commission, furnish a
copy of such amendment(s) to the Trust. The information contained in the
Adviser's Form ADV is accurate and complete in all material respects and
does not omit to state any material fact necessary in order to make the
statements made, in light of the circumstances under which they were made,
not misleading.
(c) FUND DISCLOSURE DOCUMENTS. The Adviser has reviewed and will in
the future review, the Registration Statement, and any amendments or
supplements thereto, the annual or semi-annual reports to shareholders,
other reports filed with the Commission and any marketing material of the
Funds (collectively the "Disclosure Documents") and represents and warrants
that with respect to disclosure about the Adviser, the manner in which the
Adviser manages the Funds or information relating directly or indirectly to
the Adviser, such Disclosure Documents contain or will contain, as of the
date thereof, no untrue statement of any material fact and does not omit
any statement of material fact which was required to be stated therein or
necessary to make the statements contained therein not misleading.
(d) USE OF THE NAME "RYDEX". The Adviser has the right to use the name
"Rydex" in connection with its services to the Trust and that, subject to
the terms set forth in Section 8 of this Agreement, the Trust shall have
the right to use the name "Rydex" in connection with the management and
operation of the Funds. The Adviser is not aware of any threatened or
existing actions, claims, litigation or proceedings that would adversely
effect or prejudice the rights of the Adviser or the Trust to use the name
"Rydex".
(e) INSURANCE. The Adviser maintains errors and omissions insurance
coverage in an appropriate amount and shall provide prior written notice to
the Trust (i) of any material changes in its insurance policies or
insurance coverage; or (ii) if any material claims will be made on its
insurance policies. Furthermore, the Adviser shall upon reasonable request
provide the Trust with any information it may reasonably require concerning
the amount of or scope of such insurance.
(f) NO DETRIMENTAL AGREEMENT. The Adviser represents and warrants that
it has no arrangement or understanding with any party, other than the
Trust, that would influence the decision of the Adviser with respect to its
selection of securities for a Fund, and that all selections shall be done
in accordance with what is in the best interest of the Fund.
6
(g) CONFLICTS. The Adviser shall act honestly, in good faith and in
the best interests of the Trust including requiring any of its personnel
with knowledge of Fund activities to place the interest of the Funds first,
ahead of their own interests, in all personal trading scenarios that may
involve a conflict of interest with the Funds, consistent with its
fiduciary duties under applicable law.
(h) REPRESENTATIONS. The representations and warranties in this
Section 7 shall be deemed to be made on the date this Agreement is executed
and at the time of delivery of the quarterly compliance report required by
Section 3(a), whether or not specifically referenced in such report.
8. THE NAME "RYDEX". The Adviser grants to the Trust a sublicense to use
the name "Rydex" (the "Name") as part of the name of any Fund. The foregoing
authorization by the Adviser to the Trust to use the Name as part of the name of
any Fund is not exclusive of the right of the Adviser itself to use, or to
authorize others to use, the Name; the Trust acknowledges and agrees that, as
between the Trust and the Adviser, the Adviser has the right to use, or
authorize others to use, the Name. The Trust shall (1) only use the Name in a
manner consistent with uses approved by the Adviser; (2) use its best efforts to
maintain the quality of the services offered using the Name; (3) adhere to such
other specific quality control standards as the Adviser may from time to time
promulgate. At the request of the Adviser, the Trust will (a) submit to Adviser
representative samples of any promotional materials using the Name; and (b)
change the name of any Fund within three months of its receipt of the Adviser's
request, or such other shorter time period as may be required under the terms of
a settlement agreement or court order, so as to eliminate all reference to the
Name and will not thereafter transact any business using the Name in the name of
any Fund; provided, however, that the Trust may continue to use beyond such date
any supplies of prospectuses, marketing materials and similar documents that the
Trust had at the date of such name change in quantities not exceeding those
historically produced and used in connection with such Fund.
9. ADVISER'S COMPENSATION. The Funds shall pay to the Adviser, as
compensation for the Adviser's services hereunder, a fee, determined as
described in Schedule A that is attached hereto and made a part hereof. Such fee
shall be computed daily and paid not less than monthly in arrears by the Funds.
The method for determining net assets of a Fund for purposes hereof shall
be the same as the method for determining net assets for purposes of
establishing the offering and redemption prices of Fund shares as described in
the Funds' prospectus(es). In the event of termination of this Agreement, the
fee provided in this Section shall be computed on the basis of the period ending
on the last business day on which this Agreement is in effect subject to a pro
rata adjustment based on the number of days elapsed in the current month as a
percentage of the total number of days in such month.
10. INDEPENDENT CONTRACTOR. In the performance of its duties hereunder, the
Adviser is and shall be an independent contractor and, unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Trust or any Fund in any way or otherwise
be deemed to be an agent of the Trust or any Fund. If any
7
occasion should arise in which the Adviser gives any advice to its clients
concerning the shares of a Fund, the Adviser will act solely as investment
counsel for such clients and not in any way on behalf of the Fund.
11. ASSIGNMENT AND AMENDMENTS. This Agreement shall automatically
terminate, without the payment of any penalty, in the event of its assignment
(as defined in section 2(a)(4) of the 1940 Act); provided that such termination
shall not relieve the Adviser of any liability incurred hereunder.
This Agreement may not be added to or changed orally and may not be
modified or rescinded except by a writing signed by the parties hereto and in
accordance with the 1940 Act, when applicable.
12. DURATION AND TERMINATION.
(a) This Agreement shall become effective as of the date executed and
shall remain in full force and effect continually thereafter, subject to
renewal as provided in Section 12(d) and unless terminated automatically as
set forth in Section 11 hereof or until terminated as follows:
(b) The Trust may cause this Agreement to terminate either (i) by vote
of its Board or (ii) with respect to any Fund, upon the affirmative vote of
a majority of the outstanding voting securities of the Fund; or
(c) The Adviser may at any time terminate this Agreement by not more
than sixty (60) days' nor less than thirty (30) days' written notice
delivered or mailed by registered mail, postage prepaid, to the Trust; or
(d) This Agreement shall automatically terminate two years from the
date of its execution unless its renewal is specifically approved at least
annually thereafter by (i) a majority vote of the Trustees, including a
majority vote of such Trustees who are not interested persons of the Trust
or the Adviser, at a meeting called for the purpose of voting on such
approval; or (ii) the vote of a majority of the outstanding voting
securities of each Fund; provided, however, that if the continuance of this
Agreement is submitted to the shareholders of the Funds for their approval
and such shareholders fail to approve such continuance of this Agreement as
provided herein, the Adviser may continue to serve hereunder as to the
Funds in a manner consistent with the 1940 Act and the rules and
regulations thereunder; and
Termination of this Agreement pursuant to this Section shall be without
payment of any penalty.
In the event of termination of this Agreement for any reason, the Adviser
shall, immediately upon notice of termination or on such later date as may be
specified in such notice, cease all activity on behalf of the Funds and with
respect to any of their assets, except as otherwise required by any fiduciary
duties of the Adviser under applicable law. In addition, the
8
Adviser shall deliver the Fund Books and Records to the Trust by such means and
in accordance with such schedule as the Trust shall direct and shall otherwise
cooperate, as reasonably directed by the Trust, in the transition of portfolio
asset management to any successor of the Adviser.
13. CERTAIN DEFINITIONS. For the purposes of this Agreement:
(a) "Affirmative vote of a majority of the outstanding voting
securities of the Fund" shall have the meaning as set forth in the 1940
Act, subject, however, to such exemptions as may be granted by the
Commission under the 1940 Act or any interpretations of the Commission
staff.
(b) "Interested persons" and "Assignment" shall have their respective
meanings as set forth in the 1940 Act, subject, however, to such exemptions
as may be granted by the Commission under the 1940 Act or any
interpretations of the Commission staff.
14. LIABILITY OF THE ADVISER. The Adviser shall indemnify and hold harmless
the Trust and all affiliated persons thereof (within the meaning of Section
2(a)(3) of the 1940 Act) and all controlling persons (as described in Section 15
of the 1933 Act) (collectively, the "Adviser Indemnitees") against any and all
losses, claims, damages, liabilities or litigation (including reasonable legal
and other expenses) by reason of or arising out of: (a) the Adviser being in
material violation of any applicable federal or state law, rule or regulation or
any investment policy or restriction set forth in the Funds' Registration
Statement or any written guidelines or instruction provided in writing by the
Board, (b) a Fund's failure to satisfy the diversification or source of income
requirements of Subchapter M of the Code, or (c) the Adviser's willful
misfeasance, bad faith or gross negligence generally in the performance of its
duties hereunder or its reckless disregard of its obligations and duties under
this Agreement.
15. ENFORCEABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms or provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
16. LIMITATION OF LIABILITY. The parties to this Agreement acknowledge and
agree that all litigation arising hereunder, whether direct or indirect, and of
any and every nature whatsoever shall be satisfied solely out of the assets of
the affected Fund and that no Trustee, officer or holder of shares of beneficial
interest of the Fund shall be personally liable for any of the foregoing
liabilities. The Trust's Certificate of Trust, as amended from time to time, is
on file in the Office of the Secretary of State of the State of Delaware. Such
Certificate of Trust and the Trust's Agreement and Declaration of Trust describe
in detail the respective responsibilities and limitations on liability of the
Trustees, officers, and holders of shares of beneficial interest.
17. JURISDICTION. This Agreement shall be governed by and construed in
accordance with the substantive laws of state of Delaware and the Adviser
consents to the jurisdiction of courts, both state and/or federal, in Delaware,
with respect to any dispute under this Agreement.
9
18. PARAGRAPH HEADINGS. The headings of paragraphs contained in this
Agreement are provided for convenience only, form no part of this Agreement and
shall not affect its construction.
19. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
signed on their behalf by their duly authorized officers as of the date first
above written.
RYDEX ETF TRUST, on behalf of each
Fund listed on Schedule A
By:
-----------------------------------
Name: Carl G. Verboncoeur
Title: President
PADCO ADVISORS, INC.
By:
------------------------------------
Name: Carl G. Verboncoeur
Title: Chief Executive Officer
11
SCHEDULE A
TO THE
ADVISORY AGREEMENT
DATED ____, 2007 BETWEEN
RYDEX ETF TRUST
AND
PADCO ADVISORS II, INC.
The Trust will pay to the Adviser as compensation for the Adviser's services
rendered, a fee, computed daily at an annual rate based on the average daily net
assets of the respective Fund in accordance the following fee schedule:
--------------------------------------------------------------------------------
FUND RATE
--------------------------------------------------------------------------------
Rydex S&P Equal Weight ETF 0.40%
--------------------------------------------------------------------------------
Rydex Russell Top 50 ETF 0.20%
--------------------------------------------------------------------------------
Rydex S&P 500 Pure Growth ETF 0.35%
--------------------------------------------------------------------------------
Rydex S&P 500 Pure Value ETF 0.35%
--------------------------------------------------------------------------------
Rydex S&P MidCap 400 Pure Growth ETF 0.35%
--------------------------------------------------------------------------------
Rydex S&P MidCap 400 Pure Value ETF 0.35%
--------------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure Growth ETF 0.35%
--------------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure Value ETF 0.35%
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Consumer Discretionary ETF 0.50%
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Consumer Staples ETF 0.50%
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Energy ETF 0.50%
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Financial ETF 0.50%
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Health Care ETF 0.50%
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Industrial ETF 0.50%
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Materials ETF 0.50%
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Technology ETF 0.50%
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Utilities ETF 0.50%
--------------------------------------------------------------------------------
Rydex S&P 500 2x Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex Inverse S&P 500 Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex Inverse S&P 500 2x Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex S&P MidCap 400 2x Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex Inverse S&P MidCap 400 Straetgy ETF 0.70%
--------------------------------------------------------------------------------
Rydex Inverse S&P MidCap 400 2x Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex S&P SmallCap 600 2x Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex Inverse S&P SmallCap 600 Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex Inverse S&P SmallCap 600 2x Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex NASDAQ 100 2x Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex Inverse NASDAQ 100 Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex Inverse NASDAQ 100 2x Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex Russell 2000(R) 2x Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex Inverse Russell 2000(R) Strategy ETF 0.70%
--------------------------------------------------------------------------------
A-1
--------------------------------------------------------------------------------
FUND RATE
--------------------------------------------------------------------------------
Rydex Inverse Russell 2000(R) 2x Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex Russell 1000(R) 2x Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex Inverse Russell 1000(R) Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex Inverse Russell 1000(R) 2x Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex NASDAQ Biotech 2x Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex Inverse NASDAQ Biotech Strategy ETF 0.70%
--------------------------------------------------------------------------------
Rydex Inverse NASDAQ Biotech 2x Strategy ETF 0.70%
--------------------------------------------------------------------------------
A-2
RYDEX SERIES FUNDS
RYDEX DYNAMIC FUNDS
RYDEX VARIABLE TRUST
RYDEX ETF TRUST
[NAME OF FUNDS]
SPECIAL MEETING OF THE SHAREHOLDERS
PROXY SOLICITED BY THE BOARD OF TRUSTEES FOR
THE SPECIAL MEETING OF SHAREHOLDERS, TO BE HELD ON
OCTOBER 4, 2007
The undersigned hereby appoints Joanna Haigney, Nick Bonos and Mike Byrum, and
each of them individually, with power to act without the other and with the
right of substitution in each, the proxies of the undersigned to vote all shares
of the above-referenced Funds (the "Funds") held by the undersigned on August 6,
2007, at the Meeting, to be held at the offices of Rydex Investments, 9601
Blackwell Road, Suite 500, Rockville, MD 20850 at 4:30 p.m. Eastern Time and at
any adjournment(s) or postponement(s) thereof, with all powers the undersigned
would possess if present in person. All previous proxies given with respect to
the Meeting are revoked. The undersigned acknowledges receipt of the Notice of
Special Meeting and Proxy Statement dated __________, 2007.
Please refer to the Proxy Statement for a discussion of each of these matters.
As to any other matter, the Proxies shall vote in accordance with their best
judgment. THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR EACH OF THE FOLLOWING
PROPOSALS:
1. The approval of a new investment advisory agreement between Rydex Series
Funds and PADCO Advisors, Inc. (Rydex Series Funds: All Funds except the
Absolute Return Strategies Fund and Hedged Equity Fund):
____FOR ____AGAINST ____ABSTAIN
1(a). The approval of a new investment advisory agreement between Rydex Series
Funds and PADCO Advisors, Inc. (Rydex Series Funds: Absolute Return Strategies
Fund Hedged Equity Fund):
____FOR ____AGAINST ____ABSTAIN
2. The approval of a new investment advisory agreement between Rydex Dynamic
Funds and PADCO Advisors, Inc. (Rydex Dynamic Funds: All Funds):
____FOR ____AGAINST ____ABSTAIN
3. The approval of a new investment advisory agreement between Rydex Variable
Trust and PADCO Advisors II, Inc. (Rydex Variable Trust: All Funds except the
Absolute Return Strategies Fund and Hedged Equity Fund):
____FOR ____AGAINST ____ABSTAIN
3(a). The approval of a new investment advisory agreement between Rydex Variable
Trust and PADCO Advisors II, Inc. (Rydex Variable Trust: Absolute Return
Strategies Fund Hedged Equity Fund):
____FOR ____AGAINST ____ABSTAIN
3(b). The approval of a new investment sub-advisory agreement between PADCO
Advisors II, Inc. and CLS Investment Firm, LLC (Rydex Variable Trust: CLS
AdvisorOne Amerigo Fund, CLS AdvisorOne Clermont Fund, and CLS AdvisorOne
Berolina Fund):
____FOR ____AGAINST ____ABSTAIN
4. The approval of a new investment advisory agreement between Rydex ETF Trust
and PADCO Advisors II, Inc. (Rydex ETF Trust: All Funds):
____FOR ____AGAINST ____ABSTAIN
THIS PROXY WILL, WHEN PROPERLY EXECUTED, BE VOTED AS DIRECTED HEREIN BY THE
SIGNING SHAREHOLDER. IF NO DIRECTION IS GIVEN WHEN THE DULY EXECUTED PROXY IS
RETURNED, THIS PROXY WILL BE VOTED FOR THE FOREGOING PROPOSALS AND WILL BE VOTED
IN THE APPOINTED PROXIES' DISCRETION UPON SUCH OTHER BUSINESS AS MAY PROPERLY
COME BEFORE THE MEETING.
The undersigned acknowledges receipt with this proxy of a copy of the Notice of
Special Meeting and the proxy statement. Your signature(s) on this proxy should
be exactly as your name(s) appear on this proxy. If the shares are held jointly,
each holder should sign this proxy. Attorneys-in-fact, executors,
administrators, trustees or guardians should indicate the full title and
capacity in which they are signing.
Dated: _________________, 2007
--------------------------------
Signature of Shareholder
--------------------------------
Signature (Joint owners)
F-ii