January 19, 2006
Mr. Michael Schmidtberger, Esq.
Re: DB Commodity Index Tracking Fund and DB Commodity Services LLC
Dear Mr. Schmidtberger:
In your letter dated January 19, 2006, you request on behalf of DB Commodity Index Tracking Fund (the “Fund”), a Delaware statutory trust and a public commodity pool, and DB Commodity Services LLC (“DBCS”), which will be the registered commodity pool operator (“CPO”) and managing owner (the “Managing Owner”) of the Fund, on their own behalf and on behalf of (1) the DB Commodity Index Tracking Master Fund (the “Master Fund”); (2) ALPS Distributors, Inc. (the “Distributor”); (3) the American Stock Exchange (“AMEX”) and any other national securities exchange or national securities association (each a “Market”) on or through which units of fractional undivided beneficial interest in, and ownership of, the Fund (the “Shares”) may subsequently trade; (4) Deutsche Bank Securities Inc., the clearing broker for the Master Fund (“Clearing Broker”); and (5) persons or entities (including the Authorized Participants) engaging in transactions in the Shares, exemptions from, or interpretive or no-action advice regarding, Rule 10a-1 under, Rules 101 and 102 of Regulation M under, Rule 200(g) of Regulation SHO under, Section 11(d)(1) of, and Rule 11d1-2, under the Securities Exchange Act of 1934 (“Exchange Act”).
The Fund was formed as a Delaware statutory trust in May 2005. Its investment assets will consist solely of common units of beneficial interest (the “Master Fund Units”) in the Master Fund, also a Delaware statutory trust formed on the same date. The trustee of the Fund and the Master Fund is Wilmington Trust Company (the “Trustee”). Both the Fund and the Master Fund are public commodity pools that will be operated by DBCS, as CPO and as Managing Owner, in consideration of an asset-based fee. The Fund will issue and redeem Shares only in one or more Baskets for cash, and only in transactions with DTC participants that are registered broker-dealers or that are exempt from being (or otherwise not required to be) registered or regulated as broker-dealers and have entered into a participant agreement with the Managing Owner and the Fund (“Authorized Participants”). A Basket is a block of 200,000 Shares. The Shares will be listed for trading on the AMEX to provide investors with an intra-day trading market. The Master Fund will be wholly-owned by the Fund and the Managing Owner, which is a wholly owned subsidiary of Deutsche Bank, A.G. (“Deutsche Bank”). As Managing Owner, DBCS will also own a minimal equity interest in the Fund. (At present, the minimal initial capital of the Fund and the Master Fund is directly owned by DBCS.) The assets of the Master Fund will consist of exchange-traded futures contracts on the commodities comprising the Deutsche Bank Liquid Commodity IndexTM –Excess Return (the “DBLCI” or “Index”), together with U.S. Treasury securities and other high credit quality short-term fixed income securities and cash for margin purposes. As commodity pools, the Fund and the Master Fund are subject to the Commodity Exchange Act, as amended, and to applicable rules and regulations of the Commodity Futures Trading Commission. The Fund and the Master Fund are not registered or required to be registered under the Investment Company Act of 1940, as amended.
You represent that DBCS, as the CPO and Managing Owner of the Master Fund, will manage the trading of the Master Fund’s portfolio of futures contracts with a view to tracking the performance of the Index over time. The commodities comprising the Index are light, sweet crude oil, heating oil, aluminum, gold, corn and wheat. The Master Fund is not “actively managed” since it does not seek positive returns under all market conditions, but instead, as indicated, seeks to track the performance of the Index over time by holding long commodity futures contract positions that correspond to the Index Commodities and some cash or cash-equivalents consisting of high credit quality short-term fixed income securities that are permitted investments pursuant to commodities regulations. While the Master Fund will actively trade exchange-traded futures on the Index Commodities, because it is not an actively managed commodity pool, but rather is an index tracking fund, the Master Fund does not use or pay for the services of any third-party commodity trading advisor (there are no performance fees) and does not use leverage.
This response is attached to the enclosed photocopy of your correspondence. Each defined term in this letter has the same meaning as defined in your letter, unless otherwise noted herein.
Rule 200(a) of Regulation SHO defines “short sale.” Rule 10a-1(a) under the Exchange Act covers transactions in any security registered on, or admitted to unlisted trading privileges on, a national securities exchange, if trades in such security are reported pursuant to an effective transaction reporting plan, as defined in Rule 600 of Regulation NMS under the Exchange Act, and prohibits short sales with respect to these securities unless such sales occur on a “plus tick,” (that is, a price above the price at which the immediately preceding sale was reported pursuant to an effective transaction reporting plan), or “zero-plus tick,” (that is, at the last sale price if it was higher than the last reported different price). Rule 10a-1 is designed to prevent the market price of a stock or other security reported pursuant to an effective transaction reporting plan from being manipulated downward by unrestricted short selling.
On the basis of your representations and the facts presented, in particular the derivative nature of the Shares, it would not appear that trading in the Shares would be susceptible to the practices that Rule 10a-1 is designed to prevent. In particular, the Managing Owner and the Fund anticipate that the market value of the Shares will rise or fall based on changes in the value of the Index and the underlying Index Commodities. Moreover, the short sale rule does not apply to analogous derivative products such as index options and index futures contracts. Accordingly, the Commission hereby grants an exemption from Rule 10a-1 to permit sales of Shares without regard to the “tick” requirements of Rule 10a-1.
Rule 200(g) of Regulation SHO
Rule 200(g) of Regulation SHO provides that a broker-dealer must mark all sell orders of any equity security as “long,” “short,” or “short exempt.” Rule 200(g)(2) requires that a short sale order must be marked “short exempt” if the seller is relying on an exception from the tick test of Rule 10a-1 of the Exchange Act or any short sale price test of any exchange or national securities association.
Accordingly, in conjunction with the exemption granted above to permit sales of Shares without regard to the “tick” requirements of Rule 10a-1, on the basis of your representations and the facts presented, and without necessarily concurring in your analysis, the staff of the Division of Market Regulation (“Staff”) will not recommend to the Commission enforcement action under Rule 200(g) of Regulation SHO if a broker-dealer marks “short,” rather than “short exempt,” a short sale that is effected in the Shares, subject to the following conditions:
Rule 101 of Regulation M
Generally, Rule 101 of Regulation M is an anti-manipulation regulation that, subject to certain exemptions, prohibits any “distribution participant” and its “affiliated purchasers” from bidding for, purchasing, or attempting to induce any person to bid for or purchase, any security which is the subject of a distribution until after the applicable restricted period, except as specifically permitted in the Regulation. The provisions of Rule 101 of Regulation M apply to underwriters, prospective underwriters, brokers, dealers, and other persons who have agreed to participate or are participating in a distribution of securities, and affiliated purchasers of such persons.
On the basis of your representations and the facts presented, particularly that the Fund will continuously redeem Shares in Basket-size aggregations at their NAV and that the secondary market price of Shares should not vary substantially from their NAV per share, the Commission hereby grants an exemption under paragraph (d) of Rule 101 of Regulation M thus permitting persons who may be deemed to be participating in a distribution of Shares to bid for or purchase Shares during their participation in such distribution. The Commission also grants an exemption under paragraph (d) of Rule 101 of Regulation M to permit DB London, the Index Sponsor, to publish research during the applicable restricted period on the Fund’s website.
Rule 102 of Regulation M
Rule 102 of Regulation M prohibits issuers, selling security holders, or any affiliated purchaser of such person from bidding for, purchasing, or attempting to induce any person to bid for or purchase a covered security during the applicable restricted period in connection with a distribution of securities effected by or on behalf of an issuer or selling security holder. Rule 100 of Regulation M defines “distribution” to mean any offering of securities that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods.
On the basis of your representations and the facts presented, particularly that the Fund will continuously redeem Shares in Basket-size aggregations at their NAV and there should be little disparity between the market price of a Share and the NAV per Share, the Commission hereby grants an exemption under paragraph (e) of Rule 102 of Regulation M thus permitting the Fund and its affiliated purchasers to redeem Shares in Baskets during the continuous offering of the Shares.
Section 11(d)(1) and Rule 11d1-2
On the basis of your representations and the facts presented, the Staff will not recommend enforcement action to the Commission under Section 11(d)(1) of the Exchange Act if broker-dealers (other than the Distributor) that do not create or redeem Shares but engage in both proprietary and customer transactions in Shares exclusively in the secondary market extend or maintain or arrange for the extension or maintenance of credit on Shares in connection with such secondary market transactions. In this regard, we note in particular your representation that, other than Authorized Participants that purchase Baskets during the Initial Offering Period (for which Authorized Participants receive an upfront selling commission, as described in your letter) and the Distributor with respect to the Distributor’s fees, no broker-dealer or any natural person associated with such broker-dealer, directly or indirectly (including through any affiliate of such broker-dealer), receives from the Fund complex1 any payment, compensation or other economic incentive to promote or sell Shares to persons outside of the Fund complex, other than non-cash compensation permitted under NASD Rule 2830(1)(5)(A), (B), or (C).2
In addition, on the basis of your representations and the facts presented, the Staff will not recommend enforcement action to the Commission under Section 11(d)(1) of the Exchange Act if broker-dealers other than the Distributor treat Shares, for the purposes of Rule 11d1-2 under the Exchange Act, as “securities issued by a registered . . . unit investment trust as defined in the Investment Company Act of 1940” and thereby extend or maintain or arrange for the extension or maintenance of credit on Shares that have been owned by the persons to whom credit is provided for more than 30 days, in reliance on the exemption contained in the rule.
Moreover, in view of the substantial similarities between the Fund and ETFs and the nature of the assets held in the Fund, the Staff will not recommend enforcement action to the Commission under Section 11(d)(1) of the Exchange Act against an Authorized Participant that extends credit or maintains or arranges for the extension or maintenance of credit on Shares (other than any Shares acquired by the Authorized Participant as part of a Basket during the Initial Offering Period, for which the Authorized Participant receives an upfront selling commission, as described in your letter) in reliance on the class exemption granted in the Letter re: Derivative Products Committee of the Securities Industry Association (November 21, 2005) (“Class Relief Letter”), provided that the Authorized Participant satisfies conditions 1 and 2 set forth in the Class Relief Letter.3
Finally, we note that we have repeatedly expressed our views on Section 11(d)(1) and Rule 11d1-2 with respect to the extension or maintenance or the arrangement for the extension or maintenance of credit on shares of commodity-based exchange-traded trusts that hold physical commodities or currency or that are public commodity pools (“CBETTs”), in connection with secondary market transactions.4 Having stated our views, we will no longer respond to requests for relief from Section 11(d)(1) and Rule 11d1-2 relating to new CBETTs, unless they present novel or unusual issues. We will continue to consider requests, however, for relief with respect to Exchange Act Rules 10a-1, 10b-17, or 14e-5, Rule 200(g) of Regulation SHO, and Rules 101 or 102 of Regulation M.
The foregoing exemptions from Rule 10a-1, Rules 101 and 102 of Regulation M, and no-action positions taken under Rule 200(g) of Regulation SHO, Section 11(d)(1) and Rule 11d1-2 are based solely on your representations and the facts presented, and are strictly limited to the application of those rules to transactions involving Shares under the circumstances described above and in your letter. Such transactions should be discontinued, pending presentation of the facts for our consideration, in the event that any material change occurs with respect to any of those facts or representations. Moreover, the foregoing exemptions from Rule 10a-1 and Rules 101 and 102 of Regulation M and no-action positions taken under Rule 200(g) of Regulation SHO, Section 11(d)(1) and Rule 11d1-2 are subject to the condition that such transactions in Shares or any related securities are not made for the purpose of creating actual, or apparent, active trading in or raising or otherwise affecting the price of such securities.
The foregoing exemptions are subject to modification or revocation if at any time the Commission determines that such action is necessary or appropriate in furtherance of the purposes of the Exchange Act. Moreover, the foregoing no-action positions are subject to modification or revocation as necessary or appropriate. In addition, persons relying on these exemptions and no-action positions are directed to the anti-fraud and anti-manipulation provisions of the Exchange Act, particularly Sections 9(a), 10(b), and Rule 10b-5 thereunder. Responsibility for compliance with these and other provisions of the federal or state securities laws must rest with persons relying on these exemptions and no-action positions. The Staff expresses no view with respect to other questions that the proposed transactions may raise, including, but not limited to, the adequacy of disclosure concerning, and the applicability of other federal or state laws or rules or regulations of any self-regulatory organizations to, the proposed transactions.
For the Commission, by the Division of Market Regulation,
James A. Brigagliano
1 As you note in your letter, the “Fund complex” includes the Fund, the Master Fund, the Trustee, the Administrator, the Managing Owner, the Clearing Broker, DB London, Deutsche Bank and the Custodian, the Distributor, the initial depositors, the issuer of any other trust or any investment company, UIT, or fund that holds itself out to investors as a related entity for purposes of investment or investor services, any investment adviser or marketing agent (or person performing a similar function) for any such issuer, and any “affiliated person” (as defined in the Investment Company Act) of any such person.
2 We note that a broker-dealer other than an Authorized Participant that receives some or all of the upfront selling commission from an Authorized Participant would not satisfy this representation and could not, accordingly, rely on the relief granted above.
3 For purposes of this position, the Shares would be shares of a Qualifying ETF, as defined in the Class Relief Letter, and the Fund complex would be a “fund complex,” as defined in the Class Relief Letter.
4 In addition to this letter, see Letter re: Rydex Specialized Products LLC (Dec. 5, 2005), Letter re: streetTRACKS Gold Trust® (Dec. 12, 2005), and Letter re: iShares COMEX Gold Trust (Dec. 12, 2005).