ck0001027596-20221231
Statement
of Additional Information
April 28,
2023
CAPITAL
ADVISORS GROWTH FUND
A
series of Advisors Series Trust (the “Trust”)
615
East Michigan Street
Milwaukee,
Wisconsin 53202
1-866-205-0523
This
Statement of Additional Information (“SAI”) is not a prospectus, and it should
be read in conjunction with the Prospectus dated April 28,
2023,
as may be revised (the “Prospectus”), for the Capital Advisors Growth Fund (the
“Fund”). Capital Advisors, Inc. (the “Advisor”) is the investment advisor to the
Fund. A copy of the Fund’s Prospectus may be obtained by contacting the Fund at
the above address or telephone number.
The
Fund’s audited financial statements and notes thereto for the fiscal year ended
December 31, 2022,
are contained in the Fund’s annual
report
and
are incorporated herein by reference into this SAI. A copy of the annual report
to shareholders is available without charge, upon request by calling the number
listed above.
TABLE
OF CONTENTS
The
Trust was organized as a Delaware statutory trust under the laws of the State of
Delaware on October 3, 1996, and is registered with the U.S.
Securities and Exchange Commission (the “SEC”) as an open-end management
investment company. The Trust’s Agreement and Declaration of Trust (the
“Declaration of Trust”) permits the Trust’s Board of Trustees (the “Board” or
the “Trustees”) to issue an unlimited number of full and fractional shares of
beneficial interest, par value $0.01 per share, which may be issued in any
number of series. The Trust consists of various series that represent separate
investment portfolios. The Board may from time to time issue other series, the
assets and liabilities of which will be separate and distinct from any other
series. This SAI relates only to the Fund.
Registration
with the SEC does not involve supervision of the management or policies of the
Fund. The Prospectus of the Fund and this SAI omit certain of the information
contained in the Registration Statement filed with the SEC. Copies of such
information may be obtained from the SEC upon payment of the prescribed fee or
may be accessed free of charge at the SEC’s website at www.sec.gov.
The
Fund commenced operations on December 31, 1999.
The
following paragraphs provide more detail regarding the Fund’s investment
policies and the associated risks identified in the Fund’s
Prospectus.
Diversification
The
Fund is diversified under the Investment Company Act of 1940, as amended (the
“1940 Act”). This means that, as to 75% of the Fund’s total assets, (1) no more
than 5% may be invested in the securities of a single issuer, and (2) it
may not hold more than 10% of the outstanding voting securities of a single
issuer. However, diversification of a mutual fund’s holdings is measured at the
time the Fund purchases a security and if the Fund purchases a security and
holds it for a period of time, the security may become a larger percentage of
the Fund’s total assets due to movements in the financial markets. If the market
affects several securities held by the Fund, the Fund may have a greater
percentage of its assets invested in securities of fewer issuers. Accordingly,
the Fund is subject to the risk that its performance may be hurt
disproportionately by the poor performance of relatively few securities despite
qualifying as a “diversified” fund.
Percentage
Limitations
Whenever
an investment policy or limitation states a maximum percentage of the Fund’s
assets that may be invested in any security or other asset, or sets forth a
policy regarding quality standards, such standards or percentage limitation will
be determined immediately after and as a result of the Fund’s acquisition or
sale of such security or other asset. Accordingly, except with respect to
borrowing , any subsequent change in values, net assets or other circumstances
will not be considered in determining whether an investment complies with the
Fund’s investment policies and limitations. In addition, if a bankruptcy or
other extraordinary event occurs concerning a particular investment by the Fund,
the Fund may receive stock, real estate or other investments that the Fund would
not, or could not buy. If this happens, the Fund would sell such investments as
soon as practicable while trying to maximize the return to its
shareholders.
Market
and Regulatory Risk
Events
in the financial markets and economy may cause volatility and uncertainty and
affect performance. Such adverse effect on performance could include a decline
in the value and liquidity of securities held by the Fund, unusually high and
unanticipated levels of redemptions, an increase in portfolio turnover, a
decrease in net asset value (“NAV”), and an increase in Fund expenses. It may
also be unusually difficult to identify both investment risks and opportunities,
in which case investment objectives may not be met. Market events may affect a
single issuer, industry, sector, or the market as a whole. Traditionally liquid
investments may experience periods of diminished liquidity. During a general
downturn in the financial markets, multiple asset classes may decline in value
and the Fund may lose value, regardless of the individual results of the
securities and other instruments in which the Fund invests. It is impossible to
predict whether or for how long such market events will continue, particularly
if they are unprecedented, unforeseen or widespread events or conditions,
pandemics, epidemics and other similar circumstances in one or more countries or
regions. Therefore, it is important to understand that the value of your
investment may fall, sometimes sharply and for extended periods, and you could
lose money.
Governmental
and regulatory actions, including tax law changes, may also impair portfolio
management and have unexpected or adverse consequences on particular markets,
strategies, or investments. Policy and legislative changes in the United States
and in other countries are affecting many aspects of financial regulation, and
may in some instances contribute to decreased liquidity and increased volatility
in the financial markets. The impact of these changes on the markets, and the
practical implications for market participants, may not be fully known for some
time. In addition, economies and financial markets throughout the world are
becoming increasingly interconnected. As a result, whether or not the Fund
invests in securities of issuers located in or with significant exposure to
countries experiencing economic and financial difficulties, the value and
liquidity of the Fund’s investments may be negatively affected.
The
Fund invests in the following types of investments, each of which is subject to
certain risks, as discussed below:
Equity
Securities
The
Fund may invest in common stocks, preferred stocks, foreign securities traded in
the U.S. and American Depositary Receipts (“ADRs”), each of which is subject to
certain risks, as discussed below.
All
investments in equity securities are subject to market risks that may cause
their prices to fluctuate over time. Historically, the equity markets have moved
in cycles and the value of the securities in the Fund’s portfolio may fluctuate
substantially from day to day. Owning an equity security can also subject the
Fund to the risk that the issuer may discontinue paying dividends.
Common
Stocks.
A common stock represents a proportionate share of the ownership of a company
and its value is based on the success of the company’s business, any income paid
to stockholders, the value of its assets, and general market conditions. In
addition to the general risks set forth above, investments in common stocks are
subject to the risk that in the event a company in which the Fund invests is
liquidated, the holders of preferred stock and creditors of that company will be
paid in full before any payments are made to the Fund as a holder of common
stock. It is possible that all assets of that company will be exhausted before
any payments are made to the Fund.
Preferred
Stock.
A preferred stock is a blend of the characteristics of a bond and common stock.
Preferred stock generally does not carry voting rights. It can offer the higher
yield of a bond and has priority over common stock in equity ownership, but does
not have the seniority of a bond and, unlike common stock, its participation in
the issuer’s growth may be limited. Preferred stock has preference
over
common stock in the receipt of dividends and in any residual assets after
payment to creditors should the issuer by dissolved. Although the dividend is
set at a fixed annual rate, in some circumstances it can be changed or omitted
by the issuer.
Foreign
Securities.
The Fund may invest in securities of foreign issuers, provided that they are
publicly traded in the United States, including in ADRs.
American
Depositary Receipts.
ADRs are depositary receipts for foreign securities denominated in U.S. dollars
and traded on U.S. securities markets. ADRs evidence ownership of, and represent
the right to receive, securities of foreign issuers deposited in a domestic bank
or trust company or a foreign correspondent bank. Prices of ADRs are quoted in
U.S. dollars, and ADRs are traded in the U.S. on exchanges or over-the-counter.
While ADRs do not eliminate all the risks associated with foreign investments,
by investing in ADRs rather than directly in the stock of foreign issuers, the
Fund will avoid currency and certain foreign market trading risks during the
settlement period for either purchases or sales. In general, there is a large,
liquid market in the U.S. for ADRs quoted on a national securities exchange. The
information available for ADRs is subject to the accounting, auditing and
financial reporting standards of the U.S. market or exchange on which they are
traded, which standards are generally more uniform and more exacting than those
to which many foreign issuers may be subject.
In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of depositary receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information about an
issuer that has participated in the creation of a sponsored program. There may
be an increased possibility of untimely responses to certain corporate actions
of the issuer, such as stock splits and rights offerings, in an unsponsored
program. Accordingly, there may be less information available regarding issuers
of securities underlying unsponsored programs and there may not be a correlation
between this information and the market value of the depositary receipts. If the
Fund’s investment depends on obligations being met by the arranger as well as
the issuer of an unsponsored program, the Fund will be exposed to additional
credit risk.
Real
Estate Investment Trusts (“REITs”)
The
Fund may invest in shares of REITs. REITs are pooled investment vehicles which
invest primarily in real estate or real estate related loans. REITs are
generally classified as equity REITs, mortgage REITs or a combination of equity
and mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling properties that have appreciated
in value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. Like a
regulated investment company such as the Fund, REITs are not taxed on income
distributed to shareholders provided they comply with certain requirements under
the Internal Revenue Code of 1986, as amended (the “Code”). The Fund will
indirectly bear their proportionate share of any expenses paid by REITs in which
they invest in addition to the expenses paid by the Fund. Investing in REITs
involves certain unique risks. Equity REITs may be affected by changes in the
value of the underlying property owned by such REITs, while mortgage REITs may
be affected by the quality of any credit extended. REITs are dependent upon
management skills, are not diversified (except to the extent the Code requires),
and are subject to the risks of financing projects. REITs are subject to heavy
cash flow dependency, default by borrowers, self-liquidation, and the
possibilities of failing to qualify for the exemption from tax for distributed
income under the Code and failing to maintain their exemptions from the 1940
Act. REITs (especially mortgage REITs) are also subject to interest rate
risks.
Risks
of Investing in Foreign Securities
Investments
in foreign securities involve certain inherent risks, including the
following:
Political
and Economic Factors.
Individual foreign economies of certain countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency, and
diversification and balance of payments position. The internal politics of some
foreign countries may not be as stable as those of the United States.
Governments in some foreign countries also continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could include restrictions on
foreign investment, nationalization, expropriation of goods or imposition of
taxes, and could have a significant effect on market prices of securities and
payment of interest. The economies of many foreign countries are heavily
dependent upon international trade and are affected by the trade policies and
economic conditions of their trading partners. If these trading partners enacted
protectionist trade legislation, it could have a significant adverse effect upon
the securities markets of such countries.
Currency
Fluctuations.
The Fund will invest only in securities denominated in U.S. dollars. For this
reason, the value of the Fund’s assets may not be subject to risks associated
with variations in the value of foreign currencies relative to the U.S. dollar
to the same extent as might otherwise be the case. Changes in the value of
foreign currencies against the U.S. dollar may, however, affect the value of the
assets and/or income of foreign companies whose U.S. dollar denominated
securities are held by the Fund. Such companies may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
Legal
and Regulatory Matters.
Certain foreign countries may have less supervision of securities markets,
brokers and issuers of securities, and less financial information available to
issuers, than is available in the United States.
Taxes.
The interest and dividends payable on some of the Fund’s foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to Fund shareholders. Based on the
principal investment strategies of the Fund, it is not expected that the Fund
will be eligible to pass through to its shareholders any credits or deductions
against their U.S. federal income tax with respect to any foreign withholding
taxes paid by the Fund.
Brexit.
In a June 2016 referendum, citizens of the United Kingdom voted to leave the
European Union (“EU”). In March 2017, the United Kingdom formally notified the
European Council of its intention to withdraw from the EU (commonly known as
“Brexit”) by invoking Article 50 of the Treaty on European Union. Brexit has
resulted in volatility in European and global markets and may also lead to
weakening in political, regulatory, consumer, corporate and financial confidence
in the markets of the United Kingdom and throughout Europe. The decision made in
the British referendum may lead to a call for similar referenda in other
European jurisdictions, which may cause increased economic volatility in
European and global markets. The mid-to long-term uncertainty may have an
adverse effect on the economy generally and on the value of a Fund’s
investments. This may be due to, among other things: fluctuations in asset
values and exchange rates; increased illiquidity of investments located, traded
or listed within the United Kingdom, the EU or elsewhere; changes in the
willingness or ability of counterparties to enter into transactions at the price
and terms on which a Fund is prepared to transact; and/or changes in legal and
regulatory regimes to which certain of a Fund’s assets are or become subject.
Fluctuations in the value of the British Pound and/or the Euro, along with the
potential downgrading of the United Kingdom’s sovereign credit rating, may also
have an impact on the performance of a Fund’s assets or investments economically
tied to the United Kingdom or Europe.
The
U.K. left the EU (“Brexit”) on January 31, 2020. The U.K. and EU have reached an
agreement on the terms of their future trading relationship effective January 1,
2021, which principally relates to the trading of goods rather than services,
including financial services. Further discussions are to be held between the
U.K. and the EU in relation to matters not covered by the trade agreement, such
as financial services. The Fund will face risks associated with the potential
uncertainty and consequences that may follow Brexit, including with respect to
volatility in exchange rates and interest rates. Brexit could adversely affect
European or worldwide political, regulatory, economic or market conditions and
could contribute to instability in global political institutions, regulatory
agencies and financial markets. Brexit has also led to legal uncertainty and
could lead to politically divergent national laws and regulations as a new
relationship between the U.K. and EU is defined and the U.K. determines which EU
laws to replace or replicate. Any of these effects of Brexit could adversely
affect any of the companies to which the Fund has exposure and any other assets
in which the Fund invests. The political, economic and legal consequences of
Brexit are not yet fully known. In the short term, financial markets may
experience heightened volatility, particularly those in the U.K. and Europe, but
possibly worldwide. The U.K. and Europe may be less stable than they have been
in recent years, and investments in the U.K. and the EU may be difficult to
value, or subject to greater or more frequent volatility. In the longer term,
there is likely to be a period of significant political, regulatory and
commercial uncertainty as the U.K. continues to negotiate the terms of its
future trading relationships.
Investment
Company Securities.
The Fund may invest in shares of other investment companies or mutual funds,
including exchange-traded funds (“ETFs”). For example, the Fund may invest in
money market mutual funds in connection with its management of daily cash
positions and for temporary defensive purposes. The Fund currently intends to
limit its investments in securities issued by other investment companies (except
for money market funds) so that not more than 3% of the outstanding voting
shares of any one investment company will be owned by the Fund, or its
affiliated persons, as a whole. The Fund may invest unlimited amounts in money
market funds for management of its daily cash position, subject to certain
conditions. In addition to the advisory and operational fees the Fund bears
directly in connection with its own operation, the Fund would also bear its pro
rata portions of each other investment company’s advisory and operational
expenses.
Section
12(d)(1)(A) of the 1940 Act generally prohibits a fund from purchasing (1) more
than 3% of the total outstanding voting stock of another fund; (2) securities of
another fund having an aggregate value in excess of 5% of the value of the
acquiring fund; and (3) securities of the other fund and all other funds having
an aggregate value in excess of 10% of the value of the total assets of the
acquiring fund. There are some exceptions, however, to these limitations
pursuant to various rules promulgated by the SEC.
The
Fund may rely on Section 12(d)(1)(F) and Rule 12d1-3 of the 1940 Act, which
provide an exemption from Section 12(d)(1) that allows the Fund to invest all of
its assets in other registered funds, including ETFs, if, among other
conditions: (a) the Fund, together with its affiliates, acquires no more than 3%
percent of the outstanding voting stock of any acquired fund, and (b) the
sales load charged on the Fund’s shares is no greater than the limits set forth
in Rule 2341 of the Conduct Rules of the Financial Industry Regulatory
Authority, Inc. (“FINRA”) applicable to a fund of funds (e.g,
8.5%). In accordance with Rule 12d1-1 under the 1940 Act, the provisions of
Section 12(d)(1) shall not apply to shares of money market funds purchased by
the Fund, whether or not for temporary defensive purposes, provided that the
Fund does not pay a sales charge, distribution fee or service fee as defined in
Rule 2341 of the Conduct Rules of FINRA on acquired money market fund shares (or
the Adviser must waive its advisory fees in amount necessary to offset any sales
charge, distribution fee or service fee).
Rule
12d1-4 permits additional types of fund of fund arrangements without an
exemptive order. The rule imposes certain conditions, including limits on
control and voting of acquired funds’ shares, evaluations
and
findings by investment advisers, fund investment agreements, and limits on most
three-tier fund structures.
Exchange-Traded
Funds. ETFs
are open-end investment companies whose shares are listed on a national
securities exchange. An ETF is similar to a traditional index mutual fund, but
trades at different prices during the day on a security exchange like a stock.
Similar to investments in other investment companies discussed above, the Fund’s
investments in ETFs will involve duplication of management fees and other
expenses since the Fund will be investing in another investment company. In
addition, the Fund’s investment in ETFs is also subject to its limitations on
investments in investment companies discussed above. To the extent the Fund
invests in ETFs which focus on a particular market segment or industry, the Fund
will also be subject to the risks associated with investing in those sectors or
industries. The shares of the ETFs in which the Fund will invest will be listed
on a national securities exchange and the Fund will purchase or sell these
shares on the secondary market at its current market price, which may be more or
less than its NAV per share.
As
a purchaser of ETF shares on the secondary market, a Fund will be subject to the
market risk associated with owning any security whose value is based on market
price. ETF shares historically have tended to trade at or near their NAV, but
there is no guarantee that they will continue to do so. Unlike traditional
mutual funds, shares of an ETF may be purchased and redeemed directly from the
ETFs only in large blocks and only through participating organizations that have
entered into contractual agreements with the ETF. A Fund does not expect to
enter into such agreements and therefore will not be able to purchase and redeem
their ETF shares directly from the ETF.
Derivative
Securities
The
Fund is prohibited from investing in derivatives, excluding certain currency and
interest rate hedging transactions. This restriction is not fundamental and may
be changed by the Fund without a shareholder vote. If the Fund does determine to
invest in derivatives in the future, it will comply with Rule 18f-4 under the
1940 Act.
Illiquid
and Restricted Securities
Pursuant
to Rule 22e-4 under the 1940 Act, a Fund may not acquire any “illiquid
investment” if, immediately after the acquisition, the Fund would have invested
more than 15% of its net assets in illiquid investments that are assets. An
“illiquid investment” is any investment that the Fund reasonably expects cannot
be sold or disposed of in current market conditions in seven calendar days or
less without the sale or disposition significantly changing the market value of
the investment. The Fund has implemented a liquidity risk management program and
related procedures to identify illiquid investments pursuant to Rule 22e-4. The
15% limit is applied as of the date the Fund purchases an illiquid investment.
It is possible that the Fund’s holding of illiquid investments could exceed the
15% limit, for example as a result of market developments or
redemptions.
The
Fund may purchase certain restricted securities that can be resold to
institutional investors and which may be determined not to be illiquid
investments pursuant to the Fund’s liquidity risk management program. In many
cases, those securities are traded in the institutional market pursuant to Rule
144A under the Securities Act of 1933, as amended (the "1933 Act") and are
called Rule 144A securities.
Investments
in illiquid investments involve more risks than investments in similar
securities that are readily marketable. Illiquid investments may trade at a
discount from comparable, more liquid investments. Investment of the Fund’s
assets in illiquid investments may restrict the ability of the Fund to dispose
of its investments in a timely fashion and for a fair price as well as its
ability to take advantage of
market
opportunities. The risks associated with illiquidity will be particularly acute
where the Fund’s operations require cash, such as when the Fund has net
redemptions, and could result in the Fund borrowing to meet short-term cash
requirements or incurring losses on the sale of illiquid
investments.
Restricted
securities sold in private placement transactions between issuers and their
purchasers are neither listed on an exchange nor traded in other established
markets and may be illiquid. In many cases, the privately placed securities may
not be freely transferable under the laws of the applicable jurisdiction or due
to contractual restrictions on resale. To the extent privately placed securities
may be resold in privately negotiated transactions, the prices realized from the
sales could be less than those originally paid by the Fund or less than the fair
value of the securities. A restricted security may be determined to be liquid
under the Fund's liquidity risk management program established pursuant to Rule
22e-4 depending on market, trading, or investment-specific considerations
related to the restricted security. In addition, issuers whose securities are
not publicly traded may not be subject to the disclosure and other investor
protection requirements that may be applicable if their securities were publicly
traded. If any privately placed securities held by the Fund are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of registration. Private
placement investments may involve investments in smaller, less seasoned issuers,
which may involve greater risks than investments in more established companies.
These issuers may have limited product lines, markets or financial resources, or
they may be dependent on a limited management group. In making investments in
private placement securities, the Fund may obtain access to material non-public
information about an issuer of private placement securities, which may restrict
the Fund’s ability to conduct transactions in those securities.
Short-Term
Investments
The
Fund may invest in any of the following securities and instruments:
Certificates
of Deposit, Bankers’ Acceptances and Time Deposits.
The Fund may hold certificates of deposit, bankers’ acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers’ acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are “accepted” by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers’ acceptances acquired by the Fund will be
dollar-denominated obligations of domestic banks, savings and loan associations
or financial institutions which, at the time of purchase, have capital, surplus
and undivided profits in excess of $100 million (including assets of both
domestic and foreign branches), based on latest published reports, or less than
$100 million if the principal amount of such bank obligations are fully
insured by the U.S. government.
In
addition to buying certificates of deposit and bankers’ acceptances, the Fund
also may make interest-bearing time or other interest-bearing deposits in
commercial or savings banks. Time deposits are non-negotiable deposits
maintained at a banking institution for a specified period of time at a
specified interest rate.
Commercial
Paper and Short-Term Notes.
The Fund may invest a portion of its assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Commercial paper and short-term notes will normally have
maturities of less than nine months and fixed rates of return, although such
instruments may have maturities of up to one year.
Commercial
paper and short-term notes will consist of issues rated at the time of purchase
“A-2” or higher by S&P Global Ratings, “Prime-1” or “Prime-2” by Moody’s
Investors Services, Inc., or similarly rated by another nationally recognized
statistical rating organization or, if unrated, will be determined by the
Advisor to be of comparable quality. These rating symbols are described in the
Appendix.
Special
Risks Related to Cyber Security. The
Fund and its service providers are susceptible to cyber security risks that
include, among other things, theft, unauthorized monitoring, release, misuse,
loss, destruction or corruption of confidential and highly restricted data;
denial of service attacks; unauthorized access to relevant systems, compromises
to networks or devices that the Fund and its service providers use to service
the Fund’s operations; or operational disruption or failures in the physical
infrastructure or operating systems that support the Fund and its service
providers. Cyber attacks against or security breakdowns of the Fund or its
service providers may adversely impact the Fund and its shareholders,
potentially resulting in, among other things, financial losses; the inability of
Fund shareholders to transact business and the Fund to process transactions;
inability to calculate the Fund’s NAV; violations of applicable privacy and
other laws; regulatory fines, penalties, reputational damage, reimbursement or
other compensation costs; and/or additional compliance costs. The Fund may incur
additional costs for cyber security risk management and remediation purposes. In
addition, cyber security risks may also impact issuers of securities in which
the Fund invests, which may cause the Fund’s investment in such issuers to lose
value. There can be no assurance that the Fund or its service providers will not
suffer losses relating to cyber attacks or other information security breaches
in the future.
Investment
Restrictions
The
Fund has adopted the following investment restrictions as fundamental policies
that may not be changed without approval by a “majority of the outstanding
shares” of the Fund which, as used in this SAI, means the vote of the lesser of
(a) 67% or more of the shares of the Fund represented at a meeting, if the
holders of more than 50% of the outstanding shares of the Fund are present or
represented by proxy, or (b) more than 50% of the outstanding shares of the
Fund.
The
Fund’s investment objective is fundamental. In addition, the Fund may
not:
1.Issue
senior securities, borrow money or pledge its assets.
2.Purchase
securities on margin, except such short-term credits as may be necessary for the
clearance of transactions.
3.Act
as underwriter (except to the extent the Fund may be deemed to be an underwriter
in connection with the sale of securities in its investment
portfolio).
4.Invest
25% or more of its total assets, calculated at the time of purchase and taken at
market value, in any one industry or group of industries (other than U.S.
government securities).
5.Purchase
or sell real estate or interests in real estate or real estate limited
partnerships (although the Fund may purchase and sell securities which are
secured by real estate and securities of companies which invest or deal in real
estate).
6.Purchase
or sell commodities or commodity futures contracts.
7.Make
loans of money (except for purchases of debt securities consistent with the
investment policies of the Fund and except for repurchase
agreements).
The
Fund observes the following policies, which are not deemed fundamental and which
may be changed without shareholder vote. The Fund may not:
1.Invest
in the securities of other investment companies or purchase any other investment
company’s voting securities or make any other investment in other investment
companies except to the extent permitted by federal securities law.
2.Hold
more than 15% of its net assets in investments that are restricted as to
disposition or otherwise are illiquid or have no readily available
market.
Although
the Fund generally will not invest for short-term trading purposes, portfolio
securities may be sold without regard to the length of time they have been held
when, in the opinion of the Advisor, investment considerations warrant such
action. Portfolio turnover rate is calculated by dividing (1) the lesser of
purchases or sales of portfolio securities for the fiscal year by (2) the
monthly average of the value of portfolio securities owned during the fiscal
year. A 100% turnover rate would occur if all the securities in the Fund’s
portfolio, with the exception of securities whose maturities at the time of
acquisition were one year or less, were sold and either repurchased or replaced
within one year. A high rate of portfolio turnover (100% or more) generally
leads to higher transaction costs and may result in a greater number of taxable
transactions. (See “Portfolio Transactions and Brokerage”).
Following
are the portfolio turnover rates for the Fund’s two most recent fiscal years
ended December 31, 2022:
|
|
|
|
|
| |
Portfolio
Turnover
During Fiscal Years Ended December 31 |
| 2022 |
2021 |
| 18% |
29% |
The
Advisor and the Fund maintain portfolio holdings disclosure policies (the
“Disclosure Policies”) that govern the timing and circumstances of disclosure to
shareholders and third parties of information regarding the portfolio
investments held by the Fund. These portfolio holdings disclosure policies have
been approved by the Board. Disclosure of the Fund’s complete holdings is
required to be made quarterly within 60 days of the end of each fiscal quarter
in the annual report and semi-annual report to Fund shareholders and in the
quarterly holdings report on Part F of Form N-PORT. These reports are available,
free of charge, on the EDGAR database on the SEC’s website at www.sec.gov. A
complete list of the Fund’s portfolio holdings as of each calendar quarter-end
is available upon request approximately five to ten business days after the
calendar quarter end by calling 1-866-205-0523.
Pursuant
to the Disclosure Policies, information about the Fund’s portfolio holdings is
not distributed to any person unless:
•The
disclosure is required pursuant to a regulatory request, court order or is
legally required in the context of other legal proceedings;
•The
disclosure is made to a mutual fund rating and/or ranking organization, or
person performing similar functions, who is subject to a duty of
confidentiality, including a duty not to trade on any non-public
information;
•The
disclosure is made to parties involved in the investment process,
administration, operation or custody of the Fund, including, but not limited to
U.S. Bank Global Fund Services and the Board, attorneys, auditors or
accountants;
•The
disclosure is made: (a) in connection with a quarterly, semi-annual or annual
report that is available to the public; or (b) relates to information that is
otherwise available to the public; or
•The
disclosure is made with the prior written approval of either the Trust’s Chief
Compliance Officer (“CCO”) or the President or Treasurer of the
Trust.
Certain
of the persons listed above receive information about the Fund’s portfolio
holdings on an ongoing basis. The Fund believes that these third parties have
legitimate objectives in requesting such portfolio holdings information and
operate in the best interest of the Fund’s shareholders. These persons
include:
•A
mutual fund rating and/or ranking organization, or person performing similar
functions, who is subject to a duty of confidentiality, including a duty not to
trade on any non-public information;
•Rating
and/or ranking organizations, specifically: Lipper; Morningstar; S&P;
Bloomberg; Vickers-Stock Research Corporation; Thomson Financial; and
Capital-Bridge, all of which currently receive such information between the
fifth and tenth business day of the month following the end of a calendar
quarter; or
•Parties
involved in the investment process, administration, operation or custody of the
Fund, specifically: Fund Services; the Board; and the Trust’s attorneys and
independent registered public accounting firm (currently, Sullivan &
Worcester LLP and Tait, Weller & Baker LLP, respectively), all of which
typically receive such information after it is generated.
In
addition, material non-public holdings information may be provided without lag
as part of the normal investment activities of the Fund to each of the following
entities which, by explicit agreement or by virtue of their respective duties to
the Fund, are required to maintain the confidentiality of the information
disclosed: Fund Administrator, Fund Accountant, Custodian, Transfer Agent,
auditors, counsel to the Fund or the trustees, broker-dealers (in connection
with the purchase or sale of securities or requests for price quotations or bids
on one or more securities), and regulatory authorities. Portfolio holdings
information not publicly available with the SEC or through the Fund’s website
may only be provided to additional third parties, in accordance with the
Disclosure Policies, when the Fund has a legitimate business purpose and the
third party recipient is subject to a confidentiality agreement.
The
Board exercises continuing oversight of the disclosure of the Fund’s portfolio
holdings by (1) overseeing the implementation and enforcement of the
Disclosure Policies, Codes of Ethics and other relevant policies of the Fund and
its service providers by the CCO, (2) by considering reports and
recommendations by the CCO concerning any material compliance matters (as
defined in Rule 38a-1 under 1940 Act), and (3) by considering to approve
any amendment to these Disclosure Policies. The Board reserves the right to
amend the Disclosure Policies at any time without prior notice in their sole
discretion.
In
no event shall the Advisor, its affiliates or employees, or the Fund receive any
direct or indirect compensation in connection with the disclosure of information
about the Fund’s portfolio holdings. In the event of a conflict between the
interests of the Fund and the interests of the Advisor or an affiliated
person
of the Advisor, the CCO of the Advisor, in consultation with the Trust’s CCO,
shall make a determination in the best interests of the Fund, and shall report
such determination to the Advisor’s Board of Directors and to the Board at the
end of the quarter in which such determination was made. Any employee of the
Advisor who suspects a breach of this obligation must report the matter
immediately to the CCO or to his or her supervisor.
There
can be no assurance that the Disclosure Policies and these procedures will
protect the Fund from potential misuse of that information by individuals or
entities to which it is disclosed.
The
overall management of the business and affairs of the Trust is vested with its
Board. The Board approves all significant agreements between the Trust and
persons or companies furnishing services to it, including the agreements with
the Advisor, Administrator, Custodian and Transfer Agent, each as defined
herein. The day-to-day operations of the Trust are delegated to its officers,
subject to the Fund’s investment objectives, strategies, and policies and to
general supervision by the Board.
The
current Trustees and officers of the Trust, their ages, positions with the
Trust, term of office with the Trust and length of time served, business
addresses, principal occupations during the past five years and other
directorships held during the past five years are listed in the table
below.
Independent
Trustees(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name,
Address
and Age |
Position
Held with the Trust |
Term
of Office and Length of Time Served* |
Principal
Occupation
During Past Five Years |
Number
of Portfolios
in
Fund Complex
Overseen
by Trustee(2) |
Other
Directorships Held During Past Five Years(3) |
David
G. Mertens
(age 62)
615 E. Michigan Street
Milwaukee, WI
53202 |
Trustee |
Indefinite
term; since March 2017. |
Partner
and Head of Business Development Ballast Equity Management, LLC (a
privately-held investment advisory firm) (February 2019 to present);
Managing Director and Vice President, Jensen Investment Management, Inc.
(a privately-held investment advisory firm) (2002 to 2017). |
1 |
Trustee,
Advisors Series Trust (for series not affiliated with the
Fund). |
Joe
D. Redwine
(age 75)
615 E. Michigan Street
Milwaukee, WI
53202 |
Trustee |
Indefinite
term; since September 2008. |
Retired;
formerly Manager, President, CEO, U.S. Bancorp Fund Services, LLC, and its
predecessors, (May 1991 to July 2017). |
1 |
Trustee,
Advisors Series Trust (for series not affiliated with the
Fund). |
Raymond
B. Woolson
(age 64)
615 E. Michigan Street
Milwaukee, WI
53202 |
Chairman
of the Board
Trustee |
Indefinite
term; since January 2020.
Indefinite
term; since January 2016. |
President,
Apogee Group, Inc. (financial consulting firm) (1998 to
present). |
1 |
Trustee,
Advisors Series Trust (for series not affiliated with the Fund);
Independent Trustee, DoubleLine Funds Trust (an open-end investment
company with 19 portfolios), DoubleLine Opportunistic Credit Fund,
DoubleLine Income Solutions Fund, and DoubleLine Yield Opportunities Fund
from 2010 to present; Independent Trustee, DoubleLine ETF Trust (an
open-end investment company with 2 portfolios) from March 2022 to
present. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name,
Address
and Age |
Position
Held with the Trust |
Term
of Office and Length of Time Served* |
Principal
Occupation
During Past Five Years |
Number
of Portfolios
in
Fund Complex
Overseen
by Trustee(2) |
Other
Directorships Held During Past Five Years(3) |
Michele
Rackey
(age 63)
615 E. Michigan Street
Milwaukee, WI
53202 |
Trustee |
Indefinite
term; since January 2023. |
Chief
Executive Officer, Government Employees Benefit Association (GEBA)
(benefits and wealth management organization) (2004 to 2020); Board
Member, Association Business Services Inc. (ABSI) (for-profit subsidiary
of the American Society of Association Executives) (2019 to
2020). |
1 |
Trustee,
Advisors Series Trust (for series not affiliated with the
Fund). |
Officers
|
|
|
|
|
|
|
|
|
|
|
| |
Name,
Address
and Age |
Position
Held
with the Trust |
Term
of Office and Length of Time Served |
Principal
Occupation
During Past Five Years |
Jeffrey
T. Rauman
(age 54)
615 E. Michigan Street
Milwaukee, WI
53202
|
President,
Chief Executive Officer and Principal Executive Officer |
Indefinite
term; since December 2018. |
Senior
Vice President, Compliance and Administration, U.S. Bank Global Fund
Services (February 1996 to present). |
Kevin
J. Hayden
(age 51)
615 E. Michigan Street
Milwaukee, WI
53202 |
Vice
President, Treasurer and Principal Financial Officer |
Indefinite
term; since January 2023. |
Vice
President, Compliance and Administration, U.S. Bank Global Fund Services
(June 2005 to present). |
Cheryl
L. King
(age 61)
615 E. Michigan Street
Milwaukee, WI
53202
|
Assistant
Treasurer |
Indefinite
term; since January 2023. |
Vice
President, Compliance and Administration, U.S. Bank Global Fund Services
(October 1998 to present). |
Richard
R. Conner
(age 40)
615 E. Michigan Street
Milwaukee, WI
53202
|
Assistant
Treasurer |
Indefinite
term; since December 2018. |
Assistant
Vice President, Compliance and Administration, U.S. Bank Global Fund
Services (July 2010 to present). |
Michael
L. Ceccato
(age 65)
615 E. Michigan Street
Milwaukee, WI
53202
|
Vice
President, Chief Compliance Officer and AML Officer |
Indefinite
term; since September 2009. |
Senior
Vice President, U.S. Bank Global Fund Services and Senior Vice President,
U.S. Bank N.A. (February 2008 to present). |
Elaine
E. Richards
(age 55)
2020 E. Financial Way, Suite 100
Glendora,
CA 91741
|
Vice
President and Secretary |
Indefinite
term; since September 2019. |
Senior
Vice President, U.S. Bank Global Fund Services (July 2007 to
present). |
* The
Trustees have designated a mandatory retirement age of 75, such that each
Trustee, serving as such on the date he or she reaches the age of 75, shall
submit his or her resignation not later than the last day of the calendar year
in which his or her 75th birthday occurs (“Retiring Trustee”). Upon request, the
Board may, by vote of a majority of Trustees eligible to vote on such matter,
determine whether or not to extend such Retiring Trustee’s term and on the
length of a one-time extension of up to three additional years. At a meeting
held December 7-8, 2022, by vote of the majority of Trustees (not including
Mr. Redwine), Mr. Redwine’s term as Trustee was extended for three
additional years.
(1)The
Trustees of the Trust who are not “interested persons” of the Trust as defined
under the 1940 Act (“Independent Trustees”).
(2)As
of March 31, 2023, the Trust was comprised of 35 active portfolios managed by
unaffiliated investment advisors. The term “Fund Complex” applies only to the
Fund. The Fund does not hold itself out as related to any other series within
the Trust for investment purposes, nor does it share the same investment advisor
with any other series.
(3)“Other
Directorships Held” includes only directorships of companies required to
register or file reports with the SEC under the Securities Exchange Act of 1934,
as amended, (that is, “public companies”) or other investment companies
registered under the 1940 Act.
Additional
Information Concerning Our Board of Trustees
The
Role of the Board
The
Board provides oversight of the management and operations of the Trust. Like all
mutual funds, the day-to-day responsibility for the management and operations of
the Trust is the responsibility of various service providers to the Trust, such
as the Trust’s investment advisers, distributor, administrator, custodian, and
transfer agent, each of whom are discussed in greater detail in this SAI. The
Board
approves
all significant agreements between the Trust and its service providers,
including the agreements with the investment advisers, distributor,
administrator, custodian and transfer agent. The Board has appointed various
senior individuals of certain of these service providers as officers of the
Trust, with responsibility to monitor and report to the Board on the Trust’s
day-to-day operations. In conducting this oversight, the Board receives regular
reports from these officers and service providers regarding the Trust’s
operations. The Board has appointed a Chief Compliance Officer (“CCO”) who
administers the Trust’s compliance program and regularly reports to the Board as
to compliance matters. Some of these reports are provided as part of formal
“Board Meetings” which are typically held quarterly, in person, and involve the
Board’s review of recent Trust operations. From time to time one or more members
of the Board may also meet with Trust officers in less formal settings, between
formal “Board Meetings,” to discuss various topics. In all cases, however, the
role of the Board and of any individual Trustee is one of oversight and not of
management of the day-to-day affairs of the Trust and its oversight role does
not make the Board a guarantor of the Trust’s investments, operations or
activities.
Board
Leadership Structure
The
Board has structured itself in a manner that it believes allows it to
effectively perform its oversight function. It has established three standing
committees, an Audit Committee, a Nominating and Governance Committee and a
Qualified Legal Compliance Committee (the “QLCC”), which are discussed in
greater detail under “Board Committees,” below. Currently, all of the members of
the Board are Independent Trustees, which are Trustees that are not affiliated
with the Adviser or its affiliates or any other investment adviser in the Trust
or with its principal underwriter. The Independent Trustees have engaged their
own independent counsel to advise them on matters relating to their
responsibilities in connection with the Trust.
The
President, Chief Executive Officer and Principal Executive Officer of the Trust
is not a Trustee, but rather is a senior employee of the Administrator who
routinely interacts with the unaffiliated investment advisers of the Trust and
comprehensively manages the operational aspects of the Funds in the Trust. The
Trust has appointed Raymond Woolson, an Independent Trustee, as Chairman of the
Board, and he acts as a liaison with the Trust’s service providers, officers,
legal counsel, and other Trustees between meetings, helps to set Board meeting
agendas, and serves as Chairman during executive sessions of the Independent
Trustees.
The
Board reviews its structure annually. The Trust has determined that it is
appropriate to separate the Principal Executive Officer and Board Chairman
positions because the day-to day responsibilities of the Principal Executive
Officer are not consistent with the oversight role of the Trustees and because
of the potential conflict of interest that may arise from the Administrator’s
duties with the Trust. Given the specific characteristics and circumstances of
the Trust as described above, the Trust has determined that the Board’s
leadership structure is appropriate.
Board
Oversight of Risk Management
As
part of its oversight function, the Board receives and reviews various risk
management reports and assessments and discusses these matters with appropriate
management and other personnel. Because risk management is a broad concept
comprised of many elements (such as, for example, investment risk, issuer and
counterparty risk, compliance risk, operational risks, business continuity
risks, etc.) the oversight of different types of risks is handled in different
ways. For example, the Nominating and Governance Committee meets regularly with
the CCO to discuss compliance and operational risks and the Audit Committee
meets with the Treasurer and the Trust’s independent public accounting firm to
discuss,
among
other things, the internal control structure of the Trust’s financial reporting
function. The full Board receives reports from the Advisor and portfolio
managers as to investment risks as well as other risks that may be also
discussed in Audit Committee.
Information
about Each Trustee’s Qualification, Experience, Attributes or
Skills
The
Board believes that each of the Trustees has the qualifications, experience,
attributes and skills (“Trustee Attributes”) appropriate to their continued
service as Trustees of the Trust in light of the Trust’s business and structure.
Each of the Trustees has substantial business and professional backgrounds that
indicate they have the ability to critically review, evaluate and access
information provided to them. Certain of these business and professional
experiences are set forth in detail in the table above. In addition, the
majority of the Trustees have served on boards for organizations other than the
Trust, as well as having served on the Board of the Trust for a number of years.
They therefore have substantial board experience and, in their service to the
Trust, have gained substantial insight as to the operation of the Trust. The
Board annually conducts a ‘self-assessment’ wherein the effectiveness of the
Board and individual Trustees is reviewed.
In
addition to the information provided in the table above, below is certain
additional information concerning each particular Trustee and certain of their
Trustee Attributes. The information provided below, and in the table above, is
not all-inclusive. Many Trustee Attributes involve intangible elements, such as
intelligence, integrity, work ethic, the ability to work together, the ability
to communicate effectively, the ability to exercise judgment, the ability to ask
incisive questions, and commitment to shareholder interests. In conducting its
annual self-assessment, the Board has determined that the Trustees have the
appropriate attributes and experience to continue to serve effectively as
Trustees of the Trust.
David
G. Mertens.
Mr. Mertens has substantial mutual fund experience and is experienced with
financial, accounting, investment and regulatory matters. He currently serves as
Partner and Head of Business Development of Ballast Equity Management, LLC, a
privately-held investment advisory firm. Mr. Mertens also gained substantial
mutual fund experience through his tenure as Managing Director and Vice
President of Jensen Investment Management, Inc. (“Jensen”) from 2002 to 2017.
Prior to Jensen, Mr. Mertens held various roles in sales and marketing
management with Berger Financial Group, LLC from 1995 to 2002, ending as Senior
Vice President of Institutional Marketing for Berger Financial Group and
President of its limited purpose broker-dealer, Berger
Distributors.
Joe
D. Redwine.
Mr. Redwine has substantial mutual fund experience and is experienced with
financial, accounting, investment and regulatory matters through his experience
as President and CEO of U.S. Bancorp Fund Services, LLC, (now known as U.S. Bank
Global Fund Services), a full-service provider to mutual funds and alternative
investment products. In addition, he has extensive experience consulting with
investment advisers regarding the legal structure of mutual funds, distribution
channel analysis and actual distribution of those funds. Mr. Redwine serves
as an Audit Committee Financial Expert for the Trust.
Raymond
B. Woolson.
Mr. Woolson has served on a number of mutual fund boards and is experienced with
financial, accounting, investment and regulatory matters through his experience
as Lead Independent Trustee and Audit Committee Chairman for the DoubleLine
Funds as well as through his service as President of Apogee Group, Inc., a
company providing financial consulting services. Mr. Woolson also has
substantial mutual fund operations, financial and investment experience through
his prior service in senior and management positions in the mutual fund
industry, including service as Senior Managing
Director
in Investment Management for Mass Mutual Life Insurance Company, where he
oversaw fund accounting, fund administration and client services and also served
as Chief Financial Officer and Treasurer for various funds and other investment
products. Mr. Woolson has also served as a consultant for Coopers & Lybrand
(now known as, “PricewaterhouseCoopers” or “PWC”) where he provided management
consulting services to the mutual fund industry and the investment management
areas of the banking and insurance industries.
Michele
Rackey.
Ms. Rackey has
substantial experience in mutual funds and investment management through her
experience as CEO of Government Employees Benefits Association (GEBA) and also
with The ARK Funds. Ms. Rackey
is
experienced with financial, accounting, investment and regulatory matters and
serves as an Audit Committee Financial Expert for the Trust. Ms. Rackey
was
CEO of GEBA for 17 years and Chief Operating Officer of the ARK Funds for 9
years. Ms. Rackey
has
a BS in Business Administration from the University of Illinois at Chicago and
has an MBA from Keller Graduate School of Management in Chicago. Ms. Rackey
previously
held FINRA series 6, 7 and 63 licenses as well as a Maryland Life and Health
License.
Trust
Committees
The
Trust has established the following three standing committees and the membership
of each committee to assist in its oversight functions, including its oversight
of the risks the Trust faces: the Audit Committee, the QLCC, and the Nominating
and Governance Committee. There is no assurance, however, that the Board’s
committee structure will prevent or mitigate risks in actual practice. The
Trust’s committee structure is specifically not intended or designed to prevent
or mitigate the Fund’s investment risks. The Fund is designed for investors that
are prepared to accept investment risk, including the possibility that as yet
unforeseen risks may emerge in the future.
The
Audit Committee is comprised of all of the Independent Trustees.
Mr. Redwine is the Chairman of the Audit Committee. The Audit Committee
typically meets once per year with respect to the various series of the Trust.
The function of the Audit Committee, with respect to each series of the Trust,
is to review the scope and results of the audit and any matters bearing on the
audit or the Fund’s financial statements and to ensure the integrity of the
Fund’s pricing and financial reporting. The Audit Committee met once with
respect to the Fund during the Fund’s fiscal year ended December 31,
2022.
The
Audit Committee also serves as the QLCC for the Trust for the purpose of
compliance with Rules 205.2(k) and 205.3(c) of the Code of Federal
Regulations, regarding alternative reporting procedures for attorneys retained
or employed by an issuer who appear and practice before the SEC on behalf of the
issuer (the “issuer attorneys”). An issuer attorney who becomes aware of
evidence of a material violation by the Trust, or by any officer, director,
employee, or agent of the Trust, may report evidence of such material violation
to the QLCC as an alternative to the reporting requirements of
Rule 205.3(b) (which requires reporting to the chief legal officer and
potentially “up the ladder” to other entities). The QLCC did not meet with
respect to the Trust during the fiscal year ended December 31,
2022.
The
Nominating and Governance Committee is comprised of all, and only of, the
Independent Trustees. The Nominating and Governance Committee is responsible for
seeking and reviewing candidates for consideration as nominees for Trustees as
is considered necessary from time to time and meets only as necessary. The
Nominating and Governance Committee will consider nominees recommended by
shareholders for vacancies on the Board. Recommendations for consideration by
the Nominating and Governance Committee should be sent to the President of the
Trust in writing together with the appropriate biographical information
concerning each such proposed Nominee, and such recommendation must comply with
the notice provisions set forth in the Trust’s By-Laws. In general, to comply
with such
procedures,
such nominations, together with all required biographical information, must be
delivered to and received by the President of the Trust at the principal
executive office of the Trust between 120 and 150 days prior to the shareholder
meeting at which any such nominee would be voted on.
The
Nominating and Governance Committee meets regularly with respect to the various
series of the Trust. The Nominating and Governance Committee is also responsible
for, among other things, assisting the Board in its oversight of the Trust’s
compliance program under Rule 38a-1 under the 1940 Act, reviewing and
making recommendations regarding Independent Trustee compensation and the
Trustees’ annual “self-assessment.” Mr. Mertens is the Chairman of the
Nominating and Governance Committee. The
Nominating and Governance Committee met once with respect to the Trust during
the fiscal year ended December 31, 2022.
Trustee
Ownership of Fund Shares and Other Interests
The
following table shows the amount of shares in the Fund
and the amount of shares in other portfolios of the Trust owned by the Trustees
as of the calendar year ended December 31, 2022.
|
|
|
|
|
|
|
|
| |
| Independent
Trustees |
Dollar
Range of Equity
Securities in the
Fund |
Aggregate
Dollar Range
of Fund Shares in the Trust |
(None,
$1-$10,000, $10,001-$50,000, $50,001-$100,000,
Over
$100,000) |
|
| David
G. Mertens |
None |
Over
$100,000 |
| Raymond
B. Woolson |
$10,001-$50,000 |
Over
$100,000 |
| Joe
D. Redwine |
None |
Over
$100,000 |
|
Michele
Rackey(1) |
None |
None |
(1)
Ms.
Rackey began serving as a Trustee on January 1, 2023.
As
of December 31, 2022, neither the Independent Trustees nor members of their
immediate family, own securities beneficially or of record in the Advisor, the
distributor, as defined below, or an affiliate of the Advisor or distributor.
Accordingly, neither the Independent Trustees nor members of their immediate
family, have direct or indirect interest, the value of which exceeds $120,000,
in the Advisor, the distributor or any of their affiliates. In addition, during
the two most recently completed calendar years, neither the Independent Trustees
nor members of their immediate families have conducted any transactions (or
series of transactions) in which the amount involved exceeds $120,000 and to
which the Advisor, the distributor or any affiliate thereof was a
party.
Compensation
Effective
January 1, 2023, the Independent Trustees each receive an annual retainer
of $102,500 per year allocated among each of the various portfolios comprising
the Trust, an additional $6,000 per regularly scheduled Board meeting, and an
additional $500 per special meeting, paid by the Trust or applicable
advisors/portfolios, as well as reimbursement for expenses incurred in
connection with attendance at Board meetings. Prior to January 1, 2023, the
annual retainer was $100,000. The Trust Chairman, Chairman of the Audit
Committee, and Chairman of the Nominating and Governance Committee each receive
a separate annual fee of $10,000, $5,000, and $3,000, respectively, provided
that the separate fee for the Chairman of the Audit Committee will be waived if
the same individual serves as both Trust
Chairman
and Audit Committee Chairman. The Trust has no pension or retirement plan. No
other entity affiliated with the Trust pays any compensation to the Trustees.
Set forth below is the compensation received by the Independent Trustees from
the Fund for the fiscal year ended December 31, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Aggregate
Compensation from the Fund(1) |
Pension
or Retirement Benefits Accrued as Part of Fund Expenses |
Estimated
Annual Benefits Upon Retirement |
Total
Compensation from Fund Complex Paid to Trustees(2) |
| Independent
Trustee |
| David
G. Mertens |
$3,900 |
None |
None |
$3,900 |
| Raymond
B. Woolson |
$4,104 |
None |
None |
$4,104 |
| Joe
D. Redwine |
$3,958 |
None |
None |
$3,958 |
|
Michele
Rackey(3) |
$— |
None |
None |
$— |
(1)For
the Fund’s fiscal year ended December 31, 2022.
(2)There
are currently numerous portfolios comprising the Trust. The term “Fund Complex”
applies only to the Fund, and not to any other series of the Trust. For the
Fund’s fiscal year ended December 31, 2022, aggregate Independent Trustees’ fees
for the Trust were $409,500.
(3)Ms.
Rackey began serving as a Trustee on January 1, 2023.
The
Trust and Advisor have each adopted separate Codes of Ethics under
Rule 17j-1 of the 1940 Act. These Codes permit, subject to certain
conditions, access persons of the Advisor to invest in securities that may be
purchased or held by the Fund. The Distributor, relies on the principal
underwriter’s exception under Rule 17j-1(c)(3), of the 1940 Act,
specifically where the Distributor is not affiliated with the Trust or the
Advisor, and no officer, director or general partner of the Distributor serves
as an officer, director or general partner of the Trust or the
Advisor.
The
Board has adopted Proxy Voting Policies and Procedures (the “Proxy Policies”) on
behalf of the Trust which delegate the responsibility for voting proxies to the
Advisor, subject to the Board’s continuing oversight. The Proxy Policies require
that the Advisor vote proxies received in a manner consistent with the best
interests of the Fund and its shareholders. The Proxy Policies also require the
Advisor to present to the Board, at least annually, the Advisor’s Proxy Voting
Policies and Procedures and a record of each proxy voted by the Advisor on
behalf of the Fund, including a report on the resolution of all proxies
identified by the Advisor as involving a conflict of interest.
The
Advisor has adopted Proxy Voting Policies and Procedures which underscore the
Advisor’s concern that all proxy voting decisions be made solely in the best
interests of the Fund and that the Advisor will act in a prudent and diligent
manner intended to enhance the economic value of the assets of the
Fund.
A
general statement of voting policy and specific voting positions has been
established by the Advisor. This Proxy Policy is intended to serve as a
guideline and to further the economic value of each security held by the Fund.
There will be regular review of this policy. Each proxy will be considered
individually,
taking
into account the relevant circumstances at the time of each vote.
The
Advisor will generally vote for:
•the
election of directors;
•the
selection of independent auditors;
•increases
or reclassifications of common stock;
•management
recommendations adding or amending indemnification provisions in charters or
by-laws;
•changes
in a company’s board of directors or outside director compensation;
•proposals
that will maintain or increase shareholder influence over the issuer’s board of
directors and management; and
•proposals
that maintain or increase the rights of shareholders.
Where
a proxy proposal raises a material conflict between the Advisor’s interests and
the Fund’s interests, the Advisor will resolve the conflict by voting in
accordance with the policy guidelines or using the recommendation of an
independent third party. If the third party’s recommendations are not received
in a timely fashion, the Advisor will abstain from voting the securities held by
the Fund.
The
Trust is required to annually file Form N-PX, which lists the Fund’s complete
proxy voting record for the 12-month period ending June 30. The Fund’s
proxy voting record is available without charge, upon request, by calling
toll-free 1-866-205-0523 and on the SEC’s website at www.sec.gov.
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding shares of the Fund. A control person is one who owns
beneficially or through controlled companies more than 25% of the voting
securities of a company or acknowledges the existence of control. Shareholders
with a controlling interest could affect the outcome of voting or the direction
of management of the Fund. For control persons only, if a control person is a
company, the table also indicates the control person’s parent, if any, and the
jurisdiction under the laws of which the control person is organized. As of
March 31, 2023, the following shareholders were considered to be
either a control person or principal shareholder of the Fund:
Investor
Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Name
and Address |
Parent
Company |
Jurisdiction |
%
of Ownership |
Type
of Ownership |
Charles
Schwab & Co., Inc.
Special Custody A/C FBO Customers
211 Main
Street
San Francisco, CA 94105-1905 |
The
Charles Schwab Corporation |
DE |
63.32% |
Record |
|
National
Financial Services LLC
499
Washington Blvd.
Jersey
City, NJ 07310-1995 |
Fidelity
Global Brokerage Group, Inc. |
DE |
26.39% |
Record |
|
|
|
|
| |
Management
Ownership Information.
As of March 31, 2023, the Trustees and officers of the Trust, as a
group, beneficially owned less than 1% of the outstanding shares of the
Fund.
Capital
Advisors, Inc., located at 2222 South Utica Place, Suite 300, Tulsa, Oklahoma
74114, acts as investment advisor to the Fund pursuant to an Investment Advisory
Agreement (the “Advisory Agreement”). Mr. Keith C. Goddard is a control person
of the Advisor due to his greater than 50% ownership of the Advisor and he is a
portfolio manager of the Fund. Subject to such policies as the Board may
determine, the Advisor is responsible for investment decisions for the Fund.
Pursuant to the terms of the Advisory Agreement, the Advisor provides the Fund
with such investment advice and supervision as it deems necessary for the proper
supervision of the Fund’s investments. The Advisor continuously provides
investment programs and determines from time to time what securities shall be
purchased, sold or exchanged and what portion of the Fund’s assets shall be held
uninvested. The Advisor furnishes, at its own expense, all services, facilities
and personnel necessary in connection with managing the investments and
effecting portfolio transactions for the Fund.
The
Advisory Agreement will continue in effect from year to year only if such
continuance is specifically approved at least annually by the Board or by a vote
of a majority of the Fund’s outstanding voting securities and by a majority of
the Trustees who are not parties to the Advisory Agreement or interested persons
of any such party, at a meeting called for the purpose of voting on such
Advisory Agreement. Pursuant to the terms of the Advisory Agreement, the Advisor
is permitted to render services to others. The Advisory Agreement is terminable
without penalty by the Trust on behalf of the Fund on 60 days’ written
notice to the Advisor when authorized either by a majority vote of the Fund’s
shareholders or by a vote of a majority of the Board of the Trust, or by the
Advisor on 60 days’ written notice to the Trust, and will automatically
terminate in the event of its “assignment” (as defined in the 1940 Act). The
Advisory Agreement provides that the Advisor under such agreement shall not be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution of portfolio
transactions for the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties thereunder.
As
compensation for its services, the Fund pays the Advisor a management fee at the
rate specified in the Prospectus. In addition to the fees payable to the
Advisor, the Fund is responsible for its own operating expenses, including: fees
and expenses incurred in connection with the issuance, registration and transfer
of its shares; brokerage and commission expenses; all expenses of transfer,
receipt, safekeeping, servicing and accounting for the cash, securities and
other property of the Trust for the benefit of the Fund including all fees and
expenses of its custodian, shareholder services agent and accounting services
agent; interest charges on any borrowings; costs and expenses of pricing and
calculating its daily NAV per share and of maintaining its books of account
required under the 1940 Act; taxes, if any; a pro rata portion of expenditures
in connection with meetings of the Fund’s shareholders and the Board that are
properly payable by the Fund; salaries and expenses of officers and fees and
expenses of members of the Board or members of any advisory board or committee
who are not members of, affiliated with or interested persons of the Advisor or
Administrator; insurance premiums on property or personnel of the Fund which
inure to its benefit, including liability and fidelity bond insurance; the cost
of preparing and printing reports, proxy statements, prospectuses and the
statement of additional information of the Fund or other communications for
distribution to existing shareholders; legal, auditing and accounting fees;
trade association membership dues (including membership dues in the Investment
Company Institute allocable to the Fund); fees and expenses (including legal
fees) of registering and maintaining registration of its shares for sale under
federal and applicable state and foreign securities laws; all expenses of
maintaining and servicing shareholder accounts, including all charges for
transfer, shareholder record keeping, dividend disbursing, redemption, and other
agents for the benefit of the Fund, if any; and all other charges
and
costs of its operation plus any extraordinary and non-recurring expenses, except
as otherwise prescribed in the Advisory Agreement.
Though
the Fund is responsible for its own operating expenses, the Advisor has
contractually agreed to waive a portion or all of its management fees and pay
Fund expenses to the extent necessary to limit the Fund’s Total Annual Fund
Operating Expenses (excluding acquired fund fees and expenses, taxes, interest
and extraordinary expenses) to the limit set forth in the fees and expense
tables in the Prospectus. If fees and expenses for any fiscal year exceed the
Fund’s expense limitations, the Advisor shall waive a portion or all of its
management fee to the extent of its share of such excess expenses. The amount of
any such reduction to be borne by the Advisor shall be deducted from the monthly
management fee otherwise payable with respect to the Fund during such fiscal
year; and if such amounts should exceed the monthly management fee, the Advisor
shall promptly pay to the Fund its share of such excess Fund expenses. The
Advisor does not have the ability to recoup previously paid fees and expenses or
future paid fees and expenses.
For
the fiscal years indicated below, the Fund paid the following management fees to
the Advisor:
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Fiscal
Year Ended December 31 |
|
| 2022 |
2021 |
2020 |
| Management
Fees Accrued |
$667,694 |
$751,235 |
$559,231 |
| Management
Fees Waived by Advisor |
$28,782 |
$60,066 |
$86,212 |
| Net
Management Fees Paid to Advisor |
$638,912 |
$691,169 |
$473,019 |
Distributor
The
Trust has entered into a Distribution Agreement (the “Distribution Agreement”)
with Quasar Distributors, LLC, 111 East Kilbourn Avenue, Suite 2200,
Milwaukee, Wisconsin 53202 (the “Distributor”), pursuant to which the
Distributor acts as the Fund’s distributor, provides certain administration
services and promotes and arranges for the sale of the Fund’s shares. The
offering of the Fund’s shares is continuous. The Distribution Agreement will
continue in effect only if such continuance is specifically approved at least
annually by the Board or by vote of a majority of the Fund’s outstanding voting
securities and, in either case, by a majority of the Trustees who are not
parties to the Distribution Agreement or “interested persons” (as defined in the
1940 Act) of any such party. The Distribution Agreement is terminable without
penalty by the Trust on behalf of the Fund on 60 days’ written notice when
authorized either by a majority vote of the Fund’s shareholders or by vote of a
majority of the Board, including a majority of the Trustees who are not
“interested persons” (as defined in the 1940 Act) of the Trust, or by the
Distributor on 60 days’ written notice, and will automatically terminate in
the event of its “assignment” (as defined in the 1940 Act).
Fund
Administrator
Pursuant
to the Fund Administration Servicing Agreement (the “Administration Agreement”),
U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund
Services (“Fund Services”), 615 East Michigan Street, Milwaukee, Wisconsin
53202, acts as administrator for the Fund. Fund Services provides certain
administrative services to the Fund, including, among other responsibilities,
coordinating the negotiation of contracts and fees with, and the monitoring of
performance and billing of, the Fund’s independent contractors and agents;
preparation for signature by an officer of the Trust of all
documents
required to be filed for compliance by the Trust and the Fund with applicable
federal securities laws and regulations excluding those of the securities laws
of various states; arranging for the computation of performance data, including
net asset value and yield; responding to shareholder inquiries; and arranging
for the maintenance of books and records of the Fund, and providing, at its own
expense, office facilities, equipment and personnel necessary to carry out its
duties. In this capacity, Fund Services does not have any responsibility or
authority for the management of the Fund, the determination of investment
policy, or for any matter pertaining to the distribution of Fund shares.
Additionally, Fund Services provides CCO services to the Trust under a separate
agreement. The cost of the CCO’s services is charged to the Fund and approved by
the Board annually. Fund Services also acts as the Fund’s
accountant.
The
Administration Agreement is terminable without penalty by the Trust on behalf of
the Fund or by the Administrator on 60 days’ written notice (as defined in the
1940 Act). The Administration Agreement also provides that neither Fund Services
nor its personnel shall be liable for any error of judgment or mistake of law or
for any act or omission in the administration of the Fund, except for willful
misfeasance, bad faith or negligence in the performance of its or their duties
or by reason of reckless disregard of its or their obligations and duties under
the Administration Agreement.
For
the fiscal years indicated below, the Fund paid the following fees to Fund
Services for fund administration and fund accounting services:
|
|
|
|
|
|
|
|
| |
Administration
and Accounting Fees
Paid During Fiscal Years Ended
December 31 |
| 2022 |
2021 |
2020 |
| $148,632 |
$154,369 |
$128,022 |
Custodian
and Transfer Agent
U.S.
Bank National Association, an affiliate of Fund Services, is the custodian of
the assets of the Fund (the “Custodian”) pursuant to a custody agreement between
the Custodian and the Trust, and holds the Fund’s portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The Custodian is compensated with an asset-based fee plus transaction
fees and is reimbursed for out-of-pocket expenses. The Custodian’s address is
1555 North RiverCenter Drive, Suite 302, Milwaukee, Wisconsin
53212.
Fund
Services also acts as the Fund’s transfer and dividend disbursing agent (the
“Transfer Agent”) under a separate agreement with the Trust. The Custodian and
the Transfer Agent do not participate in decisions relating to the purchase and
sale of securities by the Fund. The Custodian and its affiliates may participate
in revenue sharing arrangements with service providers of mutual funds in which
the Fund may invest.
Independent
Registered Public Accounting Firm and Legal Counsel
Tait,
Weller & Baker LLP, Two Liberty Place, 50 South 16th
Street, Suite 2900, Philadelphia, Pennsylvania 19102, is the independent
registered public accounting firm for the Fund providing audit services, tax
services and assistance with respect to the preparation of filings with the U.S.
Securities and Exchange Commission for the Fund.
Sullivan
& Worcester LLP ("Sullivan & Worcester"), 1633 Broadway, 32nd Floor, New
York, New York 10019, is counsel to the Fund and provides counsel on legal
matters relating to the Fund. Sullivan & Worcester also serves as
independent legal counsel to the Board.
Mr.
Keith C. Goddard, CFA, CEO and Chief Investment Officer and Mr. Steven V.
Soranno, CFA, CAIA and Director of Equity Research are the co-portfolio managers
primarily responsible for the day-to-day management of the Fund. The following
tables show the number of other accounts (not including the Fund) managed by Mr.
Goddard and Mr. Soranno and the total assets in the accounts managed within
various categories as of December 31, 2022.
Keith
C. Goddard
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Type
of Accounts |
Number
of
Accounts
(Excluding the Fund) |
Total
Assets |
Number
of Accounts for Which Advisory Fee is Based on Performance |
Total
Assets in Accounts with Advisory Fee Based on Performance |
| Registered
Investment Companies |
0 |
$0 |
0 |
$0 |
| Other
Pooled Investments |
0 |
$0 |
0 |
$0 |
| Other
Accounts |
3 |
$318
million |
0 |
$0 |
Steven
V. Soranno
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Type
of Accounts |
Number
of
Accounts
(Excluding the Fund) |
Total
Assets |
Number
of Accounts for which Advisory Fee is Performance Based |
Total
Assets in Accounts with Advisory Fee Based on Performance |
| Registered
Investment Companies |
0 |
$0 |
0 |
$0 |
| Other
Pooled Investments |
0 |
$0 |
0 |
$0 |
| Other
Accounts |
1 |
$1.1
billion |
0 |
$0 |
Material
Conflicts of Interest.
Where conflicts of interest arise between the Fund and other accounts managed by
the portfolio managers, the portfolio managers will proceed in a manner that
ensures the Fund will not be treated materially less favorably. There may be
instances where similar portfolio transactions may be executed for the same
security for numerous accounts managed by the portfolio managers. In such
instances, securities will be allocated in accordance with the Advisor’s trade
allocation policy.
Potential
conflicts may arise if the investment strategies of the Fund differ from the
strategy required to comply with the unique objectives and constraints of
another client portfolio managed by the portfolio managers. Whenever a given
investment opportunity is appropriate for all of the firm’s client relationships
(i.e.,
the Fund, the private pooled fund, and the firm’s separately managed accounts),
each constituency receives a pro-rata share of an executed block trade. None of
the firm’s client relationships, including the Fund, receives preferential
treatment.
Compensation.
Mr. Goddard’s compensation is comprised of a fixed salary and bonus from the
Advisor. The compensation is not based upon performance or value of the Fund.
From time to time, the Advisor pays dividends on its common stock, of which Mr.
Goddard is a principal shareholder. Mr. Soranno’s compensation is comprised of a
fixed salary, a bonus from the Advisor as well as company stock options. Bonuses
are determined by the Advisor and represent a percentage of salary plus any
incentive for new business to the Advisor. Bonuses are not based on the assets
of the Fund.
Securities
Owned in the Fund by Portfolio Managers.
As of December 31, 2022,
Mr. Goddard and Mr. Soranno, respectively, beneficially owned the
following securities in the Fund.
|
|
|
|
|
| |
|
Name
of Portfolio Manager |
Dollar
Range of Equity Securities Owned in the Fund
(None,
$1-$10,000, $10,001-$50,000, $50,001-$100,000, $100,001 - $500,000,
$500,001 to $1,000,000, Over $1,000,000) |
| Mr.
Keith C. Goddard |
Over
$1,000,000 |
| Mr.
Steven V. Soranno |
$50,001
- $100,000 |
Pursuant
to the Advisory Agreement, the Advisor determines which securities are to be
purchased and sold by the Fund and which broker-dealers will be used to execute
the Fund’s portfolio transactions. Purchases and sales of securities in the
over-the-counter market will be executed directly with a “market-maker” unless,
in the opinion of the Advisor, a better price and execution can otherwise be
obtained by using a broker for the transaction.
Purchases
of portfolio securities for the Fund also may be made directly from issuers or
from underwriters. Where possible, purchase and sale transactions will be made
through dealers (including banks) that specialize in the types of securities
that the Fund will be holding, unless better executions are available elsewhere.
Dealers and underwriters usually act as principal for their own account.
Purchases from underwriters will include a concession paid by the issuer to the
underwriter and purchases from dealers will include the spread between the bid
and the asked price. If the execution and price offered by more than one broker,
dealer or underwriter are comparable, the order may be allocated to a broker,
dealer or underwriter that has provided research or other services as discussed
below.
In
placing portfolio transactions, the Advisor will seek best execution. The full
range and quality of services available will be considered in making these
determinations, such as the size of the order, the difficulty of execution, the
operational facilities of the firm involved, the firm’s risk in positioning a
block of securities, and other factors. The Advisor considers such information,
which is in addition to and not in lieu of the services required to be performed
by it under its Advisory Agreement with the Fund, to be useful in varying
degrees, but of indeterminable value. Portfolio transactions may be placed with
broker-dealers who sell shares of the Fund subject to rules adopted by FINRA and
the SEC.
Investment
decisions for the Fund are made independently from those of other client
accounts or mutual fund managed or advised by the Advisor. Nevertheless, it is
possible that at times identical securities will be acceptable for both the Fund
and one or more of such client accounts. In such event, the position of the Fund
and such client account(s) in the same issuer may vary and the length of time
that each may choose to hold its investment in the same issuer may likewise
vary. However, to the extent any of these client accounts seeks to acquire the
same security as the Fund at the same time, the Fund may not be able to acquire
as large a portion of such security as it desires, or it may have to pay a
higher price or obtain a lower yield for such security. Similarly, the Fund may
not be able to obtain as high a price for, or as large
an
execution of, an order to sell any particular security at the same time. If one
or more of such client accounts simultaneously purchases or sells the same
security that the Fund is purchasing or selling, each day’s transactions in such
security will be allocated between the Fund and all such client accounts in a
manner deemed equitable by the Advisor, taking into account the respective sizes
of the accounts and the amount being purchased or sold. It is recognized that in
some cases this system could have a detrimental effect on the price or value of
the security insofar as the Fund is concerned. In other cases, however, it is
believed that the ability of the Fund to participate in volume transactions may
produce better executions for the Fund.
The
Fund does not place securities transactions through brokers for selling shares
of the Fund. However, as stated above, broker-dealers who execute brokerage
transactions may effect purchases of shares of the Fund for their
customers.
During
the fiscal year ended
December 31, 2022, the
Fund did not invest in the securities of any of its regular
broker-dealers.
For
the fiscal years indicated below, the Fund paid the following in brokerage
commissions:
|
|
|
|
|
|
|
|
| |
| Aggregate
Brokerage Commissions Paid During Fiscal Years Ended
December 31 |
| 2022 |
2021 |
2020 |
| $307 |
$416 |
$470 |
The
Advisor did not direct the Fund’s brokerage transactions to a broker because of
research services during the Fund’s fiscal year ended
December 31, 2022.
The
Advisor, out of its own resources and not out of Fund assets (i.e.,
without additional cost to the Fund or its shareholders), may provide additional
cash payments or non-cash compensation to some, but not all, brokers and other
financial intermediaries who sell shares of the Fund. Such payments and
compensation are in addition to other fees paid by the Fund to such brokers and
other financial intermediaries. These arrangements are sometimes referred to as
“revenue sharing” arrangements. Revenue sharing arrangements are not financed by
the Fund, and thus, do not result in increased Fund expenses. They are not
reflected in the fees and expenses listed in the fees and expenses section of
the Prospectus.
The
information provided below supplements the information contained in the
Prospectus regarding the purchase and redemption of the Fund’s
shares.
How
to Buy Shares
Fund
shares are purchased at the NAV per share next determined after the Transfer
Agent receives your order in proper form. In most cases, in order to receive
that day’s NAV, the Transfer Agent must receive your order in proper form before
the close of regular trading on the New York Stock Exchange (“NYSE”), currently
4:00 p.m., Eastern Time. Orders paid by check and received after 4:00 p.m.,
Eastern Time, will generally be available for the purchase of shares the
following business day.
If
you are considering redeeming or transferring shares to another person shortly
after purchase, you should pay for those shares with a wire to avoid any delay
in redemption or transfer. Otherwise the Fund may delay payment until the
purchase price of those shares has been collected, which may take up to
15 calendar days.
The
Trust reserves the right in its sole discretion (1) to suspend the
continued offering of the Fund’s shares, and (2) to reject purchase orders
in whole or in part when in the judgment of the Advisor or the Distributor such
rejection is in the best interest of the Fund.
Selected
securities brokers, dealers or financial intermediaries may offer shares of the
Fund. Investors should contact these agents directly for appropriate
instructions, as well as information pertaining to accounts and any service or
transaction fees that may be charged by those agents. Purchase orders through
securities brokers, dealers and other financial intermediaries are effected at
the next-determined NAV after receipt of the order by such agent before the
Fund’s daily cutoff time, currently the close of regular NYSE trading. Orders
received after that time will be purchased at the next-determined NAV per
share.
How
to Sell Shares
You
can sell your Fund shares any day the NYSE is open for regular trading, either
directly to the Fund or through your investment representative. The Fund will
forward redemption proceeds or redeem shares for which it has collected payment
of the purchase price.
Payments
to shareholders for Fund shares redeemed directly from the Fund will be made as
promptly as possible but no later than seven days after receipt by the Fund’s
Transfer Agent of the written request in proper form, with the appropriate
documentation as stated in the Prospectus, except that the Fund may suspend the
right of redemption or postpone the date of payment during any period when
(a) trading on the NYSE is restricted as determined by the SEC or the NYSE
is closed for other than weekends and holidays; (b) an emergency exists as
determined by the SEC making disposal of portfolio securities or valuation of
net assets of the Fund not reasonably practicable; or (c) for such other
period as the SEC may permit for the protection of the Fund’s shareholders. At
various times, the Fund may be requested to redeem shares for which it has not
yet received confirmation of good payment; in this circumstance, the Fund may
delay the payment of the redemption proceeds until payment for the purchase of
such shares has been collected and confirmed to the Fund.
Selling
Shares Directly to the Fund
Send
a signed letter of instruction to the Transfer Agent. The price you will receive
is the next NAV calculated after the Fund receives your request in proper form.
In order to receive that day’s NAV, the Transfer Agent must receive your request
before the close of regular trading on the NYSE.
Selling
Shares Through Your Investment Representative
Your
investment representative must receive your request before the close of regular
trading on the NYSE to receive that day’s NAV. Your investment representative
will be responsible for furnishing all necessary documentation to the Transfer
Agent, and may charge you for its services.
If
you want your redemption proceeds sent to an address other than your address as
it appears on the Transfer Agent’s records, a signature guarantee is required
(see “Signature Guarantees” below). The Fund may require additional
documentation for the sale of shares by a corporation, partnership, agent or
fiduciary, or a surviving joint owner. Contact the Transfer Agent for
details.
Delivery
of Proceeds
The
Fund generally sends you payment for your shares the business day after your
request is received in proper form, assuming the Fund has collected payment of
the purchase price of your shares. Under unusual circumstances, the Fund may
suspend redemptions, or postpone payment for more than seven days, as permitted
by federal securities law.
Telephone
Redemptions
Upon
receipt of any instructions or inquiries by telephone from a shareholder or, if
held in a joint account, from either party, or from any person claiming to be
the shareholder, the Fund or its agent are authorized, without notifying the
shareholder or joint account parties, to carry out the instructions or to
respond to the inquiries, consistent with the service options chosen by the
shareholder or joint shareholders in his or their latest account application or
other written request for services, including redeeming shares of the Fund and
depositing and withdrawing monies from the bank account specified in the Bank
Account Registration section of the shareholder’s latest account application or
as otherwise properly specified to the Fund in writing.
The
Transfer Agent will employ these and other reasonable procedures to confirm that
instructions communicated by telephone are genuine; if such procedures are
observed, neither the Fund nor its agents will be liable for any loss,
liability, cost or expense arising out of any redemption request, including any
fraudulent or unauthorized request. For information, consult the Transfer
Agent.
During
periods of unusual market changes and shareholder activity, you may experience
delays in contacting the Transfer Agent by telephone. In this event, you may
wish to submit a written redemption request, as described in the Prospectus, or
contact your investment representative. The telephone redemption privilege may
be modified or terminated without notice.
Signature
Guarantees
To
protect the Fund and its shareholders, a signature guarantee is required for all
written redemption requests over $100,000. Signature(s) on the redemption
request must be guaranteed by an “eligible guarantor institution.” These include
banks, broker-dealers, credit unions and savings institutions. A broker-dealer
guaranteeing signatures must be a member of a clearing corporation or maintain
net capital of at least $100,000. Credit unions must be authorized to issue
signature guarantees. Signature guarantees will be accepted from any eligible
guarantor institution which participates in a signature guarantee program. A
notary public cannot provide a signature guarantee. Certain other transactions
or account requests also require a signature guarantee.
Redemptions
In-kind
The
Trust has elected to be governed by Rule 18f-1 under the 1940 Act so that the
Fund is obligated to redeem its shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for any
shareholder of the Fund. The Fund has reserved the right to pay the redemption
price of its shares in excess of $250,000 or l% of its net asset value either
totally or partially, by a distribution in-kind of portfolio securities (instead
of cash). The securities so distributed would be valued at the same amount as
that assigned to them in calculating the NAV for the shares being sold. If a
shareholder received a distribution in-kind, the shareholder could incur
brokerage or other charges in converting the securities to cash.
The
Fund does not intend to hold any significant percentage of its portfolio in
illiquid securities, although the Fund, like virtually all mutual funds, may
from time to time hold a small percentage of securities that are illiquid. In
the unlikely event the Fund were to elect to make an in-kind redemption, the
Fund expects
that
it would follow the Trust protocol of making such distribution by way of a pro
rata distribution of securities that are traded on a public securities market or
are otherwise considered liquid pursuant to the Fund’s liquidity policies and
procedures. Except as otherwise may be approved by the Trustees, the securities
that would not be included in an in-kind distribution include (1) unregistered
securities which, if distributed, would be required to be registered under the
Securities Act of 1933 (the “1933 Act”), as amended; (2) securities issued by
entities in countries which (a) restrict or prohibit the holding of securities
by non-nationals other than through qualified investment vehicles, such as a
fund, or (b) permit transfers of ownership of securities to be effected only by
transactions conducted on a local stock exchange; and (3) certain Fund assets
that, although they may be liquid and marketable, must be traded through the
marketplace or with the counterparty to the transaction in order to effect a
change in beneficial ownership.
The
NAV of the Fund’s shares will fluctuate and is determined as of the close of
trading on the NYSE (generally 4:00 p.m., Eastern Time) each day that the NYSE
is open for business. The NYSE annually announces the days on which it will not
be open for trading. The most recent announcement indicates that it will not be
open for the following holidays: New Year’s Day, Martin Luther King, Jr. Day,
Washington’s Birthday/Presidents’ Day, Good Friday, Memorial Day, Juneteenth
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However,
the NYSE may close on days not included in that announcement.
The
NAV per share is computed by dividing the value of the securities held by the
Fund plus any cash or other assets (including interest and dividends accrued but
not yet received) minus all liabilities (including accrued expenses) by the
total number of shares in the Fund outstanding at such time.
Generally,
the Fund’s
investments are valued at market value or, in the absence of a market value, at
fair value as determined in good faith by the Advisor
as valuation
designee pursuant to procedures approved by or under the direction of the Board.
Pursuant to those procedures, the valuation designee considers, among other
things: (1) the last sales price on the securities exchange, if any, on which a
security is primarily traded; (2) the mean between the bid and asked prices; (3)
price quotations from an approved pricing service; and (4) other factors as
necessary to determine a fair value under certain circumstances.
Securities
that are traded on more than one exchange are valued on the exchange determined
by the Advisor to be the primary market. Securities primarily traded in the
National Association of Securities Dealers Automated Quotation (“Nasdaq”) Global
Market System for which market quotations are readily available shall be valued
using the Nasdaq Official Closing Price (“NOCP”). If there has been no sale on
such exchange or on Nasdaq on such day, the security is valued at the mean
between the bid and asked prices. Over-the-counter (“OTC”) securities which are
not traded in the Nasdaq Global Market System shall be valued at the most recent
sales price.
Debt
securities are valued on the basis of valuations provided by independent
third-party pricing services, approved by the valuation
designee,
or at fair value as determined in good faith by procedures adopted
by the valuation designee.
Any such pricing service, in determining value, will use information with
respect to transactions in the securities being valued, quotations from dealers,
market transactions in comparable securities, analyses and evaluations of
various relationships between securities and yield to maturity
information.
All
other assets of the Fund are valued in such manner as the valuation
designee
in good faith deems appropriate to reflect their fair value.
Each
series of the Trust is treated as a separate entity for federal income tax
purposes. The Fund has elected and intends to continue to qualify to be treated
as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the “Code”), and to comply with all applicable
requirements regarding the source of its income, diversification of its assets
and the amount and timing of its distributions. The Fund’s policy is to
distribute to its shareholders all of its investment company taxable income and
any net realized long‑term capital gains for each fiscal year in a manner that
complies with the distribution requirements of the Code, so that the Fund will
not be subject to federal income or excise taxes in any year. If the Fund does
not qualify as a regulated investment company, it will be taxed as a
corporation.
In
order to qualify as a regulated investment company, the Fund must, among other
things, derive at least 90% of its gross income each year from dividends,
interest, payments with respect to loans of stock and securities, gains from the
sale or other disposition of stock or securities or foreign currency gains
related to investments in stock or securities, or other income (generally
including gains from options, futures or forward contracts) derived with respect
to the business of investing in stock, securities or currency, and net income
derived from an interest in a qualified publicly traded partnership. The Fund
also must satisfy both of the following asset diversification tests: At the end
of each quarter of each taxable year, (i) at least 50% of the value of the
Fund’s total assets must consist of cash and cash items (including receivables),
U.S. government securities, the securities of other regulated investment
companies, and other securities, with such other securities being limited in
respect of any one issuer to an amount not greater than 5% of the value of the
Fund’s total assets and not more than 10% of the outstanding voting securities
of such issuer, and (ii) not more than 25% of the value of the Fund’s total
assets may be invested in the securities of any one issuer (other than U.S.
government securities or the securities of other regulated investment
companies), the securities of any two or more issuers (other than the securities
of other regulated investment companies) that the Fund controls (by owning 20%
or more of their outstanding voting stock) and that are determined to be engaged
in the same or similar trades or businesses or related trades or businesses, or
the securities of one or more qualified publicly traded partnerships. The Fund
also must distribute each taxable year sufficient dividends to its shareholders
to claim a dividends paid deduction equal to at least the sum of 90% of the
Fund’s net investment income (which generally includes dividends, interest and
the excess of net short-term capital gain over net long-term capital loss) and
90% of the Fund’s net tax-exempt interest, if any.
If
the Fund does not qualify as a regulated investment company, it will be taxed as
a regular corporation and will not be entitled to deduct dividends paid to
shareholders. In addition to the taxable year distribution requirement described
in the previous paragraph, in order to avoid the imposition of a nondeductible
4% income tax, the Fund must distribute (or be deemed to have distributed) by
December 31 of each calendar year (i) at least 98% of its ordinary income
for such year, (ii) at least 98.2% of the excess of its realized capital gains
over its realized capital losses for the 12-month period ending on October 31
during such year, and (iii) any amounts from prior years that were not
distributed and on which no federal income
tax was paid. The Fund intends to declare and pay dividends and other
distributions, as stated in the Prospectus.
Net
investment income generally consists of interest and dividend income, less
expenses. Net realized capital gains for a fiscal period are computed by taking
into account any capital loss carryforward of the
Fund.
As of December 31, 2022, the Fund had short-term tax capital losses of $799,230
which may be carried over to offset future gains. These losses do not
expire.
Distributions
of net investment income and net short-term capital gains are taxable to
shareholders as ordinary income or qualified dividend income. Distributions of
certain qualified dividend income paid out of the Fund’s net investment income
may be taxable to noncorporate shareholders at long-term capital gain rates,
which are significantly lower than the highest rate that applies to ordinary
income. In the case of corporate shareholders, a portion of the distributions
may qualify for the intercorporate dividends-received deduction to the extent
the Fund reports the amount distributed as a qualifying dividend. This reported
amount cannot, however, exceed the aggregate amount of qualifying dividends
received by the Fund for its taxable year. In view of the Fund’s investment
policies, it is expected that dividends from domestic corporations will be part
of the Fund’s gross income and that, accordingly, part of the Fund’s
distributions may be eligible for the dividends-received deduction for corporate
shareholders. However, the portion of the Fund’s gross income attributable to
qualifying dividends is largely dependent on the Fund’s investment activities
for a particular year and therefore cannot be predicted with certainty. The
deduction may be reduced or eliminated if the Fund shares held by a corporate
investor are treated as debt-financed or are held for less than
46 days.
The
Fund may be subject to foreign withholding taxes on dividends and interest
earned with respect to securities of foreign corporations.
Any
long-term capital gain distributions are taxable to shareholders as long-term
capital gains regardless of the length of time shares have been held by such
shareholder. There is no requirement that the Fund take into consideration any
tax implications when implementing its investment strategy. Capital gains
distributions are not eligible for the dividends‑received deduction referred to
above. Distributions of any net investment income and net realized capital gains
will be taxable as described above, whether received in shares or in cash.
Shareholders who choose to receive distributions in the form of additional
shares will have a cost basis for federal income tax purposes in each share so
received equal to the NAV of a share on the reinvestment date. Distributions
generally are taxable when received. However, distributions declared in October,
November or December to shareholders of record on a date in such a month and
paid the following January are taxable as if received on December 31.
Distributions are includable in alternative minimum taxable income in computing
liability for the alternative minimum tax of a shareholder who is an individual.
Shareholders should note that the Fund may make taxable distributions of income
and capital gains even when share values have declined.
For
taxable years beginning after 2017 and before 2025, non-corporate taxpayers
generally may deduct 20% of “qualified business income” derived either directly
or through partnerships or S corporations. For this purpose, “qualified business
income” generally includes dividends paid by a real estate investment trust
(“REIT”) and certain income from publicly traded partnerships. Regulations
recently adopted by the United States Treasury allow non-corporate shareholders
of the Fund to benefit from the 20% deduction with respect to net REIT dividends
received by the Fund if the Fund meets certain reporting requirements. There is
currently no mechanism for the Fund, to the extent that the Fund invests in
MLPs, to pass through to non-corporate shareholders the character of income
derived from MLP investments so as to allow such shareholders to claim this
deduction. It is uncertain whether future legislation or other guidance will
enable the Fund to pass through to non-corporate shareholders the ability to
claim this deduction.
A
redemption of Fund shares may result in recognition of a taxable gain or loss.
Any loss realized upon a redemption of shares within six months from the date of
their purchase will be treated as a long-term
capital
loss to the extent of any amounts treated as distributions of long-term capital
gains during such 6‑month period. Any loss realized upon a redemption may be
disallowed under certain wash sale rules to the extent shares of the same Fund
are purchased (through reinvestment of distributions or otherwise) within
30 days before or after the redemption.
Under
the Code, the Fund will be required to report to the Internal Revenue Service
all distributions of taxable income and capital gains as well as gross proceeds
from the redemption of Fund shares, except in the case of exempt shareholders,
which includes most corporations. Pursuant to the backup withholding provisions
of the Code, distributions of any taxable income and capital gains and proceeds
from the redemption of Fund shares may be subject to withholding of federal
income tax at a rate under section 3406 of the Code, in the case of
non-exempt shareholders who fail to furnish the Fund with their Social Security
or taxpayer identification numbers and with required certifications regarding
their status under the federal income tax law. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in additional shares, will be reduced by the amounts required
to be withheld. Corporate and other exempt shareholders should provide the Fund
with their taxpayer identification numbers or certify their exempt status in
order to avoid possible erroneous application of backup withholding. Backup
withholding is not an additional tax and any amount withheld may be credited
against a shareholder’s ultimate federal income tax liability if proper
documentation is provided. The Fund reserves the right to refuse to open an
account for any person failing to provide a certified taxpayer identification
number.
The
foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. citizens or residents and U.S. domestic
corporations, estates the income of which is subject to United States federal
income taxation regardless of its source and trusts that (1) are subject to
the primary supervision of a court within the United States and one or more
United States persons have the authority to control all substantial decisions of
the trust or (2) have a valid election in effect under applicable United States
Treasury regulations to be treated as a United States person.
The
Foreign Account Tax Compliance Act (“FATCA”). A 30% withholding tax on the
Fund’s ordinary income distributions, generally applies if paid to a foreign
entity unless: (i) if the foreign entity is a “foreign financial
institution,” it undertakes certain due diligence, reporting, withholding and
certification obligations, (ii) if the foreign entity is not a “foreign
financial institution,” it identifies certain of its U.S. investors or
(iii) the foreign entity is otherwise excepted under FATCA. If applicable
and subject to any applicable intergovernmental agreements, withholding under
FATCA is required generally with respect to ordinary income distributions from
the Fund. If withholding is required under FATCA on a payment related to your
shares, investors that otherwise would not be subject to withholding (or that
otherwise would be entitled to a reduced rate of withholding) on such payment
generally will be required to seek a refund or credit from the IRS to obtain the
benefits of such exemption or reduction. The Fund will not pay any additional
amounts in respect to amounts withheld under FATCA. You should consult your tax
advisor regarding the effect of FATCA based on your individual circumstances, as
well as the other U.S. federal, state, local and foreign tax consequences of an
investment in the Fund’s shares.
Distributions
and redemptions may be subject to state and local income taxes, and the
treatment thereof may differ from the federal income tax treatment. Foreign
taxes may also apply to non-U.S. investors. Shareholders are advised to consult
with their own tax advisors concerning the application of foreign, federal,
state and local taxes to an investment in the Fund.
Capital
losses sustained and not used in a taxable year may be carried forward
indefinitely to offset capital gains of the Fund in future years.
No
rulings with respect to tax matters of the Fund will be sought from the Internal
Revenue Service. Sullivan & Worcester has expressed no opinion in respect of
the foregoing or the tax information in the Prospectus.
The
Fund will receive income in the form of dividends and interest earned on its
investments in securities. This income, less the expenses incurred in its
operations, is the Fund’s net investment income, substantially all of which will
be declared as dividends to the Fund’s shareholders.
The
amount of income dividend payments by the Fund is dependent upon the amount of
net investment income received by the Fund from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board. The Fund does not pay
“interest” or guarantee any fixed rate of return on an investment in its
shares.
The
Fund also may derive capital gains or losses in connection with sales or other
dispositions of its portfolio securities. Any net gain the Fund may realize from
transactions involving investments held less than the period required for
long-term capital gain or loss recognition or otherwise producing short-term
capital gains and losses (taking into account any carryover of capital losses
from prior taxable years), although a distribution from capital gains, will be
distributed to shareholders with and as a part of dividends giving rise to
ordinary income. If during any year the Fund realizes a net gain on transactions
involving investments held more than the period required for long-term gain or
loss recognition or otherwise producing long‑term capital gains and losses, the
Fund will have a net long-term capital gain. After deduction of the amount of
any net short-term capital loss, the balance (to the extent not offset by any
capital losses carried over from prior taxable years) will be distributed and
treated as long-term capital gains in the hands of the shareholders regardless
of the length of time the Fund’s shares may have been held by the shareholders.
For more information concerning applicable capital gains tax rates, see your tax
advisor.
Any
dividend or distribution paid by the Fund reduces the Fund’s NAV per share on
the date paid by the amount of the dividend or distribution per share.
Accordingly, a dividend or distribution paid shortly after a purchase of shares
by a shareholder would represent, in substance, a partial return of capital (to
the extent it is paid on the shares so purchased), even though it would be
subject to income taxes.
Dividends
and other distributions will be made in the form of additional shares of the
Fund unless the shareholder has otherwise indicated. Investors have the right to
change their elections with respect to the reinvestment of dividends and
distributions by calling or writing to the Transfer Agent, but any such change
will be effective only as to dividends and other distributions for which the
record date is seven or more business days after the Transfer Agent has received
the written request.
The
Trust has established an Anti-Money Laundering Compliance Program (the “AML
Program”) as required by the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA
PATRIOT Act”). In order to ensure compliance with this law, the Trust’s AML
Program provides for the development of internal practices, procedures and
controls,
designation
of anti-money laundering compliance officers, an ongoing training program and an
independent audit function to determine the effectiveness of the AML
Program.
Procedures
to implement the AML Program include, but are not limited to, determining that
the Fund’s distributor and transfer agent have established proper anti-money
laundering procedures, reporting suspicious and/or fraudulent activity, checking
shareholder names against designated government lists, including Office of
Foreign Asset Control (“OFAC”), and a complete and thorough review of all new
opening account applications. The Fund will not transact business with any
person or legal entity whose identity and beneficial owners, if applicable,
cannot be adequately verified under the provisions of the USA PATRIOT
Act.
The
Trust’s Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest and to divide or combine
the shares into a greater or lesser number of shares without thereby changing
the proportionate beneficial interest in the Fund. Each share represents an
interest in the Fund proportionately equal to the interest of each other share.
Upon the Fund’s liquidation, all shareholders would share pro rata in the net
assets of the Fund available for distribution to shareholders.
With
respect to the Fund, the Trust may offer more than one class of shares. The
Trust has reserved the right to create and issue additional series or classes.
Each share of a series or class represents an equal proportionate interest in
that series or class with each other share of that series or class. Currently,
the Fund offers only an Investor Class.
The
shares of each series or class participate equally in the earnings, dividends
and assets of the particular series or class. Expenses of the Trust which are
not attributable to a specific series or class are allocated among all the
series in a manner believed by management of the Trust to be fair and equitable.
Shares have no preemptive or conversion rights. Shares, when issued, are fully
paid and non-assessable, except as set forth below. Shareholders are entitled to
one vote for each share held. Shares of each series or class generally vote
together, except when required under federal securities laws to vote separately
on matters that only affect a particular class, such as the approval of
distribution plans for a particular class.
The
Trust is not required to hold annual meetings of shareholders but will hold
special meetings of shareholders of a series or class when, in the judgment of
the Trustees, it is necessary or desirable to submit matters for a shareholder
vote. Shareholders have, under certain circumstances, the right to communicate
with other shareholders in connection with requesting a meeting of shareholders
for the purpose of removing one or more Trustees. Shareholders also have, in
certain circumstances, the right to remove one or more Trustees without a
meeting. No material amendment may be made to the Declaration of Trust without
the affirmative vote of the holders of a majority of the outstanding shares of
each portfolio affected by the amendment. The Declaration of Trust provides
that, at any meeting of shareholders of the Trust or of any series or class, a
Shareholder Servicing Agent may vote any shares as to which such Shareholder
Servicing Agent is the agent of record and which are not represented in person
or by proxy at the meeting, proportionately in accordance with the votes cast by
holders of all shares of that portfolio otherwise represented at the meeting in
person or by proxy as to which such Shareholder Servicing Agent is the agent of
record. Any shares so voted by a Shareholder Servicing Agent will be deemed
represented at the meeting for purposes of quorum requirements. Any series or
class may be terminated at any time by vote of a majority of the shares of that
series or by the Trustees by written notice to the shareholders of that series.
Unless each series is so terminated, the Trust will continue
indefinitely.
The
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, Trustees, officers, employees and
agents covering possible tort and other liabilities.
The
Declaration of Trust does not require the issuance of stock certificates. If
stock certificates are issued, they must be returned by the registered owners
prior to the transfer or redemption of shares represented by such
certificates.
Rule 18f-2
under the 1940 Act (the “Rule”) provides that as to any investment company which
has two or more series outstanding and as to any matter required to be submitted
to shareholder vote, such matter is not deemed to have been effectively acted
upon unless approved by the holders of a “majority” (as defined in the Rule) of
the voting securities of each series affected by the matter. Such separate
voting requirements do not apply to the election of Trustees or the ratification
of the selection of accountants. The Rule contains special provisions for cases
in which an advisory contract is approved by one or more, but not all, series. A
change in investment policy may go into effect as to one or more series whose
holders so approve the change even though the required vote is not obtained as
to the holders of other affected series.
The
annual
report
to shareholders for the Fund for the fiscal year ended
December 31, 2022,
is available without charge, upon request by calling 1-866-205-0523 and the
financial statements, accompanying notes and report of the independent
registered public accounting firm appearing therein are incorporated by
reference into this SAI.
Corporate
Bond Ratings
Moody’s
long-term ratings are forward-looking opinions of the relative credit risks of
financial obligations with an original maturity of one year or more. Such
ratings reflect both the likelihood of default on contractually promised
payments and the expected financial loss suffered in the event of default. The
following summarizes the ratings used by Moody’s for long-term
debt:
“Aaa”
– Obligations rated “Aaa” are judged to be of the highest quality, subject to
the lowest level of credit risk.
“Aa”
– Obligations rated “Aa” are judged to be of high quality and are subject to
very low credit risk.
“A”
– Obligations rated “A” are judged to be upper-medium grade and are subject to
low credit risk.
“Baa”
– Obligations rated “Baa” are judged to be medium-grade and subject to moderate
credit risk and as such may possess certain speculative characteristics.
“Ba”
– Obligations rated “Ba” are judged to be speculative and are subject to
substantial credit risk.
“B”
– Obligations rated “B” are considered speculative and are subject to high
credit risk.
“Caa”
– Obligations rated “Caa” are judged to be speculative of poor standing and are
subject to very high credit risk.
“Ca”
– Obligations rated “Ca” are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
“C”
– Obligations rated “C” are the lowest rated and are typically in default, with
little prospect for recovery of principal or interest.
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from “Aa” through “Caa.” The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
Standard
& Poor’s Ratings Services
“AAA”
– An obligation rated “AAA” has the highest rating assigned by Standard &
Poor’s. The obligor’s capacity to meet its financial commitment on the
obligation is extremely strong.
“AA”
– An obligation rated “AA” differs from the highest-rated obligations only to a
small degree. The obligor’s capacity to meet its financial commitment on the
obligation is very strong.
“A”
– An obligation rated “A” is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor’s capacity to meet its financial
commitment on the obligation is still strong.
“BBB”
– An obligation rated “BBB” exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
“BB,”
“B,” “CCC,” “CC” and “C” – Obligations rated “BB,” “B,” “CCC,” “CC” and “C” are
regarded as having significant speculative characteristics. “BB” indicates the
least degree of speculation and “C” the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
“BB”
– An obligation rated “BB” is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor’s inadequate capacity to meet its financial commitment on the
obligation.
“B”
– An obligation rated “B” is more vulnerable to nonpayment than obligations
rated “BB”, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor’s capacity or willingness to meet its
financial commitment on the obligation.
“CCC”
– An obligation rated “CCC” is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the
obligation.
“CC”
– An obligation rated “CC” is currently highly vulnerable to nonpayment. The
“CC” rating is used when a default has not yet occurred, but Standard &
Poor’s expects default to be a virtual certainty, regardless of the anticipated
time to default.
“C”
– An obligation rated “C” is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority or lower ultimate
recovery compared to obligations that are rated higher.
“D”
– An obligation rated “D” is in default or in breach of an imputed promise. For
non-hybrid capital instruments, the “D” rating category is used when payments on
an obligation are not made on the date due, unless Standard & Poor’s
believes that such payments will be made within five business days in the
absence of a stated grace period or within the earlier of the stated grace
period
or 30 calendar days. The “D” rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action and where default on an
obligation is a virtual certainty, for example due to automatic stay provisions.
An obligation’s rating is lowered to “D” if it is subject to a distressed
exchange offer.
Plus
(+) or minus (-) – The ratings from “AA” to “CCC” may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within the
major rating categories.
“NR”
– This indicates that no rating has been requested, or that there is
insufficient information on which to base a rating, or that Standard &
Poor’s does not rate a particular obligation as a matter of policy.
Local
Currency and Foreign Currency Risks - Standard & Poor’s issuer credit
ratings make a distinction between foreign currency ratings and local currency
ratings. An issuer’s foreign currency rating will differ from its local currency
rating when the obligor has a different capacity to meet its obligations
denominated in its local currency, vs. obligations denominated in a foreign
currency.
Appendix
B
Commercial
Paper Ratings
Moody’s
Investors Service, Inc.
short-term ratings are forward-looking opinions of the relative credit risks of
financial obligations with an original maturity of thirteen months or less and
reflect the likelihood of a default on contractually promised payments. Ratings
may be assigned to issuers, short-term programs or to individual short-term debt
instruments.
Moody’s
employs the following designations to indicate the relative repayment ability of
rated issuers:
“P-1”
– Issuers (or supporting institutions) rated Prime-1 have a superior ability to
repay short-term debt obligations.
“P-2”
– Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay short-term debt obligations.
“P-3”
– Issuers (or supporting institutions) rated Prime-3 have an acceptable ability
to repay short-term obligations.
“NP”
– Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
Standard
& Poor’s Ratings Services
A-1”
– A short-term obligation rated “A-1” is rated in the highest category and
indicates that the obligor’s capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor’s capacity to meet its
financial commitment on these obligations is extremely strong.
“A-2”
– A short-term obligation rated “A-2” is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor’s capacity to meet
its financial commitment on the obligation is satisfactory.
“A-3”
– A short-term obligation rated “A-3” exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
“B”
– A short-term obligation rated “B” is regarded as vulnerable and has
significant speculative characteristics. The obligor currently has the capacity
to meet its financial commitments; however, it faces major ongoing uncertainties
which could lead to the obligor’s inadequate capacity to meet its financial
commitments.
“C”
– A short-term obligation rated “C” is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
“D”
– A short-term obligation rated “D” is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the “D” rating category is used
when payments on an obligation are not made on the date due, unless Standard
& Poor’s believes that such payments will be made within any stated grace
period. However, any stated grace period longer than five business days will be
treated as five business days. The “D” rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action and where default on
an obligation is a virtual certainty, for example due to automatic stay
provisions. An obligation’s rating is lowered to “D” if it is subject to a
distressed exchange offer.
Local
Currency and Foreign Currency Risks – Standard & Poor’s issuer credit
ratings make a distinction between foreign currency ratings and local currency
ratings. An issuer’s foreign currency rating will differ from its local currency
rating when the obligor has a different capacity to meet its obligations
denominated in its local currency, vs. obligations denominated in a foreign
currency.
