Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave., N.W.
Washington, DC 20004
ASHLEY VROMAN-LEE
202.739.5914
avromanlee@morganlewis.com
April 16, 2009
VIA EDGAR CORRESPONDENCE
Ms. Kimberly Browning
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Re: RYDEX SERIES FUNDS (THE "TRUST") - N-14
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(FILE NO. 333-158016)
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Dear Ms. Browning:
This letter responds to your comments conveyed to us during a telephone
conference on April 3, 2009 relating to the Rydex Series Funds (the "Trust")
N-14 filed on March 16, 2009 (the "N-14"), in connection with the business
combination of the Trust's Hedged Equity Fund ("Acquired Fund") to the Trust's
Multi-Hedge Strategies Fund ("Surviving Fund") (the "Reorganization"). The
following summarizes your comments, and our response to those comments. Unless
otherwise noted, capitalized terms have the same meaning as contained in the
N-14.
PROSPECTUS
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1. COMMENT. The N-14 is a prospectus/information statement, not a proxy
statement/prospectus, therefore consider disclosing in the N-14 why no
shareholder vote is required.
RESPONSE. We have added the following disclosure to the second
paragraph of the N-14, explaining why no shareholder vote is necessary
(new language in bold):
"Shareholders of the Acquired Fund are not being asked to vote on the
Plan or approve the Reorganization. NEITHER DELAWARE LAW NOR THE
TRUST'S DECLARATION OF TRUST REQUIRES SHAREHOLDER APPROVAL OF THE
AGREEMENT AND PLAN OF REORGANIZATION."
2. COMMENT. Please confirm in the response letter that the Board of
Trustees of the Trust (the "Board") was advised of the legal
considerations of the reorganization and that a Rule 17a-8 analysis was
conducted and presented to the Board.
3. RESPONSE. At the February 26, 2009 Board of Trustees meeting of the
Trust, the Board was advised as to the structure of the Reorganization
and the legal considerations, including a Rule 17a-8 analysis,
pertaining to their consideration of the proposed Reorganization.
4. COMMENT. Disclose that shareholders have the ability to redeem shares
prior to the date of the reorganization, as well as the tax
implications arising from redeeming out of the Acquired Fund.
RESPONSE. We have added the following disclosure under the heading "The
Reorganization" (new language in bold):
"The Reorganization is intended to be tax-free for U.S. Federal income
tax purposes. This means that it is intended that shareholders of the
Acquired Fund will become shareholders of the Surviving Fund without
realizing any gain or loss for federal income tax purposes. This also
means that it is intended that the Reorganization will be tax-free for
the Surviving Fund. SHAREHOLDERS CAN CONTINUE TO REDEEM AND EXCHANGE
THEIR SHARES BEFORE THE EFFECTIVE TIME, WHICH MAY RESULT IN A TAXABLE
EVENT. EFFECTIVE ON OR ABOUT MAY 22, 2009, THE ACQUIRED FUND WILL BE
CLOSED TO NEW SHAREHOLDERS AND ADDITIONAL PURCHASES AND EXCHANGES INTO
THE FUND BY EXISTING SHAREHOLDERS."
5. COMMENT. Consider adding capitalization/asset sizes of the Funds, a
summation of fees each Fund pays, and if the fundamental and/or
non-fundamental policies are identical or different.
RESPONSE. We have added the following disclosure (new language in
bold):
"The reorganization will combine a smaller fund into a larger fund. AS
OF APRIL 1, 2009, THE ACQUIRED FUND HAD APPROXIMATELY $24.6 MILLION IN
ASSETS AND THE SURVIVING FUND HAD APPROXIMATELY $137.1 MILLION IN
ASSETS. THE MANAGEMENT FEE FOR BOTH FUNDS IS 1.15% AND EACH FUND PAYS A
DISTRIBUTION FEE OF 0.25%. THE FUNDAMENTAL AND NON-FUNDAMENTAL POLICIES
ARE IDENTICAL FOR BOTH FUNDS."
6. COMMENT. Consider adding headings to the fee table after each Fund
name, which would clarify for shareholders which Fund is the Acquired
Fund and which Fund is the Surviving Fund. Under the heading
"Information about the Reorganization," consider adding a heading to
the section about receiving dividends.
RESPONSE. We have added the headings as requested.
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7. COMMENT. The SEC staff position is that dividends on securities sold
short, are, for financial accounting purposes, an expense of the Fund.
Revise disclosure in footnote number five regarding Short Dividend
Expense to reflect that the dividend expense is an expense of the Fund.
RESPONSE. We have revised the disclosure as follows (new text appears
in bold):
"Short Dividend Expense occurs because the Fund short-sells an equity
security to gain the inverse exposure necessary to meet its investment
objective. WHEN THE FUND SELLS SHORT AN EQUITY THAT PAYS A DIVIDEND,
the Fund must pay out the dividend rate of the equity security to the
LENDER AND records this as an expense OF THE FUND AND REFLECTS THE
EXPENSE IN ITS FINANCIAL STATEMENTS. However, a dividend on a security
sold short generally HAS THE EFFECT OF REDUCING the market value of the
shorted security and thus increases the Fund's unrealized gain or
reduces the Fund's unrealized loss on its short sale transaction. Short
Dividend Expense is not a fee charged to the shareholder by the Advisor
or other service provider. Rather it is more similar to the transaction
costs or capital expenditures associated with the day-to-day management
of any mutual fund. If these costs had been treated as transaction
costs or capital items rather than as expenses, the expense ratio for
the Hedged Equity Fund would have equaled 1.46% for H-Class Shares,
1.47% for A-Class Shares, and 2.21% for C-Class Shares. The expense
ratio for the Multi-Hedge Strategies Fund would have equaled 1.45% for
H-Class Shares, 1.46% for A-Class Shares, and 2.21% for C-Class Shares.
8. COMMENT. Consider adding a line item in the fee table, which shows
which expenses of the Fund are contractually waived through an advisory
agreement with the Advisor.
RESPONSE. No expenses of the Fund are being waived. The fees presented
in the fee table are the only fees each Fund pays, as the Fund incurs
no additional expenses. Footnote four states that 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.
9. COMMENT. Under the "Example," confirm the numbers disclosed are
accurate.
RESPONSE. We have confirmed that the numbers provided in the example
are accurate.
10. COMMENT. Under the heading, "Information about the Reorganization," the
disclosure states that the Reorganization may be terminated at any time
prior to the Effective Time. Confirm and disclose that the
Reorganization may also be amended at any time prior to the Effective
Time.
RESPONSE. We have confirmed the Reorganization may be amended prior to
the Effective Time and have added the following disclosure (new text
appears in bold):
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"The Reorganization may be AMENDED OR terminated at any time prior to
the Effective Time;"
11. COMMENT. Under the heading "Reasons for Reorganization," disclosed are
a list of factors that the Board considered in deciding whether to
approve the Reorganization, including that the management fee with
respect to the Acquired Fund is identical to the management fee of the
Surviving Fund. Consider disclosing whether the Board looked at other
fees besides the management fee.
RESPONSE. In addition to considering whether the management fee was the
same for both Funds, the Board also considered the distribution fees
that the Funds pay, which are identical. We have added the following
disclosure (new text appears in bold):
"...that the management fee AND DISTRIBUTION FEE with respect to the
Acquired Fund is identical to that of the Surviving Fund..."
12. COMMENT. Disclose whether any portfolio securities have been identified
for sale.
RESPONSE. We have confirmed that no portfolio securities have been
identified for sale.
***
I hereby acknowledge on behalf of the Rydex Series Funds (the "Trust") that: (i)
the Trust is responsible for the adequacy and accuracy of the disclosure in its
registration statement; (ii) SEC staff comments or changes to disclosure in
response to staff comments in the registration statement reviewed by the staff
do not foreclose the SEC from taking any action with respect to the registration
statement; and (iii) the Trust may not assert SEC staff comments as a defense in
any proceeding initiated by the SEC or any person under the federal securities
laws of the United States.
If you have any additional questions or comments, please do not hesitate to
contact either John McGuire at 202.739.5654 or me at 202.739.5914.
Sincerely,
/s/ Ashley Vroman-Lee
c: W. John McGuire, Esq.
Joanna Haigney
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